2 How Bulge Bracket Banks Are Set Up… An Illustrative Example: J. P How Bulge Bracket Banks Are Set Up… An Illustrative Example: J.P. MorganJ.P. MorganInvestment BankingSales & TradingResearchAsset ManagementTreasury Security ServicesCredit RiskBehind all these divisions are accounting and operations functions.
4 Group Heads / Managing Directors Typical Management Structure Varies depending on the bank, group size and number of senior positionsGroup Heads / Managing DirectorsVice PresidentsAssociates (2 years)Analysts (2-3 yrs)Most familiar with current u-grad standards
7 Overview of Investment Banking Who are the major playersHow do they make $$What functions do they performWho are their clientsWhat other divisions do they connect/work with (if any)How is IB broken up? What kind of teams, groups or subdivision make up this sector of the bank?Who are the major playersJPM, GS, MS, BAML, Citi, CS, Barclays, Deutsche Bank, UBS.Boutique: Evercore and LazardHow do they make $$Financial Advisory (M&A, investitures, corporate defense action, restructuring, spin offs)Underwriting (IPOS, private placement, debt)What functions do they performWho are their clientsCorporationsWhat other divisions do they connect/work with (if any)S&T, Research,….Chinese wall.How is IB broken up? What kind of teams, groups or subdivision make up this sector of the bank?Product versus industry
9 Overview of Sales & Trading Facilitates movement of capital (securities) from those that have it to those that need itPrimary markets: where new securities are issuedSecondary markets: where trading of already issued securities occursMarket participants: individuals, pension and mutual funds, banks, governments, insurance companies, corporationsSell-side financial institutions (broker-dealers) add value by making markets in particular securitiesSalesTake orders from clients and communicate them to their trading desks for executionIntroduce new opportunities to customersKeep clients informed about changing market conditions that might affect the value of securities in their portfolioDinners/entertainment with clientsTradingDoes actual buying/selling of securitiesContinuously adjust bid/ask to make spread from transactionsTake on proprietary positions (principal investments)Risk management and securities pricing
10 General Characteristics Overall-Interest in the markets-Good communication and analytical skills-Thrive in fast-paced environmentSales-Good at attracting, building and maintaining relationshipsTrading-Be able to take calculated risk-Instinctively react to market movements(-Financial modelling)
12 Research Equity, Credit, Economic… Sell Side (Banks) and Buy side (Hedge Funds)Teams of 2-10, not standard across the streetEquity ResearchBuy/Sell/HoldThey Serve:Internal clients: traders, internal fundsExternal clients: sell side shops, hedge fundsDAN!
14 Overview of Asset Management Asset management is the professional management of various securities (shares, bonds etc.) and assets (e.g., real estate), to meet specified investment goals for the benefit of the investors. Investors may be institutions (insurance companies, pension funds, corporations etc.) or private investorsInvestment managers who specialize in advisory or discretionary (client gives the bank control over what to do and how to invest) management on behalf of (normally wealthy) private investors may often refer to their services as wealth management or portfolio management often within the context of so-called "private banking".The provision of 'investment management services' includes elements of financial analysis, asset selection, stock selection, plan implementation and ongoing monitoring of investments. Also, brokers and bankers have to be knowledgeable about any issues a client can face: mortgages, planning for college, planning for retirement, transferring assets to children, estate planning, wills etc. Investment management is a large and important global industry in its own right responsible for caretaking of trillions of dollars, euro, pounds and yen.
15 Overview of Asset Management Coming under the remit of financial services many of the world's largest companies are at least in part investment managers and employ millions of staff and create billions in revenue. All of the big banks have Asset Management divisions. Goldman, JPM, HSBC and Bank of America / Merrill Lynch are particularly well known in this industryMoney is earned by charging a commission on the investments that are sold to clients, by charging trading fees and fees for other services such as estate planning, or by charging a spread on the total yearly return for the portfolio.Client typically tend to be wealthy individuals and institutionsAsset management relies heavily on other divisions of the bank – the commercial bank for their credit card services which are offered to clients and S&T to help place trades for the wealthy clients.
