Chap004 - Chapter 04 Financial Services Securities...

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Chapter 04 - Financial Services: Securities Brokerage and Investment Banking Chapter Four Financial Services: Securities Brokerage and Investment Banking Chapter Outline Introduction Size, Structure, and Composition of the Industry Balance Sheet and Recent Trends Recent Trends Balance Sheet Regulation Global Issues Summary 4-1
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Chapter 04 - Financial Services: Securities Brokerage and Investment Banking Solutions for End-of-Chapter Questions and Problems 1. Explain how securities firms differ from investment banks. In what ways are they financial intermediaries? Securities firms specialize primarily in the purchase, sale, and brokerage of securities, while investment banks primarily engage in originating, underwriting, and distributing issues of securities. In more recent years, investment banks have undertaken increased corporate finance activities such as advising on mergers, acquisitions, and corporate restructuring. In both cases, these firms act as financial intermediaries in that they bring together economic units who need money with those units who wish to invest money. Both segments have undergone substantial structural changes in recent years. Some of the most recent consolidations include the acquisition of Bears Stearns by J.P. Morgan Chase, the bankruptcy of Lehman Brothers and the acquisition of Merrill Lynch by Bank of America. Indeed, as discussed later in the chapter, the investment banking industry has seen the failure or acquisition of all but two of its major firms (Goldman Sachs and Morgan Stanley) and these two firms converted to commercial bank holding companies in 2008. 2. In what ways have changes in the investment banking industry mirrored changes in the commercial banking industry? First, both industries have seen a concentration of business among the larger firms. This concentration has occurred primarily through the merger and acquisition activities of several of the largest firms. Second, firms in both industries tend to be divided along product line services provided to customers. Some national full-line firms provide service to both retail customers, in the form of brokerage services, and corporate customers, in the form of new issue underwriting. Other national full-line firms specialize in corporate finance and security trading activities. Third, the remaining firms specialize in more limited activities such as discount brokerage, regional full service retail activities, etc. This business line division is not dissimilar to that of the banking industry with money center banks, regional banks, and community banks. Clearly product line overlap occurs between the different firm divisions in each industry. 3. What are the different types of firms in the securities industry and how does each type differ from the others?
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