Inside Investment Banking: Second Edition
By Ernest Bloch
2005/07 - Beard Books
1587982684 - Paperback - Reprint - 440 pp.
The classic and early definitive work on investment banking.
This book is the reprint of the classic and early definitive work on investment banking. Applauded, relied on, and read extensively, all of the essential financial intermediation functions in the securities industry are as relevant today as when the book was first written. The book covers the areas of market making, the market for corporate control, new issues flotation, and policy issues. A useful definitional list of common investment banking and financial terms is included. This book will prove to be informative reading or study for professionals as well as all interested in securities and financial markets.
From Turnarounds and Workouts,
Review by Henry Berry:
Even though Bloch states that “no last word may ever be written about the investment banking industry,” he nonetheless has written a definitive book on the subject.
Bloch wrote Inside Investment Banking after discovering that no textbook on the subject was available when he began teaching a course on investment banking. Bloch’s book is like a textbook, though one not meant to be limited to classroom use. It’s a complete, knowledgeable study of the structure and operations of the field of investment banking. With a long career in the field, including work at the Federal Reserve Bank of New York, Bloch has the background for writing the book. He sought the input of many of his friends and contacts in investment banking for material as well as for critical guidance to put together a text that would stand the test of time.
While giving a nod to today’s heightened interest in the innovative securities that receive the most attention in the popular media, Inside Investment Banking concentrates for the most part on the unchanging elements of the field. The book takes a subject that can appear mystifying to the average person and makes it understandable by concentrating on its central processes, institutional forms, and permanent aims. The author shows how all aspects of the complex and ever-changing field of investment banking, including its most misunderstood topic of innovative securities, leads to a “financial ecology” which benefits business organizations, individual investors in general, and the economy as a whole. “[T]he marketplace for innovative securities becomes, because of its imitators, a systematic mechanism for spreading risk and improving efficiency for market makers and investors,” says Bloch.
For example, Bloch takes the reader through investment banking’s “market making” which continually adapts to changing economic circumstances to attract the interest of investors. In doing so, he covers the technical subject of arbitrage, the role of the venture capitalist, and the purpose of initial public offerings, among other matters. In addition to describing and explaining the abiding basics of the field, Bloch also takes up issues regarding policy (for example, full disclosure and government regulation) that have arisen from the changes in the field and its enhanced visibility with the public. In dealing with these issues, which are to a large degree social issues, and similar topics which inherently have no final resolution, Bloch deals indirectly with criticisms the field has come under in recent years.
Bloch cites the familiar refrain “the more things change, the more they remain the same” and then shows how this applies to investment banking. With deregulation in the banking industry, globalization, mergers among leading investment firms, and the growing number of individuals researching and trading stocks on their own, there is the appearance of sweeping change in investment banking. However, as Inside Investment Banking shows, underlying these surface changes is the efficiency of the market.
Anyone looking for an authoritative work covering in depth the fundamentals of the field while reflecting both the interest and concerns about this central field in the contemporary economy should look to Bloch’s Inside Investment Banking.
After time as an economist with the Federal Reserve Bank of New York, Ernest Bloch was a Professor of Finance at the Stern School of Business at New York University.
Ernest Bloch was a Professor of Finance at the Stern School of Business at New York University, and his teaching career spanned more than forty years. Prior to that he was an economist at the Federal Reserve Bank of New York. Dr. Bloch was the author of numerous books and monographs, as well as articles published in professional journals. He died in 1998.
|Preface to First Edition
|Preface to Second Edition
|Part I. Market Making
||The Market Process. A Quick Glance at History.
The Antitrust Case. Competition for Syndicate Business: Postwar Finance:
The 1960s. Inflationary Finance. A Few Conclusions
||Investment Banking as Market Making in the Real World
||A Note on Technological Change. Types of Market
Making: Brokered Trading. Dealer Markets. Market
Making. Some Conclusions.
||The Investment Banking Industry: Size and Structure
||Introduction. Investment Banking Firms: Some Parameters.
The SEC Classification of Industry Groups and Size Comparisons. Which
Are the Major Firms? Marjory Revenue Components.
||The Investment Banking Business in the Mid-1980s
||The Good Old Days: 1983 to 1986. Morgan Stanley: An
Institutional Firm Goes Public. The Morgan Stanley Secondary Offering of
May 13, 1988. Merrill Lynch: Big and Still in Transition. Drexel Burnham
Lambert: From Junk Bonds to Special Bracket Firm. The Last Decade in
Investment Banking: A Brief Review. Bridge Financing: What Is It? Why Is
It Done? Success and Its Discontents: Or, How Do You Manage?
||The Stock Market Crash of 1987 and Its Aftermath: Market
Making in Crisis
||What Happened? The Drama: The Stage Set. Prologue:
Prices Begin to Break. Act 1: The New York Stock Exchange on
October 19. Act 2: The Terror Intensifies--and Recedes. What
Can We Learn? Investment Banking Management.
||Market Making by Innovation
||Deep-Discount Bonds and Other Variants: A Zero Coupon
Prototype. Synthetic Zeros: Conversions of Government
Securities. The Next Step: STRIPS. Interest-Rate Swaps:
Swap Mechanics. Swap Arbitrage. Innovating High-Yield
Debt: The Junk Bond Market: Market Entry by Investment Bankers.
