Chapter 1
Investment Banking Activities
1
A. Investment Banking Activities
Investment Bank
Revenue-Generating Activities
Support Activities
Primary market making
•Corporate finance
•Municipal finance
•Treasury and agency finance
Clearing
Secondary market making
•Dealer Activity
•Brokerage activities
Research
Trading
•Speculation
•Arbitrage
Corporate Restructuring
•Expansion
•Contraction
•Ownership and control
Internal finance(funding)
Information services
Financial engineering
•Zero coupon securities
•Mortgage-backed securities
•Asset-backed securities
•Derivative products
Other revenue-generating activities
•Advisory services
•Investment Management
•Merchant banking
•Venture capital
•Consulting
2Chapter 1
B. Investment Banking v.s. Commercial Banking
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The Glass-Steagall Act, 1933
Gramm-Leach-Bliley Act, 1999
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Banking
Securities
Insurance
Fed funds market vs. Repo market
3Chapter 1
C. Investment Bankers
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Oligopoly
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U.S. Firms
Merrill Lynch, Pierce, Fenner & Smith Inc.
(Bank of America)
 Citigroup Salomon Smith Barney(SSB) Inc.
 Lehman Brothers. (Chapter 11)
 Goldman Sachs & Co.
 Morgan Stanley Dean Witter.
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4Chapter 1
C. Investment Bankers
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Oligopoly
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Euro Firms
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UBS Warburg
Credit Swissie
Deutsche Bank
Abn Amro (RBS)
Barclays
5Chapter 1
C. Investment Bankers
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Oligopoly
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Local Firms
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China Development Industrial Bank
Taiwan Industrial Bank
Securities Firms
6Chapter 1
D. Types of Market Making
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Brokered Trading
Dealer Trading
Market Making
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8Chapter 1
9Chapter 1
10Chapter 1
E. Market Making by Underwriting
Equity financing vs. Debt financing
Equity Financing
a.
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Venture Capital(VC)
Initial Public Offering(IPO)
Seasoned Equity Offering(SEO)
Deposit Receipt(DR)
Debt Finance
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Mezzanine Finance
Convertible bonds
Government bonds
Eurodollar bonds
Junk bonds
LYONs
11Chapter 1
E. Market Making by Underwriting
Public offerings vs. Private placement
b.
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Public Offerings
Private placement
Initial Public Offerings vs. Seansoned
Public Offerings
c.
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IPOs
Seasoned Public Offerings
12Chapter 1
F. Market Making by Financial Innovation
* Conversion arbitrage :
The investment bank takes one (or
more) financial instruments and,
through a process of composition or
decomposition, creates one (or more)
very different financial instruments.
13Chapter 1
F. Market Making by Financial Innovation
a.
Mortgage Pass-through
Mortgage-backed securities: a single-class
whole mortgage is used to create multi-class
mortgage-back securities call collateralized
mortgage obligations.
* GNMA collateralized Bonds
* Collateralized Mortgage obligations of
FHLMC
* GNMA-type CMOs issued by subsidiaries of
investment bankers, mortgage bankers and
home builders
14Chapter 1
F. Market Making by Financial Innovation
Demand side:
1.
For short term issues
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Thrifts
Commercial-bank portfolios
Money-market funds
Corporate treasurers
For intermediate term and longer term
issues
2.
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Insurance companies
Pension funds
Bank trust departments
Investment advisors
International investors
15Chapter 1
F. Market Making by Financial Innovation
b.
Zero coupon bonds
a single-class conventional bond is
used to create a strip of individual
zero coupon bonds
16Chapter 1
Interest rate swaps
c.
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Fixed-rate payer (S&L) has sold a
hypothetical fixed rate security to the
floating rate payer (the bank)
Floating rate payer (bank) has sold a
hypothetical floating rate note to the fixe
rate payer (the S&L)
17Chapter 1
G. Market Making by Corporate Restructuring
Expansion
a.
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Mergers : horizontal, vertical,
conglomerate
Tender offer
Joint ventures
Sell offs
b.
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Spin offs
Divestitures
18Chapter 1
G. Market Making by Corporate Restructuring
Corporate control
c.
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Premium buybacks
Anti-takeover amendments
Changes in ownership structure
b.
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Exchange offers
Share repurchases
Going private
Leverage Buy out (LBO)
19Chapter 1