Download Financial Institutions and Capital Markets

UVA-MOD-0142Y
Rev. Oct. 16, 2013
FINANCIAL INSTITUTIONS AND CAPITAL MARKETS
GBUS 8490
Syllabus
Introduction (Link to Video: Voice of the Instructor)
This course highlights the importance of
About Darden Course Syllabi
institutions and markets. Markets do not exist in a
vacuum; rather, participants interact in organized The Darden Graduate School of
markets that are set up to promote efficient exchange of Business Administration is regularly
funds from buyers to sellers. Institutions such as banks, recognized as having one of the
hedge funds, sovereign wealth funds etc., are key world’s premier teaching faculties
players in the capital markets looking for arbitrage within business education. Darden
opportunities; with their insights and volume of trading, Business Publishing is pleased to
provide current Darden course syllabi
any arbitrage opportunities are usually eliminated
for verified faculty members. These
quickly, pushing markets to become more efficient. syllabi provide instructors with context
Markets that have existed for some time are generally as to how cases could be used in a
efficient but that may not always be true for newer particular sequence to achieve the
markets such as some emerging markets. Trading in the learning outcomes of the teaching
markets takes place in the form of instruments, the teams at the Darden School. Use the
most common of which are stocks and bonds. Constant modules in these course syllabi as a
innovation on the part of banks has created a large reference for updating case materials
number of alternative securities; to the extent that these within your school’s programs.
new instruments facilitate trading (or help in the
execution of arbitrage trading strategies), they can have a long life (e.g., stock options) and earn
banks fees.
Financial engineering (structured products) can provide a solution to clients’ problems
often in a cost-effective way. Arbitrage and financial engineering both entail risks; sometimes
these risks are not clearly seen and evaluated properly, which can cause (and has caused)
problems among banks and even for the entire market-based system (just think of the recent
subprime mortgage crisis as one such example).
This syllabus was prepared by Yiorgos Allayannis of the Darden Graduate School of Business Administration at the
University of Virginia. Copyright  2011 by the University of Virginia Darden School Foundation, Charlottesville,
VA. All rights reserved. To order copies, send an e-mail to [email protected]. No part of this
publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by
any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden
School Foundation.
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Risk management is a key function that firms use to understand their exposures and
manage them. Recent moves by banks have elevated its stature, and only time will tell whether
these new measures will be sufficient to avert new crises. The government plays a big role in the
creation and evolution of the markets, most commonly, via regulation. Regulation can also
change the rules of the game altogether and create a new class of winners and losers.
Understanding its implications is therefore critical to continued innovation and growth on the
part of market participants.
This course is important for students pursuing careers in investment banking, private
equity, sales and trading, hedge funds, investment management, and financial services. The
course is also appropriate for those seeking careers in corporate treasuries or wanting to
understand markets, as well as for financial consultants (such as asset management consultants).
The course links with several courses in the MBA curriculum, such as Valuation, Investments,
M&A, Financial Trading, and Fixed Income. With the exception of Valuation, none of the other
courses listed here are requirements for taking or successfully completing this course.
Course Outline
Session one examines Warren Buffett, his success, his decision to invest in particular
securities/industries and start his own reinsurance company while at the same time avoiding any
large investment in financial institutions, and how he is now looking for the “new Buffett.” The
rest of the course contains the following three modules:
1. The first module, “Financial Institutions” (UVA-MOD-0142), concentrates on financial
institutions. Specifically, session 2 analyses a bank, its role, and how it is valued; session
3 examines the way banks use capital strategically to grow; session 4 examines bank risk
management (identification, measurement, and management of the various risks that
banks face); session 5 discusses the new leaders of financial giants Citi and Merrill and
the problems they have faced regarding risk and capital raising, as they were caught in
the subprime crisis, and the solutions/plans that they have used to deal with the crisis.
2. The second module, “Innovations in Capital Markets” (UVA-MOD-0143), examines
specific markets and innovations in the capital markets. Although some of this survey of
markets and instruments may have a historical view, the issues in these cases are ever
present. Specifically, sessions 6 and 7 cover the Treasury market, its function, the auction
process in the issuance of Treasury securities, and an early case of arbitrage in this
market; session 8 discusses CDOs, a more recent innovation linked to the recent financial
crisis; session 9 covers the high-yield market and provides an opportunity to discuss the
credit rating process and how securities are designed to fit investor appetite in the context
of a refinancing deal. Session 10 examines the commercial paper and the CDS markets
and the impact that the Lehman Brothers bankruptcy had on them.
3. The third module, “Creation of New Markets” (UVA-MOD-0144), covers the creation of
new markets, such as the carbon markets and the emerging equity and bond markets, and
key players such as the sovereign wealth funds and infrastructure funds. It concludes with
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lessons learned from the recent financial crisis—why it happened and how it can be
prevented from happening again. Specifically, session 11 discusses carbon markets;
session 12 discusses sovereign wealth funds; session 13 discusses infrastructure funds
and the Athens Ring Road in southeastern Europe; and session 15 concludes with
discussion on the financial crisis, its causes, and its consequences for the markets.
Course Requirements
Grading is based on class participation (50%), and an exam (50%). For some sessions,
preparation involves reading technical notes and applying techniques to specific problems. Other
sessions tackle comprehensive cases, while others discuss conceptual issues surrounding capital
markets and the role of institutions.
Optional readings are from Capital Markets: Institutions, and Instruments, Frank J.
Fabozzi and Franco Modigliani, 4th ed., Pearson (FM). These readings provide general
background material, and the book is a good reference book to have on capital markets.
By the end of the course, students should have mastered the following topics:

