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SECURITIES |
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CAPITAL MARKETS
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INVESTMENT BANKING
Investment banks underwrite securities for the business community and offer investment advice. The type of equity deals they bring to market reflects a variety of factors including investor sentiment, the economy and market cycles. Examples of how these market factors drive this segment of the securities business include the rise and retreat of technology stocks; the varying levels of initial public offerings, where new stock issues are first offered to the public; and fluctuations in merger and acquisition activity.
In 2008 the crisis in the U.S. financial markets led to a shake up in the investment banking industry. Following the collapse of the giant investment bank Lehman Brothers, Goldman Sachs and Morgan Stanley opted to dismantle their investment bank structures to convert to traditional bank holding companies.
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CORPORATE UNDERWRITING, 2003-2007
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Value of U.S. corporate underwritings ($ billions) |
Number of U.S. corporate underwritings |
Year |
Debt |
Equity |
Total |
Debt |
Equity |
Total |
| 2003 | $1,793.3 | $156.3 | $1,949.6 | 4,845 | 829 | 5,674 |
| 2004 | 2,086.0 | 202.7 | 2,288.7 | 5,022 | 1,056 | 6,078 |
| 2005 | 2,598.7 | 190.4 | 2,789.1 | 5,479 | 856 | 6,335 |
| 2006 | 3,145.7 | 188.0 | 3,333.7 | 5,814 | 812 | 6,626 |
| 2007 | 2,706.5 | 246.0 | 2,952.5 | 4,370 | 816 | 5,186 |
| Source: Thompson Reuters; Securities Industry and Financial Markets Association. |
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EQUITY AND DEBT, 1998-2007
($ billions, end of year)
Year |
Corporate equities (1) |
Corporate bonds (2) |
Total U.S. government securities (3) |
Municipal bonds |
| 1998 | $15,547.3 | $4,127.7 | $7,046.6 | $1,402.7 |
| 1999 | 19,522.8 | 4,446.4 | 7,568.7 | 1,457.1 |
| 2000 | 17,627.0 | 4,798.4 | 7,704.8 | 1,480.7 |
| 2001 | 15,310.6 | 5,537.5 | 8,341.8 | 1,603.5 |
| 2002 | 11,900.5 | 6,199.7 | 9,146.1 | 1,762.9 |
| 2003 | 15,618.5 | 6,986.6 | 9,961.1 | 1,900.5 |
| 2004 | 17,389.3 | 7,860.0 | 10,445.9 | 2,031.0 |
| 2005 | 18,512.0 | 8,585.2 | 10,836.0 | 2,225.9 |
| 2006 | 20,909.3 | 9,747.0 | 11,350.3 | 2,403.2 |
| 2007 | 21,477.2 | 10,711.4 | 12,496.3 | 2,618.2 |
(1) Market value.
(2) Includes foreign bonds.
(3) Includes Treasury and agency- and government-sponsored enterprise-backed securities.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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MUNICIPAL BONDS
Municipal bonds are debt obligations issued by state or local governments to raise funds for general government needs (general obligation bonds) or special projects (revenue bonds). The average daily trading volume of these bonds more than doubled from $8.8 billion in 2000 to $22.5 billion in 2006 and stood at $17.0 billion in May 2008. The bonds play a significant role in investment portfolios because their yield is tax-free.
There are a variety of types of municipal bonds. Revenue bonds are used to fund projects that will eventually create revenue directly, such as a toll plaza. The principal and interest on revenue bonds are paid out of the revenues of the local government operation that issued the bonds. General obligation bonds are unsecured bonds; the principal and interest are backed by the “full faith and credit” of the local government and paid for out of the municipality’s general revenues.
Municipal bonds are usually sold in blocks to securities dealers, who either submit competitive bids for the bonds or negotiate a sale price. Negotiation is the prevailing form when the issuer is new to the financial markets or when the issue is particularly complex. Negotiation enables the underwriting dealer to become familiar with the issuer and the bonds and to help the municipality structure a complex issue. In some cases, new issues of municipal bonds are sold through private placements, in which issuers sell the bonds directly to investors, without a public offering.
