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CHAPTER 24

Securities Operations

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CHAPTER 24 OVERVIEW

A. Describe the key functions of investment banking

B. Describe the key functions of the brokerage business

Securities Firms

Business of securities firms:

1) Investment banking

2) brokerage

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Key Functions of Investment Banking

1. Facilitate New Stock Offerings (initial public offering)

a. Origination (recommend the amount of stock to issue and price, help to register with SEC, road show, etc)

b. Underwriting (help to sell the stock)

c. Distribution of Stock

* Seasoned Equity Offering

* Private Placements of Stocks

Underwriting

1. Best Efforts Agreement

- the underwriter agrees to use all efforts to sell as much of an issue as possible to the public. The underwriter will purchase only the amount required to fulfill its client's demand. However, if the underwriter is unable to sell all securities, it is not responsible for any unsold inventory.

2. Firm Commitment

- underwriters are responsible for any unsold inventory. The dealer profits from the spread between the purchase price and the public offering price.

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Key Functions of Investment Banking

2. Facilitate New Bond Offering

3. Facilitate Leveraged Buyouts (LBOs)

LBOs: the management of a firm borrows money to purchase the firms’ common stock in the market so as to control the firm.

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Key Functions of Investment Banking

4. Facilitate Arbitrage

Arbitrage -purchase the stocks of a firm and after restructuring sell them at a higher price. Generally, after a firm is acquired, its individual divisions are sold off (asset stripping)

5. Facilitate Corporate Restructuring Such As Mergers and Acquisitions

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Key Functions of Brokerage Services

1. Market Orders

2. Limit Orders

3. Short Selling

e.g. Charles Schwab

Exhibit 24.3 Sources of Income for a Securities Firm

Exhibit 24.6 Participation of Securities Firms in Financial Markets

News in Investment Banking Industry

1. In 2007, the five big independent investment banks: Merrill Lynch, Goldman Sachs, Morgan Stanley, Lehman Brothers, and Bear Stearns.

2. March 2008, Bear Stearns was swallowed by JPMorgan Chase.

3. Sept 2008, Lehman Brothers filed for bankruptcy.

4. Sept 2008, Merrill Lynch was sold to Bank of America.

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News in Investment Banking Industry

5. Sept 2008, Goldman Sachs and Morgan Stanley got the approval to change their status to bank holding companies. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions. Both companies will come under the direct regulation of the Federal Reserve, which regulates the nation's bank holding companies. The primary regulator for investment banking was the Securities and Exchange Commission (SEC).

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Homework Assignment 14

Questions : 4 5 6 10 11

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