Lecture Financial markets - Lecture 15 introduce investment banking and secondary markets. The main contents of this chapter include all of the following: The role of underwriters, directly placed offerings, directly placed offerings, role of investment banks in financial innovation. | Lecture 15: Investment Banking and Secondary Markets Glass-Steagall Act 1933 The modern concept of “Investment Bank” was created in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercial banks, investment banks, and insurance companies. Carter Glass, Senator from Virginia, believed that commercial banks securities operations had contributed to the crash of 1929, that banks failed because of their securities operations, and that commercial banks used their knowledge as lenders to do insider trading of securities. Investment Banks Bulge bracket firms: First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Brothers, Lehman Brothers. Traditionally were often partnerships, but partnership form is disappearing. Controversy over Glass Steagall Prof. George Benston showed that unregulated banks have lower failure rate. Other countries (Germany, Switzerland) have always allowed universal banking In 1990s, regulators nibbled away at Glass Steagall by allowing commercial banks to engage in certain securities operations Graham-Leach Act 1999 President Clinton November 1999 signs Graham-Leach Bill which rescinded the Glass-Steagall Act of 1933. Consumer groups fought repeal of Glass-Steagall saying it would reduce privacy. Graham-Leach calls for a study of the issues of financial privacy Mergers among Commercial Banks, Investment Banks & Insurance Companies Travelers’ Group (insurance) and Citicorp (commercial bank) 1998 to produce Citigroup, on anticipation that Glass-Steagall would be rescinded. Brokerage Smith Barney Chase Manhattan Bank (commercial bank) acquires JP Morgan (investment bank) (2000) for $ billion UBS Switzerland buys Paine Webber (brokerage) 2000 Credit Suisse buys Donaldson Lufkin Jenrette (investment bank) 2000 Underwriting of Securities Issuance of shares and corporate debt Seasoned issue versus IPO Underwriter provides advice for issuer, distribution of securities, sharing of risks of issue, and stabilization of | Lecture 15: Investment Banking and Secondary Markets Glass-Steagall Act 1933 The modern concept of “Investment Bank” was created in the Glass-Steagall act (Banking Act of 1933). Glass Steagall separated commercial banks, investment banks, and insurance companies. Carter Glass, Senator from Virginia, believed that commercial banks securities operations had contributed to the crash of 1929, that banks failed because of their securities operations, and that commercial banks used their knowledge as lenders to do insider trading of securities. Investment Banks Bulge bracket firms: First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Brothers, Lehman Brothers. Traditionally were often partnerships, but partnership form is disappearing. Controversy over Glass Steagall Prof. George Benston showed that unregulated banks have lower failure rate. Other countries (Germany, Switzerland) have always allowed universal banking In 1990s, regulators nibbled away at Glass Steagall by .
