Introduction Flashcards
Security Underwriting
A process by which investment banks raise investment capital from INVESTORS on behalf of corporations and governments that are issuing securities (both equity and debt capital).
Investment bank served as a bridge/middleman between…?
People who have capital and want to invest it &
People who need financing for their projects.
Why reputation matters in their jobs?
Investment banks work with top tier investors
➡️ Higher reputation
➡️ All issuers want to work with middlemen because they could contact top tier investors.
Commercial bank
Provide loans to the public.
Collect savings/deposit ➡️ Lend the money to borrowers
Spread
Interest pay to depositors ➖ Interest charge borrowers
Difference between Investment Bank and Commercial Bank
1️⃣ No cheap financing (client deposits)
2️⃣ Investment Banks work on large scale and sophisticated transactions.
Universal banks
Commercial ➕ Investment banking services
Advantage of universal banks
1️⃣ Sell more products to the same client
2️⃣ One stop shop
3️⃣ Advisors for all situations (regular business & when the company raise equity/debt)
4️⃣ Understand the business (close relationship with the firm)
Disadvantage of universal banks
Dangerous. Universal banks have more information about their clients and clients are also BORROWERS.
1️⃣ May sell low quality securities that they are underwriting to the <b>public/depositors</b>
2️⃣ May resell low quality securities that they are underwriting to <b>Investors</b>
3️⃣ Corporate can be both Borrower and Issuer. Bank may <b>force</b> the corporate to use their securities underwriting services. If not, charge borrower <b>higher interest rate</b>.
4️⃣ As corporate can be borrower and issuer, bank may provide troubled corporate securities underwriting service and issue securities in order to repay the loans. <b>Transfer the bankruptcy risk to the public</b>. Prevent them from losing their own money.
The Glass Steagall Act (1933)
It prohibited commercial banks engagement in investment banking services.
1999, this act was repealed 废除. Allowing banks to sell commercial and investment banking services under the same roof.
It protected securities firms from competing with much bigger commercial banks AS commercial banks access to retail deposits.
Example of Global Financial Conglomerates
HSBC, JP Morgan, Bank of America, Deutsche Bank
Example of Pure Investment Banks
Goldman Sachs, Morgan Stanley
Advantage of Pure Investment Bank
1️⃣ Specialization
2️⃣ Niche
3️⃣ Reputation
<b><i>#1 Most Valuable asset</i></b>: <b>🌟 Long-lasting client relationships</b>
Example of conflict of interest
Trading and Brokerage:
Proprietary - buying a company’s shares with the bank’s money
Brokerage - buying a company’s shares with the clients’ money
If the market crashes, which are the securities that will be taken care first?
Also, it is possible that the opinion of a bank’s researcher would be influenced by the bank underwriting that given company’s securities.
Research departments
Examine stocks and provide recommendations
