Answers to Chapter 16 Questions
As with all intermediaries, these firms bring together those who may need extra money with
those who wish to invest their money. This may take the form of an investment banker
underwriting an IPO for a growing company or a brokerage firm finding good investment for a
Beginning in 1980 and until the stock market crash of October 19, 1987, the number of firms in
the industry expanded dramatically from 5,248 in 1980 to 9,515 in 1987. The aftermath of the
crash included a major shakeout, with the number of firms declining to 7,785 by 1998, or 18
percent since 1987. Concentration of business among the largest firms over this period has
increased dramatically. The largest investment bank in 1987, Salomon Brothers, held capital of
$3.21 billion. In 1997 the largest investment bank, Morgan Stanley, held capital of $15.4 billion,
i.e., almost four times as much. Some of the significant growth in size has come through M&A by
the top-ranked firms. Indeed, 12 of the largest 210 mergers in the industry occurred in 1997
through 2001. Many recent M&As are interindustry mergers (e.g., among insurance companies
and investment banks).
The firms in the security industry vary by size and specialization. They include:
National, full-line firms servicing both retail and corporate clients, such as
National firms specializing in corporate finance and trading, such as Goldman, Sachs, Salomon
Securities firms providing investment banking services that are subsidiaries of commercial
banks. These subsidiaries are continuing to erode into the markets held by traditional investment
banks as the restrictions imposed by the Glass-Steagall Act (separating commercial banking from
investment banking) are removed slowly in stages.
Specialized discount brokers providing trading services such as the purchase and sale of stocks,
without offering any investment tips, advice or financial counseling.
Regional securities firms that offer most of the services mentioned above but restrict their
activities to specific geographical locations.
Specialized electronic trading securities firms (such as E*Trade) that provide a platform
customers to trade without the use of a broker. Rather trades are enacted on a computer via the
A major similarity between securities firms and all other types of FIs is a high degree of
financial leverage. They all solicit funds that are used to finance an asset portfolio consisting of
financial securities. The difference is that securities firms' liabilities tend to be extremely short
term (see the balance sheet in Table 16-6). Typically payables incurred in the transaction process.