Department of Finance

H
How th
the Cit
City W
Works
k

Janet Bacastow
Wednesday 15 September 2010

MSc Finance
MSc Finance and Private Equity
 Department of Finance

How Canary Wharf Works

 Department of Finance

Global Finance
 Department of Finance

B
Based
d on hi
history
t

Nearly two thirds of you will end up

working in a Financial Institution
 Department of Finance

City and Banking Forum

7 October 2010

Banking & Financial Services Fair

12 and 14 October 2010
 Department of Finance

Financial Institutions

• Banks
• g
Investment Managers
• Hedge Funds
• Principal Investing
 Basic Business Models
• Glass Steagall Act 1933-1999
Separation of CBs and IBs
Also established the FDIC
• Commercial Bank “Retail” or “High Street”
– tthe
e “Utility”
Ut ty
• Investment bank – the “Casino”
• “Universal” banks the model today
 Financial Institutions Facilitate
Transfer of Capital

Transfer:
Providers of Capital Agent or Users of Capital
“Lenders” Principal
“Borrowers”
“Investors” ssue s
“Issuers”
Commercial Banks Typically used
the Loan Market - Principal

Depositors Borrowers
Loan Market

This market was “frozen” due to the credit crunch

D
Demandd or supplyl problem????
bl ????
 Investment Banks Typically used
the Capital Markets – Intermediary
and Principal
p

“Investors”
Capital Markets “Issuers”
“Buyers”
 Department of Finance

BARCLAYS
GROUP plc

BARCLAYS BANK plc “BAR CAP” “BGI”

COMMERCIAL INVESTMENT BANK INVESTMENT MANAGER

BANK
 Department of Finance

Goldman Sachs
Group

Goldman Sachs Bank

Goldman Sachs GSAM

COMMERCIAL INVESTMENT BANK INVESTMENT MANAGER

BANK
 Banks
Commercial Banking Investment Banking

Primaryy Assets= trading

g
Primary Assets=Loans positions
Primary Liab.= Deposits Primary Liab.= s.term
Collateralised debt
Large B
L Balance
l Sh
Sheett
Lower Leverage Smaller Balance Sheet
Illiquid B/S Higher Leverage
Liquid B/S
Syndicate Loans
Sell securities Backed Purchase assets to
By loans C
Collateralise MBS
S
CDOs,CLOs
MBS High bonuses
Few bonuses
 An “Investment Bank”
Functions

Corporate Finance Capital Markets Sales and Trading

“IBD”
IBD Division Division

Interface between
Strategic Advice
IBD and S & T
To Sales and Trading
for
Corporations for all securities
Capital Raising
Financial Inst. Inc.ABS
for new
Governments
securitises
iti
 What Does Office Mean?

“Front Office” “Middle Office” “Back Office”

External/Internal
Focus
External Focus Internal Focus
Support Revenue
Customer Interface “Ticket” Processing
Production
Revenue Production Now: IT Focus
Product Control
“Desk”/Product Financial Reporting
Structuring
 “Analyst”
Analyst

Job Title as in Job Level as in

“Research Analyst” Analyst/Associate
 Department of Finance

Investment Banking Skills

• Analytical
A l ti l and
d Modelling
M d lli

• Presentation and Communication

• Motivation

• High Energy and Stamina

• Teamwork

• Problem Solving

• Project Management
 Department of Finance

Student Attributes from WSJ Survey

• Communication and Interpersonal skills- 90%

• Ability to work well within a team - 87%

• Analytical and Problem Solving Skills – 86%

• Ability to drive results – 81%

 Weight of IBD Skills Varies
Analytic and Modelling
Analyst

Associate

Vice President

(Executive) Director

Managing Director Communication

 Weight of Skills Varies Depending
on Job
Derivatives Structuring Analytic and Modelling
Middle office

Analytic and Communication

Communication
Equity Sales
Front Office
 An “Investment Bank”
Functions
Sales and Trading
Corporate Finance Capital Markets
((and Research))
“IBD”
IBD Division
Division

Interface between Sales and Trading

Strategic Advice
IBD and S & T for all securities
To
for Inc.ABS
Corporations
Capital Raising
Financial Inst.
for new Sometimes
Governments
securitises
iti “Global Markets”
 An “Investment Bank”
Functions

Corporate Finance
Equity
q y Division Fixed Income Division
“IBD”
IBD

Sales, Trading,
Strategic Advice
Capital Raising for Sales, Trading,
To
Equities and Capital Raising for
Corporations
Equity Related Fixed Income
Financial Inst.
Securities Securities
Governments
Might inc. ECM Probably inc. ABS
Might inc. DCM
 IBD Front Office IBD Front Office

