The investment industry is comprised of a wide variety of sectors and service providers. At the top of the list are the giant asset managers, like BlackRock, a firm managing more than $4 trillion in investment assets, an amount so immense that it is roughly equal to the gross national products of Russia and India combined. Also at the top of the industry are the biggest exchanges, were billions of shares trade hands yearly, along with the major investment banks, those firms that raise money for corporate clients by selling their stocks and bonds to the public. Investment banks also deal in private equity investments and asset management, and they earn immense fees by brokering mergers and acquisitions.
Then there are the big firms that provide stock brokerage services. Some of them, like Merrill Lynch, are also investment banks. Others, like Charles Schwab, are primarily stock brokers that deal with millions of individual customers. However, the lines have blurred between sectors in recent years. It is common for one firm to operate in multiple segments of the business at once: commercial banking, investment banking, asset management, insurance, mortgages, financial advisory, venture capital, mergers and acquisitions and more.
The Global Investment Industry: This is a massive, global industry, and, in light of the fact that it provides the services that enable companies to have access to capital, it is one of the most important industries of all.
Global mutual fund assets totaled $27.44 trillion on June 30, 2013, according to the Investment Company Institute.
The World Federation of Exchanges estimated the total value (market capitalization) of stocks on all of the world’s significant exchanges at $63.3 trillion as of November 30, 2013 (up from $47.4 trillion at the end of 2011), with shares available in 45,438 companies. Worldwide during the first 11 months of 2013, 50.2 trillion shares were traded.
After an extremely turbulent environment during the recent recession, the global investment industry has been greatly altered. Lehman Brothers was allowed to fail completely. Bear Stearns was taken over by JPMorgan Chase at a nominal price. Global banking and investment industry leader RBS (Royal Bank of Scotland) was bailed out with public funds to the extent that it became controlled by the UK government. Insurance industry giant AIG was bailed out by the American government. The world became familiar with phrases like “toxic assets,” and American taxpayers, whether they liked it or not, backed emergency plans and market support programs with acronyms like TARP (Troubled Asset Relief Program) and TALF (Term Asset-Backed Loan Facility). By the end of 2009, the U.S. government had created initiatives based on corporate bailouts, asset purchases, emergency lending and financial market support totaling more than $2 trillion. These were only a few of the massive changes wrought by the upheaval of the global financial crisis that began quietly in the late summer of 2007 and roared into a full financial hurricane in 2008.
By the end of the painful 2008-09 period, the investment industry, on a global basis, had been through losses, layoffs, scandals, bankruptcies, forced mergers, government intervention, bailouts and/or disappointments on a scale not seen in decades. In 2010 through 2013, the investment industry began rebuilding and reshaping its strategy, and the industry generally enjoyed robust business, with strong IPO volume and high stock market values.
Regulation: In the U.S. and Europe, one rapid result of the global financial crisis was a cry in the halls of government for greatly increased supervision and revamped regulation of the financial industry, from banking to insurance to the investment sector.
The biggest changes faced by commercial banks that plan to comply with the latest round of recommendations, the “Basel III” accords, will be in raising sufficient capital. The Tier-1 minimum capital requirement will increase to 10.5% by 2019. (Tier-1 capital is a ratio of equity capital plus stated bank reserves to assets, and is a commonly used measure of a bank’s core financial stability. The massive UK bank RBS had only about 3.5% of Tier-1 capital when the financial crisis began, and the bank promptly failed. U.S. banks endured losses equal to about 7% of assets during the recent crisis.) The intent is to make it much less likely that massive bank failures will be faced in the future, even during a major financial upheaval.
A looming issue that remains is known as the “leverage ratio.” As of mid 2013, this rule had not been finalized, but it could eventually impose stringent, additional capital requirements on banks. The rule is intended to limit banks' ability to use sophisticated accounting and special corporate structures to build up liabilities off of their balance sheets. It is intended to be in place by January 1, 2015. The leverage ratio is calculated by dividing Tier 1 capital by total consolidated assets.
In the U.S. a sweeping reform bill, the Dodd-Frank Wall Street Reform and Consumer Protection Act, was signed by President Obama in July 2010, after European finance ministers approved similar regulations for much of Europe a few months earlier. In general, requirements under the law include broad powers for the government to monitor systemic financial risk and to intervene where it deems necessary. For example, it requires a bank to shrink in size if the government believes that the bank is posing financial risks, and an orderly liquidation process has been set out for extreme cases in which regulators need to seize and auction off financial firms that are nearing bankruptcy.
In June 2012, the U.S. Federal Reserve Board approved three proposals implementing the Basel III standards. Basel III requirements and capital increases were planned to be phased-in at American banks starting on January 1, 2013. However, after wide-ranging complaints and criticism, the Federal Reserve, in November 2012, delayed implementation of a large part of the requirements pending further study.
More recently, the long-awaited Volcker Rule was finalized in December 2013. This is an effort to limit the trading in stocks, bonds, swaps, hedges, derivatives, etc. that banks can participate in for their own accounts (as opposed to trading for the direct benefit of specific clients). The intent is to limit the risks that banks may take, and therefore reduce the likelihood of massive bank failures. However, the list of exceptions allowed is so extensive that the rule leaves much open to future interpretation. For example, the rule allows banks to trade for "liquidity management" and to maintain adequate inventory of financial risk for their day to day "market maker" activities.
The U.S. Investment Industry: Employment in America alone, in firms that are involved in securities and investments, was estimated at 833,000 as of October 2013, up by about 30,000 from the previous year according to numbers published by the U.S. Bureau of Labor Standards.
About 51 million Americans participate in 401(k) investment plans at their places of work, with assets totaling about $3.5 trillion as of June 2013. Mutual funds in America held $14.6 trillion in assets as of October 2013, while ETFs held $1.61 trillion. U.S. retirement account assets totaled about $20.9 trillion in mid 2013, according to ICI, the Investment Company Institute (www.ici.org).
America’s stock exchanges are highly electronic today, trading vast amounts of stocks, bonds and options at blazing speed. Average daily volume on the NYSE was running at a 1.04 billion shares rate in late 2013 and a 1.76 billion shares rate on the NASDAQ.