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Chapter 1

Investment Banking Activities

2Chapter 1

A. Investment Banking Activities

Investment Bank

Revenue-Generating Activities Support ActivitiesPrimary market making•Corporate finance•Municipal finance•Treasury and agency finance

Clearing

Secondary market making•Dealer Activity•Brokerage activities

Internal finance(funding)

Information services

Research

Trading •Speculation •Arbitrage

Corporate Restructuring•Expansion•Contraction•Ownership and control

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

3Chapter 1

B. Investment Banking v.s. Commercial Banking

The Glass-Steagall Act, 1933 Gramm-Leach-Bliley Act, 1999

Banking Securities Insurance

Fed funds market vs. Repo market

4Chapter 1

C. Investment Bankers Oligopoly

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.

5Chapter 1

C. Investment Bankers Oligopoly

Euro Firms UBS Warburg Credit Swissie Deutsche Bank Abn Amro (RBS) Barclays

6Chapter 1

C. Investment Bankers Oligopoly

Local Firms China Development Industrial Bank Taiwan Industrial Bank Securities Firms

7Chapter 1

D. Types of Market Making

Brokered Trading Dealer Trading Market Making

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9Chapter 1

10Chapter 1

11Chapter 1

E. Market Making by Underwriting

a. Equity financing vs. Debt financing Equity Financing

Venture Capital(VC) Initial Public Offering(IPO) Seasoned Equity Offering(SEO) Deposit Receipt(DR)

Debt Finance Mezzanine Finance Convertible bonds Government bonds Eurodollar bonds Junk bonds LYONs

12Chapter 1

E. Market Making by Underwriting

b. Public offerings vs. Private placement

Public Offerings Private placement

c. Initial Public Offerings vs. Seansoned Public Offerings

IPOs Seasoned Public Offerings

13Chapter 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.

14Chapter 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

15Chapter 1

F. Market Making by Financial Innovation

Demand side:1. For short term issues

Thrifts Commercial-bank portfolios Money-market funds Corporate treasurers

2. For intermediate term and longer term issues

• Insurance companies• Pension funds• Bank trust departments• Investment advisors• International investors

16Chapter 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

17Chapter 1

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)

c. Interest rate swaps

18Chapter 1

G. Market Making by Corporate Restructuring

a. Expansion Mergers : horizontal, vertical,

conglomerate Tender offer Joint ventures

b. Sell offs Spin offs Divestitures

19Chapter 1

G. Market Making by Corporate Restructuring

c. Corporate control Premium buybacks Anti-takeover amendments

d. Changes in ownership structure Exchange offers Share repurchases Going private Leverage Buy out (LBO)