16 JPMorgan Asset Management How is Asset Management Set Up? Example in Review: JPMorgan Asset ManagementJPMorgan Asset ManagementPrivate BankingFor private clients with $25million+ in liquid assetsIssues mainly evolve around protecting wealth and transferring assets to heirs, as well as implementing the best possible tax strategies.Private Wealth ManagementFor private clients with $2-25million in liquid assetsLower-level issues: this group may still have to worry about paying for college, planning for retirement or growing their portfolio.Investment ManagementFor institutional clients. Includes more quantitative groups and specialized groups in areas such as real estate, mutual funds, pension funds etc.**Different banks use the above titles differently. For example, all clients at Credit Suisse are part of their “Private Bank”, regardless of the amount of money they have.**Liquid Assets does NOT include your house, car, business etc. ONLY cash or investments
17 Types of AM TeamsBanking Teams (also known as Brokers – these are the “face” to the client and direct contact). Have a talking knowledge about a broad range of topics.Investor teams- make strategy calls specific to certain clients’ portfolios. Know the client well. Market oriented.Product Teams – Equity Solutions, FICC (Fixed Income / Currencies / Commodities), Mortgages, Hedge Funds, Due Diligence, Global Access Portfolios, Portfolio Construction. “Make the strategy calls for clients to get in or out of investments.” Deep knowledge about 1 specific topic.
19 Commercial BankingTreasury Securities Services-largest cash flows for most of the banks with credit card servicesGenerate enough cash flows to be their own stand-alone Fortune 500 companyOther Roles of the Commercial BankPayment processingIssuing bank chequesAccepting depositsLendingProviding guaranteesSafety deposit boxesIt is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits.Commercial banks engage in the following activities:processing of payments by way of telegraphic transfer, EFTPOS, internet banking, or other meansissuing bank drafts and bank chequesaccepting money on term depositlending money by overdraft, installment loan, or other meansproviding documentary and standby letter of credit, guarantees, performance bonds, securities underwriting commitments and other forms of off balance sheet exposuressafekeeping of documents and other items in safe deposit boxessale, distribution or brokerage, with or without advice, of insurance, unit trustsand similar financial products as a “financial supermarket”cash management and treasury servicesmerchant banking and private equity financingtraditionally, large commercial banks also underwrite bonds, and make marketsin currency, interest rates, and credit-related securities, but today large commercial banks usually have an investment bank arm that is involved in the mentioned activities.
20 Credit RiskCredit Risk-Evaluates the risk levels associated with certain dealsRating companies
21 Investment vs. Commercial Banks Investment BanksClients: Large corporations and high net worth individualsFinancial services and adviceIntermediariesS&T functionLoans are usually sold (removed from the Balance Sheet)Higher riskMake bets with own moneyCommercial BanksClients: Every day peopleProvide basic banking functionsAccept deposits (FDIC)Make consumer & commercial loans (held on Balance Sheet)Lower riskGlass-Steagall Act caused complete separation between commercial and investment banksIts repeal removed the separation. (1994-R) in Senate, bi-partisan in houseMS, GS, DB, CS
22 What is private equity?Private equity is a broad term that refers to any type of equity investment in an asset in which the equity is not freely tradable on a public stock market.Categories of private equity investment include leveraged buyouts, venture capital, growth capital, angel investing, mezzanine capital and others.PE firms will sometimes pool funds together to take very large public companies private. Many private equity firms conduct what are known as leveraged buyouts (LBOs), where large amounts of debt are issued to fund a large purchase. Private equity firms will then try to improve the financial results and prospects of the company in the hope of reselling the company to another firm or cashing out via an IPO.Alternative asset class favored by university endowments, insurance companies, corporate pension plans, public employee retirement plans and high net worth individuals
23 Reading List Reminiscences of a Stock Operator by Edwin Lefevre Stock Market Wizards: Interviews with Top Traders by Jack D. SchwagerWhen Genius Failed: The Rise and Fall of Long-Term Capital Management by Roger LowensteinLiar’s Poker: Rising Through the Wreckage on Wall Street by Michael LewisMonkey Business: Swinging Through the Wall Street Jungle by Peter Troob & John RolfeBarbarians at the Gate: The Fall of RJR Nabisco by John HelyarDen of Thieves by James B. StewartThe Alchemy of Finance: Reading the Mind of the Market by George Soros & Paul VolckerFooled by Randomness: The Hidden Role of Chance in Life and in the Markets by Nassim N. TalebAgainst the Gods by Peter L. BersteinThe Black Swan: The Impact of the Highly Improbable by Nassim N. TalebExtraordinary Popular Delusions and the Madness of Crowds by Charles MacKayIce Age by John Gribbin & Mary GribbinInfluence: The Psychology of Persuasion by Robert B. CialdiniWealth and Poverty of Nations: Why Some Are So Rich and Some So Poor by David S. LandesPoor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Charles T. Munger & Peter D. Kaufman