Remaking the Market: Innovative Gains to Users. Last
But Not Least: The Banks. Appendix: $500,000,000 Holiday Inns,
Inc. $400,000,000 R.H. Macy & Co., Inc. $55,000,000 Queen City
Broadcasting of New York, Inc.
||The Macro Side of the Innovation Process: How Markets
||The 1988 Legislation. Housing Finance Problems and
Financial Intermediation. Security Intermediation: Structural
Characteristics of Mortgage Passthrough Securities. Passthrough
Problems. Next Steps in Securitization: The Collateralized
Mortgage Obligation (CMO). Stripped Mortgage-Back Issues.
Concluding Remarks. Appendix 1: Two Necessary Digressions: The
Prepayment Problem. Underwriting Risks: Mortgage
Commitments. Appendix 2: Maturity Measures for CMOs.
Appendix 3: REMICs.
|Conclusion to Part I. Financial
Innovation and the Capital Markets Today
|Part II. The Market for Corporate Control
||Merger and Acquisitions I: Market Making as a Circus
||Defining Economic Costs and gains. Two Big Merger
Cases. Merger Calculations. Role of Investment
Bankers. Measuring Benefits to the Bidding Firm.
||Mergers and Acquisitions II: Risk Arbitrage and Merger
Market Making as Insurance
||Risk Arbitrage. The Risk-Arbitrage Deal.
Calculating the Rate of Institutional Sales. Return from
Risk Arbitrage. Investment Bankers: Other Activities in Corporate
Restructuring: Investment Banker Fees Once Again. The
Merger Fee as an Insurance Premium: Demand for Advice.
||Insider Trading Problems
||Recent Surge in Insider Activity.
Recent Case Law: Individual Insiders: Chiarella (1980). Dirks
(1983). Misappropriation Theory. Legislative Actions.
The SEC Actions. Institutional Insider Trading. Some
Conclusions, and Extensions to Commercial Banking.
|Part III. New Issues Flotation
||The Venture Capitalist
||The Venture Capital Process: The
Organization of Venture Capital Funds. Venture Capital
Financing of a New Firm: Bioengineering. Moving into the
world of Finance: Venture Capital. Brief Digression on
Convertible Preferred. The IPO: The End of Another Beginning: The
Investment Banking Function.
||The New Issue Underwriter: How to Price that
||New Issue Market Making. The
Information Set for a New Issue. Price Action for a New Stock
Issue: Preoffering Price Action. Pricing Debates.
Underpricing Once Again: An Investment Banker's IPO.
||The Nuts and Bolts of an Initial Public Offering
||Preparation. First Steps in Finance from,
and Information for, Outsiders. Purpose of Public Financing.
Decisions, Decisions... Preparations. The Legal Side.
Execution: The Underwriting Problem Summarized. The Adjusted
Present Value Rule. Dealing with the Underwriters. The
Underwriter's Side. Security Analysts Versus Valuation of a
Firm. The Time Line of an IPO. Schematic Time Schedule for
Public Offering of Common Stock.
||New Issue Underwriting as Insurance to the Issuer
||Waiting Risk. Pricing Risk. The
Demand for Risk Shifting. supply of Risk Shifting by Underwriters
through Diversification, Marketing, Hedging, and Institutional Sales: Diversification.
Marketing. Hedging. Pricing Services:
New Issues Pricing. Valuation of an IPO. Valuing
Informatics: A Case Study: Avoidance of Floatation Risks:
Management's Point of View. "Privileged Subscription"
for Rights Issues and Standby "Insurance." Some Conclusions:
Underwriting and Its Risks.
||New Issue Underwriting of Stocks and Bonds: Another
Application of Options Theory
||The Black/Scholes Model as an Underwriting
Process. Underwriting as a Put Option: Volatility. Insurance
Components of New Issue Flotation. Put Option Valuation.
Calculation of Put Premium: Low Price Variance. High
Price Variance. Moving from High Variance to Low Variance.
Pricing New Issues and Syndicate Management: The Good Old Days: Bidding
Mechanics in the 1960s: A Case Study. Preparation for a
Large Issue. Marketing Strategy. Syndicate
Tactics. The Final Price Meeting.
|Part IV. Policy Issue
||Full Disclosure and Securities Regulation: The Change
to Shelf Registration
||Full Disclosure. Short-Form
Registrations. Perspectives on the Prospectus under Rule
415. Underwriter Liability and Due Diligence. Capital-Market
Efficiency: How Relevant? Bond Shelf Announcements and Market Efficiency
Hypothesis. Could Rating Agensies Provide a Substitute for Affiance
||Shelf Registration of Bond Issues: The Current
||The Shift in Risk. Shelf
Registration: Current Supply Problems. Hedging. Doing a
Deal: Underwriting Spreads and Discounts. Reallowance.
Bought Deals, Premarketed Deals, and Competitive bids, Circa 1985.
Syndicate Risk Management and Hedging: Tactics. Strategy.
Other Syndicate Games--An Example. Summary and Some New
Thoughts on Agency Costs: Agency Costs.
||Investment Bankers and Their Clients:
Institutionalization Takes Command
||Large-Scale Trading: Investment Bankers as
Dealers: Size. Agility. A Case Study. Other
Institutional Demands. Management Conflicts for Institutions.
Agency Theory: Implications for Trading. Mergers and Pension
|Conclusion to Part IV: Institutionalization
and the One-Market Concept
||How the Industry Is Changing (Again)
||Institutional Investors. Increasing
Financial and Human Capital. Organizational Changes. Crisis
Management. Toward a Finance Ecology. The First Change: From
Partnership to Corporation. The Challenge: How to Control
Change. Change as Norm.
|Suggestions for Further Reading
|Common Investment Banking and Financial