Structure of markets

Institutions

Valuation methodologies

Financial engineering and innovation

Risk and risk management

Key players in the markets

New markets
Darden Course Instructor
Darden Teaching Faculty
Yiorgos Allayannis
Cases by Author
Allayannis cases
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Course Outline
Class
Materials
Introduction
1
“Warren Buffett, 2008” (UVA-F-1550)
Optional reading: FM, Ch. 2
“Financial Institutions” (UVA-MOD-0142)
2
“Comerica Incorporated: The Valuation Dilemma” (UVA-F-1581)
Supplemental Spreadsheet Available.
“Technical Note: Bank Valuation Issues” (UVA-F-1582)
Optional reading: FM, Ch. 3
3
“SunTrust Inc. Acquisition of National Commerce” (UVA-F-1554)
Supplemental Spreadsheet Available.
“Bank Capital Structure: A Primer” (UVA-F-1555)
4
“Risk Exposure and Risk Management at Korea First Bank” (UVAF-1386)
Supplemental Spreadsheet Available.
5
“New Leaders of Financial Giants: The Case of Vikram Pandit (Citi)
and John Thain (Merrill Lynch)” (UVA-F-1551)
“Innovations in Capital Markets” (UVA-MOD-0143)
6
“Salomon and the Treasury Securities Auction” (HBS 9-292-114)
Optional reading: FM, Ch. 20, 21
7
“Arbitrage in the Government Bond Market?” (HBS 9-293-093)
8
“Western Asset Arbitrage” (UVA-F-1577)
Optional reading: FM, Ch. 26, 28, 32
9
“Metromedia” (HBS 9-286-044)
Optional reading: FM, Ch. 22, 23
10
“The Weekend That Changed Wall Street” (UVA-F-1587)
“Creation of New Markets” (UVA-MOD-0144)
11
“CO2 Australia—The Case for Carbon Credits” (UVA-F-1585)
“Carbon Credit Markets” (UVA-F-1583)
12
“The Case of Sovereign Wealth Funds: A New (Old) Force in the
Capital Markets” (UVA-F-1564)
13
“Athens Ring Road (ATTIKI ODOS)” (UVA-F-1576)
Supplemental Spreadsheet Available.
14
TBD
15
“The Financial Crisis of 2007–2009: The Road to Systemic Risk”
(UVA-F-1590)
Topic
Intro to institutions and markets
Institutions: banks
Importance of bank capital;
strategic use
Bank risk management
Subprime crisis and banks
Treasury market
Arbitrage
CDOs
High yield
Commercial paper; CDS
Carbon credit markets
Sovereign wealth funds
TBD
Lessons from the financial crisis