Global Banking and Capital Markets – Course Syllabus

Course B40.3387 Summer 2011 Prof. Frederick C. Militello, Jr. Department of Finance Course Description The focus of this course is primarily on the determinants of competitive dynamics and performance in the global financial services industry. It covers commercial and investment banking: specifically, markets, products and global activities. It addresses the determinants of competition in global banking; focusing especially on financial strategies, organizational structures and geographical dimensions—looking at markets and institutions in the US, Europe, Japan and emerging markets. The course also focuses its attention on the special risks of operating in these markets and related products; and, the challenges they present to both regulators and market participants. Throughout the course, relevant current events are examined and used to illustrate teaching/discussion points.

Course Outline Class One - July 2, 2011 The Global Financial Crisis Winning and Failing Strategies (morning) This opening session establishes the framework for the course. It explores what it means to be a “winning” financial organization. It explores fundamental strategies (and related tactics) and how they contribute to the workings of sound financial institutions and global capital markets. We will discuss:    

Who are the major players in today’s global capital markets—changes and trends? What do we mean by the “winning” strategies of global banking? What role did these “winning” strategies play in the recent financial crisis of 2007-09? When and why did many of these “winning” strategies fail? 1

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What precisely do we mean by the global capital markets? What role have the “winning” strategies played in the development and practices of global capital markets? Where are these strategies headed given the emergence of a new financial architecture—an initial view? What role did these strategies play – both positive and negative – in the development and practices of global financial markets?

Risk and Regulation (afternoon) This session explores how such strategies and tactics—when ignored, abused or misinterpreted—lead to the breakdown of otherwise sound financial organizations and global markets; and the eventual re-regulation of almost every aspect of industry behavior and practice. We will discuss:       

What are the specific risks of such strategies—in loan, debt, equity and derivative markets—and how do they manifest themselves? How have such strategies impacted the thinking of global regulators and their reengineering of the world’s financial system? What have been some of the specific regulatory manifestations, e.g., the Dodd-Frank Act, Basel III and the new architecture of global finance? How have these regulatory considerations already begun to influence the organizational structure and behavior of financial organizations and markets? What are the key sources of risk encountered in global markets and financial market activities? What are the systemic drivers of risk that are likely to continue to shape the thinking of regulators and the realities of practitioners? How do these factors impact risk assessment and capital requirements, e.g., VaR and RAROC?

A Common Framework In short, these two opening sessions are designed to provide a common framework for discussion and reference. As we move forward and discuss organizational behaviors and market practices we shall relate back to this framework. Also, we will use this framework—as the course progresses—to help formulate a vision of what the new financial order (and related playing field) will look like and how it is likely to impact our personal and business lives.

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Global Banking and Capital Markets – Course Syllabus Reading Assignment: Bank for International Settlements (BIS) – 2010 Annual Report Chapters 1 & 6

http://www.bis.org/publ/arpdf/at2010e.pdf “GB” Chapters 12&13 “RWS” Prologue, Chapters 1, 4, 5, 6, and 7 For reference it will be useful to review: http://enwikipedia.org/wiki/porter_generic_strategies http://emwikipedia.org/wiki/porter_five_forces_analysis Case Assignment: “BB” UBS AG 2008

Session Two – July 9, 2011 The Global Capital Markets Global Market Integration (morning) The morning session is designed to introduce participants to the global capital markets. Its focus is on explaining the development of these markets and their increased integration. It will focus on the key players and practices of each market—but in the context of their overall development and general practices. (More specific practices and products of select markets will be covered as we progress throughout the course). Also, in this introduction to the global markets, we will explore the role that the “winning” strategies have had on the formulation of global markets including the Eurocurrency and Euro-securities markets. Specifically, we will look at the evolution and increased integration of the following:   

Money market instruments, debt and equity securities—the role of securitization and disintermediation Global bank lending (syndicated loans)—the role of intermediation and reintermediation Derivatives (money market, interest rate, foreign currency and equity swaps)—the role of market integration and liquidity—OTC and exchange-traded activities

This session is essential for providing participants with a complete view of the global capital markets. The focus of this session will on capital-raising activities. It will also demonstrate the interplay between market participants and how practices in the global capital markets, when driven by the “winning” strategies, can lead to increased innovation and more efficient risk distribution. We will explore the future of securitization and related markets. 3

Global Banking and Capital Markets – Course Syllabus Global Market Indicators (afternoon) The afternoon session will complete our understanding of the integrated workings of the global capital markets. In this final session of the day, we will need to learn how to “read” the markets for opportunities. The capital markets are always talking to us—all we have to do is listen. In this session we will briefly explore some of the capital market indicators and see how they impact various opportunities for raising capital. Specifically, in this session we will explore the key indicators and their capital market implications: for example, the term structure of interest rates, credit spreads, the level of interest rates (real and nominal), the implied level of volatility in the markets, etc. These indicators have a great deal to do with how security offerings are structured and offered/received in the markets. We shall apply these indicators, and the “winning” strategies to an in-class case study of market integration. Reading Assignment: “GB” Chapters 2-5 Note: These Chapters will be the foundation for the session and others to follow. It is recommended that they be read now (as an overview to our discussion) and then later again (individually and in more detail) as we move forward with our discussion of specific markets and practices. Additional data/information on these markets will be posted on “BB” as the course moves forward. Case Assignment: “BB” Meeting Borrower/Investor Needs: Structuring a Complex Capital-Raising Transaction in Integrated Global Capital Markets Note: In teams, this case will be completed and discussed in class. It will be posted on “BB” prior to the session—please have a copy for your reference and review before coming to class.

