ch19 - CHAPTER 19 INVESTMENT BANKING CHAPTER OBJECTIVES 1....

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CHAPTER 19 INVESTMENT BANKING CHAPTER OBJECTIVES 1. To explain core business activities of investment banking both in primary and secondary markets. 2. Discuss how the Glass-Steagall Act of 1933 and the Gramm-Leach-Bliley Act of 1999 influenced commercial and investment banking in the U.S. 3. Describe the role of venture capital firms and explain why they are important to economic growth. CHANGES FROM THE LAST EDITION 1. The chapter preview has been revised. 2. Tables and statistics have been updated. 3. A new, shorter, subsection, titled “The Financial Services Modernization Act of 1999” replaced the one titled “Banks Enter Investment Banking”. 4. The Internet exercise has been revised. CHAPTER KEY POINTS 1. Two financial organizations that work in the background of finance are analyzed in this chapter. Investment banks serve the money and capital market in a variety of ways, but underwriting is their most important economic function. Working in the primary market, investment banks buy the securities from governments and corporations and sell them into the market, providing financing and investment opportunities. Venture capitalists, usually individuals with considerable wealth, provide necessary early stage financing for new technology, ideas, and entrepreneurs. 2. Investment banks function in the direct, primary market, originating, underwriting, and selling new direct security issues. Most new securities sold in the primary markets are underpriced to ensure a quick sale. The brokerage, secondary market functions are also an important aspect of many firms who also perform investment banking functions. Stress the functions performed rather than companies that perform the services. 3. Many investment banking houses are part of financial conglomerates that have evolved for a variety of reasons: a desire for low-cost funding, a need to assist customers with credit as products of the firm are sold, profit opportunities in the financial services area, and a desire to serve their present customers with a full range of financial services, 1
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achieving economies of scope. Expansion into a variety of financial services may be undertaken internally or externally, by merger with an existing firm. The acquisition strategy has been the favorite strategy of the financial conglomerate. In an attempt to build shareholder value various subsidiaries and divisions are bought, sold, or spun off very quickly. The merger of Citicorp, Travelers Insurance, and Salomon Brothers into Citigroup provided the momentum for Congress to pass the Financial Services Modernization Act of 1999, This law provided a legal means for combining investment banking, commercial banking, and insurance underwriting. 4.
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This note was uploaded on 02/23/2011 for the course FINA 4090 taught by Professor S during the Spring '11 term at Toledo.

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ch19 - CHAPTER 19 INVESTMENT BANKING CHAPTER OBJECTIVES 1....

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