Flashcards in Test 1 Deck (51)
Principally M&A, also financial restructuring and money management
Retail brokerage firms
Compete with large investment banks in relation to retail client investments and stocks and bonds (also securities firm)
Sections of an Investment Bank
a. Investment banking business managed by the Investment Banking Division that principally focuses on capital raising and M&As
b. A sales and trading division managed by the Trading Division that provides investing, intermediating, and risk-management services.
c. An asset management business managed by the Asset Management Division that is responsible for managing the money for individual and institutional investing clients
Key product groups
M&A (specialize in a specific industry within the division) and Capital Markets
Capital Markets groups
Debt capital markets or equity markets
Client coverage bankers
Part of the investment banking division that works directly with the company and focuses on raising capital for a company. They have to become very familiar with the company so that they can optimize the amount of cash and debt on their balance sheet
Components of a M&A
Client coverage bankers work with product bankers to execute the transaction. They act as a trusted advisor for the corporate clients in terms of strategic financial decisions
Sometimes own separate entity in bank, sometimes combined with client coverage bankers. Parts: sell side, buy side, restructurings or acquisitions that all try to increase shareholder value
Contains two parts: Fixed income, currencies, and commodities; and equities
Trading Division: FICC
Trades government bonds, corporate bonds, mortgage-related securities, asset-back securities, currency, and commodities (sometimes participate in proprietary trading as well)
Trading Division: Equities
Makes markets in and trades equities, equity-related products, and derivatives. Also engage in proprietary trading as well.
Capital Markets: Equity Capital Markets
Comprised of bankers who specialize in common stock, convertible security issuance, and equity derivatives. *This group acts as the intermediary between Investment Banking's Division and the Trading Division, which creates competing interests because one side is trying to sell high while the other buy low.*
Capital Markets: Debt Capital Markets
Focus on debt financing for corporate and government clients. Divided into investment grade (high rating) and non-investment grade issuers (low rating). They stand between corporate or government issuers and investors.
Prime Brokerage business
Most investment banks have this in their business and they provide bundled services such as securities borrowing and lending, etc. They provide investors with a centralized location to clear their securities and finances, while also allowing them to trade with brokers.
The portion of an investment banks that trades their firm's capital to raise money. However, the Dodd-Frank Act only allows banks to have a 3% or less stake in the fund they are investing in within one year.
LBO (Leveraged Buyout)
Also known as taking a company private... A form of principal investment where they buy a public company with their capital.
Function of the non-client investing portion of an investment bank. This is where banks use large amounts of their capital to invest in the market, competing with large hedge funds. However, the Dodd-Frank act will severely limit their ability to use capital.
Asset Management Division
Offers equity, fixed income, alternative investments (hedge funds, real estate, etc.) and money market investment products. They are offered in the forms of mutual funds, private investment funds or separately managed funds. Their is usually a Private Wealth Management team alongside this division as well.
Asset Management: Alternative assets
Includes private equity (LBOs and other equity), hedge-fund type investments, and real estate. They often invest some of their own capital alongside their clients.
The Securities Act of 1933
Requires that investors receive information about public companies that they are investing in and makes sure that the companies are not deceiving their investors and other fraud
Glass Steagall Act (1933)
Limited the underwriting capabilities of commercial banks and separated commercial and investment banks. The FDIC was also created to insure your funds
Securities and Exchange Act of 1934
Requires the filing of quarterly and annual reports, that exchanges are overseen by self-regulatory organizations (SROs), created the SEC to look over the public markets, and insider trading is prohibited
Gramm-Leach-Bliley Act (1999)
Overturned the separation of investment banks and commercial ones
Dodd-Frank Act (2010)
Established warning system for emerging market risks (liquidation/bailout plans), created Consumer Protection Agency to protect consumers and investors, regulates over-the-counter derivatives (CDOs, etc), and restrains proprietary trading by investment banks and limits their stake in directly investing in fund (hedge and private equity)
Equity vs. debt financing
Equity financing looks better on the balance sheet, which helps their credit rating, but it may dilute their EPS. Debt financing looks poor on a balance sheet, but has a lower cost of capital.
Debt financing options
Investment and non-investment grade bonds, investment grade loans, low-grade loans, asset-back securities, and commercial paper.
Debt securities that have interest and principal payments that are backed by underlying cash flows from other assets such as mortgage/auto/student loans or leases.
Special purpose vehicles
Third parties who buy banks' asset-backed securities and then resell them to insulate investors from credit risk
Equity financing options
IPOs, Follow-on offerings, and convertible securities