Investment Banking A Guide to Underwriting and Advisory Services
The recent financial turmoil has raised suspects on investment banks and will certainly reshape the industry. However, the transactions traditionally managed by investment banks will still require the intervention of financial institutions, as always in t
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Giuliano Iannotta
Investment Banking A Guide to Underwriting and Advisory Services
Professor Giuliano Iannotta Department of Finance Universita` Bocconi via Roentgen 1 20136 Milano Italy [email protected]
ISBN: 978-3-540-93764-7 e-ISBN: 978-3-540-93765-4 DOI 10.1007/978-3-540-93765-4 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2009943831 # Springer-Verlag Berlin Heidelberg 2010 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Cover design: WMXDesign GmbH, Heidelberg, Germany Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)
To my family
Preface
From a historical point of view, the main activity of investment banks is what today we call security underwriting. Investment banks buy securities, such as bonds and stocks, from an issuer and then sell them to the final investors. In the eighteenth century, the main securities were bonds issued by governments. The way these bonds were priced and placed is extraordinarily similar to the system that investment banks still use nowadays. When a government wanted to issue new bonds, it negotiated with a few prominent “middlemen” (today we would call them investment bankers). The middlemen agreed to take a fraction of the bonds: they accepted to do so only after having canvassed a list of people they could rely upon. The people on the list were the final investors. The middlemen negotiated with the government even after the issuance. Indeed, in those days governments often changed unilaterally the bond conditions and being on the list of an important middleman could make the difference. On the other hand, middlemen with larger lists were considered to be in a better bargaining position. This game was repeated over time, and hence, reputation mattered. For the middlemen, being trusted by both the investors on the list and by the issuing governments was crucial. In case of problems with a bond, investors would have blamed the middlemen, who naturally became advisors in distressed situations. For example, in the nineteenth century, the accumulation of capital in America was not sufficient to finance the increasing investments in railroads and other infrastructure. The nascent investment
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