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NUMBER AND VALUE OF LONG-TERM MUNICIPAL BOND
UNDERWRITINGS, 1998-2007 (1)
($ billions)
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Revenue bonds |
General obligation bonds |
Private placement bonds |
Total municipal bonds |
Year |
Value |
Number |
Value |
Number |
Value |
Number |
Value |
Number |
| 1998 | $187.2 | 7,208 | $93.5 | 7,362 | $6.1 | 834 | $286.8 | 15,404 |
| 1999 | 148.6 | 6,401 | 70.8 | 5,939 | 8.1 | 870 | 227.5 | 13,210 |
| 2000 | 128.3 | 5,325 | 66.3 | 5,267 | 6.2 | 668 | 200.8 | 11,260 |
| 2001 | 183.2 | 6,457 | 101.4 | 6,874 | 3.1 | 455 | 287.7 | 13,786 |
| 2002 | 229.4 | 6,505 | 125.4 | 7,552 | 2.7 | 341 | 357.5 | 14,398 |
| 2003 | 238.2 | 6,688 | 140.6 | 8,065 | 3.9 | 277 | 382.7 | 15,030 |
| 2004 | 227.8 | 6,022 | 129.1 | 7,295 | 2.9 | 286 | 359.8 | 13,603 |
| 2005 | 262.4 | 6,108 | 144.0 | 7,664 | 1.8 | 176 | 408.2 | 13,948 |
| 2006 | 267.5 | 5,921 | 114.6 | 6,537 | 4.4 | 284 | 386.7 | 12,742 |
| 2007 | 293.2 | 5,994 | 131.1 | 6,263 | 4.6 | 372 | 428.9 | 12,629 |
| (1) Excludes taxable municipal bonds and bonds with maturities under 13 months.
Source: Thompson Reuters; Securities Industry and Financial Markets Association. |
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PRIVATE PLACEMENTS
Private placement is the sale of stocks, bonds or other securities directly to an insitutional investor such as an insurance company. If the purchase is for investment purposes, as opposed to resale purposes, the transaction does not have to be registered with the Securities and Exchange Commission, as public offerings do.
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PRIVATE PLACEMENTS, 2003-2007
($ billions)
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Value of U.S. private placements |
Number of U.S. private placements |
Year |
Debt |
Equity |
Total |
Debt |
Equity |
Total |
| 2003 | $491.4 | $28.9 | $520.3 | 2,635 | 534 | 3,169 |
| 2004 | 570.4 | 32.1 | 602.5 | 2,729 | 560 | 3,289 |
| 2005 | 554.7 | 57.7 | 612.4 | 2,887 | 516 | 3,403 |
| 2006 | 523.7 | 73.5 | 597.2 | 2,705 | 596 | 3,301 |
| 2007 | 555.2 | 72.0 | 627.2 | 1,933 | 512 | 2,445 |
| Source: Thompson Reuters; Securities Industry and Financial Markets Association. |
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FOREIGN HOLDINGS OF U.S. SECURITIES, 1998-2007
($ billions, end of year)
Year |
Stocks |
Corporate bonds |
Treasuries (1) |
Total |
| 1998 | $1,107.9 | $589.7 | $1,351.8 | $3,049.4 |
| 1999 | 1,434.0 | 673.1 | 1,290.7 | 3,397.8 |
| 2000 | 1,483.0 | 841.8 | 1,369.6 | 3,694.4 |
| 2001 | 1,441.0 | 1,018.7 | 1,599.3 | 4,059.0 |
| 2002 | 1,221.6 | 1,123.8 | 1,915.3 | 4,260.7 |
| 2003 | 1,674.6 | 1,330.6 | 2,168.3 | 5,173.5 |
| 2004 | 1,904.6 | 1,559.1 | 2,688.6 | 6,152.3 |
| 2005 | 2,039.1 | 1,764.0 | 2,996.1 | 6,799.2 |
| 2006 | 2,454.7 | 2,201.4 | 3,353.6 | 8,009.7 |
| 2007 | 2,797.1 | 2,497.7 | 3,799.8 | 9,094.6 |
| (1) Includes agency issues.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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U.S. HOLDINGS OF FOREIGN SECURITIES, 1998-2007
($ billions, end of year)
Year |
Stocks (1) |
Bonds |
Total |
| 1998 | $1,475.0 | $594.4 | $2,069.4 |
| 1999 | 2,003.7 | 548.2 | 2,551.9 |
| 2000 | 1,852.8 | 572.7 | 2,425.5 |
| 2001 | 1,612.7 | 557.1 | 2,169.8 |
| 2002 | 1,374.7 | 705.2 | 2,079.9 |
| 2003 | 2,079.4 | 874.4 | 2,953.8 |
| 2004 | 2,560.4 | 993.0 | 3,553.4 |
| 2005 | 3,317.7 | 1,028.2 | 4,345.9 |
| 2006 | 4,251.5 | 1,180.8 | 5,432.3 |
| 2007 | 4,806.1 | 1,323.6 | 6,129.7 |
(1) Market value.
Source: Board of Governors of the Federal Reserve System, June 5, 2008. |
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