BIP 394 Notes.docx - BIP 394 2/3 final exam questions are...

BIP 394
2/3 final exam questions are from end of chapter questions
Presentation
all the m&a transactions in the past 6 days, apply slide to few transactions that have been
interesting
 Pricing, structure
 Have couple pages on general economic information (what the fed is doing)
 Politics
 Total 10 minutes
Lecture 1:
Investment Banking has 3 divisions:
 Banking
o Products: M&A and Financings
o Customers: Corporations
 Trading
o Products: Investment Products
o Customers: Institutional Investors
 Asset Management
o Products: Investment Products
o Customers: Individual Investors (high net worth individuals)
Collateralized Debt Obligation (‘CDO’)
 Individual takes a regular mortgage loan from a commercial bank
 Commercial bank passes on the mortgage to an investment bank
 Investment bank passes on to a Special Purpose Vehicle (SPV) as it provided protection
for the investment banks
 CDO is created by investment bank to be the funding source for SPV
o CDOs rated as AAA, BBB, CCC (rated by rating agencies)
 CDOs purchased by bond investors
 How did IBs lose money?
o Banking division (financing) conceived the idea of taking mortgages from CBs and
creating SPVs
o In order to get high ratings on CDOs, IBs got credit support from numerous
insurance companies (AIG, Freddie Mac, Fannie Mae) – credit default swap
 If CDOs defaulted, these insurance companies would pay the deficit –
essentially insuring the bond
 Freddie Mac and Fannie Mae – biggest taxpayer bailout in history
o The IBs lost money as they owned the mortgages

o The Trading divisions lost much more money as prop trading groups within the
trading division were investing on CDOs as well
o Asset management divisions lost money from buying back CDOs from clients
Pure Play Investment Banks:
 Goldman Sachs
 Morgan Stanley
 Merrill Lynch
 Lehman Brothers
 Bear Stearns
M&A: Zephry.com, capitaliq.com, Bloomberg, Merger Market,
IPO – NASDAQ
Presentation Guidelines:
Keep it under 12 minutes
M&A and Financings: most important part of presentation (7-8 minutes)
 Acquirer, Target, Deal size, Comments, acquisition premium, consideration (cash or
stock), EPS, M&A adviser
 IPO: do as other group
 Conversion price for convertibles
2/3 pages on specific M&A Deals
CEO of Merrill Lynch John Thain: Writing off $10bn although only need $5bn – but in fact he
underreserved
 Before the deal for BoA and Merrill closed, John Thain discovered that there were
additional losses
Securities Regulation Overview:
TARP – Troubled asset relief program
 2008, when all stocks were dropping
 Forcing 1000+ banks to sell preferred stock to US government
o No equity ownership
o Same deal with Warren Buffett and GS deal
 Establishing confidence – taxpayers are doing the Warren Buffet deal