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Investment Banking Overview

Overview
The investment banking industry was transformed
during 2008 when five large US pure-play/non-
deposit taking firms experienced the following
events:
Bear Stearns was sold to JP Morgan
Lehman Brothers filed for Bankruptcy protection and
then sold its US operations to Barclays and European
and Asian businesses to Nomura
Merrill Lynch was sold to Bank of America
Goldman Sachs converted to a bank holding
company
Morgan Stanley converted to a bank holding
company
Key Problems During 2008
Investment banks were over-reliant on short-term financing (>40% of total
liabilities): largely repurchase agreements (repos) and commercial paper (CP)
A repo provides financing when a bank sells securities and agrees to
repurchasing them the next day or week at a higher price (the buyer can sell
securities in the market if the seller is unable to repurchase)
CP is unsecured financing that has a maturity of up to 270 (most CP matures in
90 days)
Benefits of CP and repo funding (during normal markets) include: cheap, liquid,
flexible and, substantial earnings power in upward sloping yield environment
when use to purchase long term assets
Risks include: refinancing risk and asset/management liability mismatch,
resulting in potential bankruptcy threat if need to sell unfunded assets because
cant replace short-term funding
Investment banks were over-leveraged: total assets to equity leverage ratios
were 26x at Goldman Sachs; 31x at Lehman; 32x at Merrill Lynch; 33x at Morgan
Stanley and 34x at Bear Stearns
Investment banks suffered large mortgage securities related losses in their
proprietary trading, underwriting and asset management areas
New Landscape
Following the 2008 transformation of the investment
banking industry, Goldman Sachs and Morgan
Stanley operated based on the same business model
employed by larger universal banks, including:
Leverage dropped from 30x to 12x
Return on equity dropped from >25% to <15%
Short term borrowings from repos and CP significantly
reduced
Risk based capital increased
Proprietary and principal investment activities reduced
Additional regulatory controls imposed
Access to discount window and FDIC guarantees
Overview
Overview
Overview
Overview
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Investment Banking Division
Trading Division
Fixed Income, Currencies and Commodities
(FICC) Business
Government Bonds, corporate bonds,
mortgage-related securities, asset-backed
securities
Commodities and foreign exchange
Equities Business
Common stock
Convertible securities
Trading Division
Responsible for all investment-related transactions
with institutional investors, including financial
institutions, investment funds and cash management
arms of governments and corporations
Make markets and clear on exchanges
Responsible for principal investments for the firms
own account (usually in partnership with the Banking
Division)
Trade derivatives as well as underlying (cash)
securities
Engage in proprietary trading
Provide research to investing clients
Trading Division
Client Related Trading
Help investing clients make money while the
firm also achieves trading profits
Primary and secondary market trading
activity
Proprietary Trading (for the firms own
account)
Similar to the trading activities of hedge
funds
Financial reform legislation will likely reduce
proprietary trading over time
Asset Management Division
Asset Management Division
Asset Managers manage money for clients brought in
my Private Wealth (PW) advisors
PW advisors help investing clients allocate investment
funds
Asset Managers receive fees from managing money
and then share these fees with PW advisors
Asset Managers and PW advisors at investment banks
compete with other large money managers such as
Fidelity and Putnam, and with hedge funds and
private equity funds
Asset Managers manage stock, bond, FX, commodity
and real estate funds, as well as funds focused on
hedge fund and private equity fund-type investments

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