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Unformatted text preview: BUSINESS ARTICLE 2.DOC 4/15/2010 4:20 PM 79 COMMERCIAL BANKS IN UNDERWRITERS AND THE DECLINE OF THE INDEPENDENT INVESTMENT BANK MODEL George J. Papaioannou ! I. INTRODUCTION The period from 1997 to 2008 has witnessed a dramatic transformation of the investment banking sector. While, prior to 1999, securities firms comprised most of the top fifteen placed underwriters in the League Tables, commercial banks had come to dominate the League Tables by 2008. Part of the disappearance of prominent independent investment banks can be traced to heavy losses or declines of reputational capital. For example, First Boston was folded into Credit Suisse in 1989 after suffering enormous losses from merchant banking loans. Salomon Brothers, unable to recover from the hit to its reputation due to trading irregularities in the early 1990s, sold to Travelers in 1998. In 2008, heavy losses in their proprietary portfolio of mortgaged-backed and collateralized debt obligations forced Bear Stearns and Merrill Lynch to sell to JP Morgan Chase and Bank of America, respectively, and Lehman to succumb to bankruptcy. Nonetheless, most securities firms lost independence through takeovers by commercial banks. Thus, contrary to the expectations of those advocating the full deregulation of investment banking in 1999, eleven years later the industry has undergone a consolidation wave that has perpetuated the traditional structure of investment banking as an industry dominated by a limited number of organizations. Moreover, deregulation led to the emergence of the commercial plus investment banking model that gradually has replaced the traditional integrated investment bank model adopted earlier by securities firms. Interestingly, the new model has materialized through the acquisition of securities firms by commercial banks. This article purports to examine two questions. First, what explains the acquisitive strategy of commercial banks? Second, does the commercial plus investment banking model possess any distinct advantages over the pure investment banking model in the conduct of underwriting business? The answer ! George J. Papaioannou, Ph.D., C.V. Starr Distinguished Professor in Finance and Investment Banking at Hofstra University Zarb School of Business. BUSINESS ARTICLE 2.DOC 4/15/2010 4:20 PM THE JOURNAL OF INTERNATIONAL BUSINESS & LAW 80 to the second question is relevant to the issue of long-run sustainability of this new model. This article examines a wide body of literature and empirical evidence in relation to these issues. II. HISTORICAL BACKGROUND Prior to the repeal of the Glass-Steagall Act by the Financial Services Modernization Act of 1999, commercial banks were barred from being directly involved in the underwriting and trading of corporate securities. However, several steps of deregulation adopted by the Federal Reserve Board had already empowered banks to enter the underwriting and trading business. In 1987 banks were given Tier I powers that allowed them to underwrite municipal revenue...
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This note was uploaded on 05/26/2011 for the course FIN 3403 taught by Professor Osagie during the Summer '09 term at Florida A&M.
- Summer '09
- Corporate Finance