Industry Specialists
FIG
TMT
Origination Specialists
Oil and Gas

Product Specialists
Mergers & Acquisitions Transaction Execution
Leveraged Finance Specialists

Geographic Specialists
Emerging Markets
Benelux
Iberia
Capital Markets Function

Equity Capital Markets

Debt Capital Markets
“ECM”
“DCM”
DCM
Equity Add-ons
Fixed Income Origination
IPO’s
Interest Rate Swaps
Convertibles
Currency Swaps

Geographic Specialists
Industry Specialists
Product Specialists
Sales and Trading functions
Front Office
Institutional Sales Individual

Flow Trading Prop Trading

e.g. ABS Structuring e.g. CDS

Equity Research Fixed Income

Marketing
 Research – “Sell
Sell Side”
Side

FIXED INCOME Macro EQUITY

Product Specific
Exchange Rates Industry or
On Trading floor
C
Commodities
diti Country Specific
or
Interest Rates
separate
“Sales” Job

Future?
Prime Brokerage

HEDGE FUND SERVICES

Lending Securities
Borrowing Securities
Lending Collateralised by
Securities
Order processing
Risk Management

See FM409

FI Portfolios
Derivatives
Credit Risk
Etc.
 Principal Investing

Putting the “Firm’s Capital “at Risk”

Examples

Prop Trading Private Equity H d F

Hedge Funds
d Real Estate
 Investment Management

Part of a Bank or Independent

“Buy Side” Money Management Sales

Research Long
“Long”
 Hedge Funds

“Unregulated”
Unregulated Investment Managers

High
g leverage
g adds to risk and return

Many different investment strategies

75% are long/short equity funds

Traders v Buy/hold
Private Equity

Not publically traded

F wealthy
For lth investors
i t
Raise “focused”funds
Rely on Leverage to
get returns
Focus on “Exit” strategy
 Regulation
UK US
g
1. Bank of England 1. Federal Reserve
2. FSA System
3 HM Treasury
3. 2. SEC
3. Department of
Treasury – Inc.
Inc
Comptroller of the
Currency
 Central Banks

Bank of England Federal Reserve Bank

Monetary Policy Monetary Policy

Formerly inflation Bank Supervision
focused Systemic Risk Focus
“Quantitative Easing” Provide liquidity
 Market Regulator
Financial Services Securities & Exchange
Authority Commission

Regulates markets, Maintain efficient and

exchanges and orderly markets
financial firms
 “Current” Issues of Regulation-
2009
• Separate
S t “utility”
“ tilit ” (CB) ffrom ““casino”
i ” (IB)?
• Adequate capital requirements? v. Liquidity/Confidence
• How to regulate systemic risk?
• Business model regulation?
• Who is responsible for what?
• Global regulation?
• Derivatives hedge funds
Derivatives, funds, rating agencies?
• “Tobin” Tax
• g Wills” – tax and regulatory
“Living g y arbitrage
g
• Non bank banks (AIG)?
• Regulation of bonuses/pay?
 US Regulatory Update
Dodd-Frank
D dd F k W Wallll St
Streett Reform
R f and
d Consumer
C P
Protection
t ti
Act
– Consumer Financial Protection Bureau
– Too Big to Fail – capital requirements and bankruptcy – “Moral
Hazard”
– Financial Stability Oversight Council – systemic risk
– “Volker” rule
– Transparency for exotics, swaps and hedge funds
– Federal bank supervision (non-banks)
– Exec. Compensation and Corp. Governance
– Credit Agency Transparency
– Strengthening SEC
– Did not tackle Fannie Mae or Freddie Mac
 UK Regulatory Update
• Bonus Tax – Labour Government
• A New Approach to Financial Regulation:
Judgment, Focus and Stability - July 2010
• Comments
C t up tto 18 O
October
t b
 Other
• International Monetary Fund – Cross
Border Resolution Mechanisms and
Enhanced Coordination – working paper
• BASEL III – Capital and Liquidity Reforms
– Timing of implementation?
– Raise capital or build up capital?
 Populist Politics
• Bonuses – “Greed”
• “Too
Too big to fail”
fail (Moral Hazard)
• “Excessive risk taking”
• “Casino banking”
• Are the global banks an oligopoly???
 Department of Finance

How to Find Out More

• Websites of Banks

• Vault.com

• Financial Times/WSJ/Economist

• Efinancial News

• IFR

• Bloomberg
Bl b
 Department of Finance

City and Banking Forum

7 October 2010

Banking & Financial Services Fair

12 and 14 October 2010
 Department of Finance

City Tour

Friday afternoon

Meet at 14.30 on Houghton St

(outside the main entrance)