As far as the role of investment banker is concerned, it encompasses three major activities: origination, risk bearing, and distribution.
Origination requires decisions about the type (e.g., debt, equity), quantity, price, timing, and other features of the new securities issue and the determination of the method of distribution. Risk bearing comes into play when the issue is a firm-commitment offering, in which the underwriter buys the securities from the issuer at a fixed price and resells them to the public. It is by far the most common form of underwriting. If the price of the securities falls before they can be resold, the underwriter will suffer a loss, thus the risk associated with this activity.
Occasionally, underwriters suffer substantial losses due to abrupt declines in some underwritten offerings. The investment bankers have been the subject of more industry analysis than has the overall broker-dealer industry. Pugel and White ( 210-14) studied the investment-banking industry using the structure-conduct-performance paradigm in a consideration of allowing commercial bank affiliates to underwrite corporate securities. Rogowski and Sorensen
Investment banking has always been a highly profitable but risky business for securities firms. Before Rule 415 was enacted, underwriting was very profitable, especially for the leading firms. Some of the profits were the result of entry barriers into the ranks of the top underwriters. But with Rule 415, the profitability of underwriting traditional corporate issues has declined. Now, the high-profit lines are not quite as profitable, although, there are always opportunities for securities firms, because of the ever-changing market conditions. For example, the opening of Eastern Europe may provide an area in which the ability of Wall Street firms to develop new products might be put to good use. As the Eastern European countries introduce more market-oriented approaches to economic management, there may be a need for unique securities instruments that would be compatible with the types of ownership that will emerge in these countries. (Mandelker, 683-94)
The riskier economic environment and the importance of innovations and diversifications for securities firms call for a new regulatory approach. The central focus of federal securities regulation has been to provide investors with sufficient material information to make informed investment decisions, to prohibit fraud in connection with the sale of securities, and to provide a safe and sound securities industry environment. (Dale, 3-13) The broad regulatory charge of protecting investors and maintaining fair and orderly markets grew out of the stock market crash of 1929 and the fraud, securities price manipulation, and other practices that took place before the crash. In the current, more volatile environment for securities firms, regulators must be more responsive to the needs of the regulated firms. Important new financial instruments have helped securities firms manage the increasing risks they face, and the regulators should facilitate the development of these instruments.
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