Capital Markets

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 convert to bank holding companies. 

 

CORPORATE CAPITAL RAISED IN THE U.S., 2007-2011 (1)

($ trillions)

Year Capital
2007 $3.5
2008 1.5
2009 1.6
2010 1.7
2011 1.5

(1) Includes corporate underwritings and private placements by U.S. issuers.

Source: Thomson Reuters; Securities Industry and Financial Markets Association.

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U.S. CORPORATE UNDERWRITINGS, 2007-2011

($ billions)

  2007 2008 2009 2010 2011
Debt securities          
Straight corporate debt $1,128.3 $707.2 $901.9 $1,062.7 $1,012.1
High yield debt 136.0 43.0 147.8 263.7 224.1
Convertible debt 76.4 42.0 33.0 29.1 20.7
Asset-backed securities 509.7 139.5 150.9 107.5 124.8
Non-agency mortgage-backed securities 773.9 45.1 32.4 19.0 22.9
Total debt $2,488.2 $933.8 $1,118.2 $1,218.4 $1,180.5
Equity securities          
Preferred stock 60.0 77.9 9.6 22.2 13.3
Common stock 187.5 164.7 254.6 239.5 185.1
    All IPOs 91.1 11.0 26.9 52.0 47.8
        True IPOs 50.7 7.2 24.5 43.1 40.7
        Closed-end fund IPOs 40.4 3.9 2.4 8.9 7.1
Total equity $247.5 $242.6 $264.2 $261.7 $198.4
Total underwriting $2,735.7 $1,176.4 $1,382.4 $1,480.0 $1,378.9

Source: Thomson Reuters; Securities Industry and Financial Markets Association.

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CORPORATE AND GOVERNMENT EQUITY AND DEBT, 2002-2011

($ billions, end of year)

Year Corporate equities (1) Corporate bonds (2) Total U.S. government
securities (3)
Municipal bonds
2002 $12,438.3 $6,367.4 $9,146.1 $1,762.8
2003 16,638.5 7,162.3 9,977.6 1,900.4
2004 18,940.1 8,049.4 10,455.2 2,850.4
2005 20,636.1 8,820.4 10,842.5 3,043.9
2006 24,339.3 10,080.0 11,354.1 3,212.2
2007 25,580.9 11,543.0 12,496.9 3,448.1
2008 15,640.5 11,118.3 14,504.9 3,543.4
2009 20,123.2 11,576.9 15,888.7 3,697.9
2010 23,249.5 11,538.5 16,959.7 3,795.6
2011 22,522.2 11,587.0 18,005.7 3,743.4

(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 7, 2012.

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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). Daily trading volume of these bonds rose steadily from $8.8 billion in 2000 to $25.1 billion in 2007 but dropped annually in subsequent years. The average daily volume dropped from $13.3 billion in 2010 to $11.3 billion in 2011.

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.

 

NUMBER AND VALUE OF LONG-TERM MUNICIPAL BOND UNDERWRITINGS, 2002-2011 (1)

($ billions)

  Revenue bonds General obligation bonds Private placement bonds Total municipal bonds
Year Value Number Value Number Value Number Value Number
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 4.4 284 386.5 12,742
2007 294.3 5,994 130.1 6,263 4.9 372 429.3 12,629
2008 277.1 4,713 110.3 5,658 4.2 315 391.5 10,686
2009 251.9 4,227 154.9 7,081 2.9 189 409.7 11,497
2010 283.4 5,307 146.9 8,258 2.8 160 433.1 13,725
2011 180.3 3,566 104.9 6,607 9.5 382 294.7 10,555

(1) Excludes taxable municipal bonds and bonds with maturities under 13 months.

Source: Thomson 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 institutional 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.

 

PRIVATE PLACEMENTS, 2007-2011

($ billions)

  Value of U.S. private placements Number of U.S. private placements
Year Debt Equity Total Debt Equity Total
2007 $579.6 $139.9 $719.5 2,031 980 3,011
2008 169.0 127.8 296.8 528 862 1,390
2009 164.4 8.1 172.5 521 517 1,038
2010 152.4 27.4 179.7 550 656 1,206
2011 114.1 25.0 139.1 484 529 1,013

Source: Thomson Reuters; Securities Industry and Financial Markets Association.

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FOREIGN HOLDINGS OF U.S. SECURITIES, 2002-2011

($ billions, end of year)

Year Stocks Corporate bonds Treasuries (1) Total
2002 $1,221.6 $1,123.0 $1,916.1 $4,260.7
2003 1,674.6 1,330.0 2,168.8 5,173.4
2004 1,904.6 1,558.9 2,688.8 6,152.3
2005 2,039.1 1,762.9 2,997.3 6,799.3
2006 2,448.1 2,320.5 3,389.8 8,158.4
2007 2,812.2 2,719.1 3,958.8 9,490.1
2008 1,806.6 2,354.0 4,659.9 8,820.5
2009 2,477.2 2,465.3 4,826.2 9,768.7
2010 2,926.1 2,488.6 5,462.6 10,877.3
2011 2,948.1 2,416.4 5,683.3 11,047.8

(1) Includes agency issues.

Source: Board of Governors of the Federal Reserve System, June 7, 2012.

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U.S. HOLDINGS OF FOREIGN SECURITIES, 2002-2011

($ billions, end of year)

Year Stocks (1) Bonds Total
2002 $1,374.0 $702.7 $2,076.7
2003 2,079.4 868.9 2,948.3
2004 2,560.4 985.0 3,545.4
2005 3,317.7 1,011.6 4,329.3
2006 4,329.0 1,275.5 5,604.5
2007 5,248.0 1,587.1 6,835.1
2008 2,748.4 1,237.3 3,985.7
2009 3,995.3 1,570.3 5,565.6
2010 4,485.6 1,737.3 6,222.9
2011 3,862.3 1,742.4 5,604.7

(1) Market value.

Source: Board of Governors of the Federal Reserve System, June 7, 2012.

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