Class Three – July 16, 2011 Raising Capital – Part One The Debt Capital Markets (morning) The morning session will focus on raising capital through the integrated utilization of the global debt capital markets and the syndicated loan markets. The first part of the session will focus on some of the specifics of the debt capital markets and possible debt capital-raising structures. It will also discuss the role of syndicated lending as a bridge to the capital markets and the use of derivatives (interest and currency) to facilitate the borrowing in markets of comparative advantage while managing unwanted liability risk exposure. In this session, we will discuss: 4

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The meaning of comparative advantage Its role in capital market fund-raising Trends in developed and emerging markets (loan, debt, derivative) The importance of derivatives to the realization of comparative advantage The mechanics and politics of syndicated lending The mechanics of structuring synthetic debt The role of investors, borrowers and intermediaries The risks (and regulatory reforms) of the debt, derivative and loan markets and related participant activities/practices.

Case Study Discussion This session (morning and afternoon) will largely rely on a discussion of the assigned case work; however, it will also focus on how each case demonstrates the evolution of the markets to one where bank lending, liability risk management and the capital-raising process have become fully integrated. This has implications for our “winning” strategies but also for the future of markets—given the prospect for increased regulation and the possible fragmentation of market practices. The Workings of Debt and Derivative Instruments (afternoon) In the afternoon, the session will shift gears a bit and will demonstrate some of the more specific workings of various capital market instruments, including:   

Interest rate swaps (including money market swaps) Foreign currency swaps Various debt instruments – with an emphasis on how their structures are designed to influence (satisfy appetites) markets of comparative advantage.

Reading Assignment: “GB” Re-read carefully Chapters 3-5 “RWS” Chapters 13, 15, and 16 Additional data/information on these markets will be posted on “BB” as the course moves forward. Case Assignment: Please order electronic copies @ http://www.hbs.edu Phillip Morris Companies, Inc. (A) (B) (C) “BB” Republic of Argentina $85billion Par Value Debt Exchange Offer

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Global Banking and Capital Markets – Course Syllabus Class Four – July 23, 2011 Raising Capital – Part Two The Global Equities Markets (Including hybrids) This session will focus on the raising of capital through the global equities markets. Included in this discussion, will be the use of certain hybrid structures designed to provide borrowers/investors with both the benefits of equity and debt. This session will also look at the use of equity derivatives as part of the increased management of equity issuance programs including those related to privatizations and related goals of increased employee stock-ownership participation. Specifically, we will discuss:        

The equity markets (domestic, foreign and global) Trends in developed and emerging markets Types of equity issuance/distribution The role of regulation in equity markets The growth of hybrid security structures Equity issuance and privatizations Equity as a tool of capital-raising flexibility The use and role of equity derivatives

Reading Assignment: “GB” Chapter 7 & 9 Additional data/information on these markets will be posted on “BB” as the course moves forward. Case Study Assignment: “BB” Deutsche Telecom 1 & 2 “BB” The Sale of Jenapharm

Class Five – July 30, 2011 Putting Capital to Work Mergers and Acquisitions (morning) Perhaps no other area has gone through such dramatic changes in thinking and practice than that of mergers and acquisitions (M&A). No-doubt M&A has been a huge driver of capital market activities—especially those involving business portfolio management and organizational restructuring. Also, the business of M&A has gone through dramatic changes in terms of 6

Global Banking and Capital Markets – Course Syllabus participants and the sources of capital that fund such transactions. Accordingly, we will discuss in the morning session:         

Trends in M&A activity—in both developed and emerging markets Changes in M&A activity, e.g., diversification, core competency and adjacency strategies Capital market transactions that compliment M&A activity, e.g., corporate spin-offs, exchangeable debt offerings, etc. The strategic role and drivers of M&A activities The funding of such through loan syndications and debt capital markets The private sponsorship and drivers of M&A activities The role of private equity firms and investment funds Some thoughts and “empirical” evidence on the effectiveness of M&A activities The connection between M&A activities and the “winning” strategies

Reading Assignment: “GB” Chapter 8 Case Assignment: “BB” The Acquisition of Martell ”BB” The Steel War: Mittal versus Arcelor

Risk and Regulation Re-visited (late afternoon) For the final session of the day, we will briefly re-visit our earlier discussions on regulation and reassess what impact we believe such regulations, and on-going thought processes and deliberations, are likely to have on:     

The structure of global capital markets The activities of participants—especially banks—in global capital markets The impact such regulations are likely to have on the risk-taking activities of financial organizations The formulation of new bank structures—the role of spin-offs—niche players The relationship between banks and their commercial customers regarding their need to raise capital and manage risk

Reading Assignment: “RWS” Review Chapters 7, 13, 16

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Global Banking and Capital Markets – Course Syllabus Final Class Six – August 6, 2011 Financial Restructuring and Competitive Challenges The future of Banking and the Global Capital Markets (morning) This session is designed to take us back to our first reflections together. We will now take a new look at the global banking and capital market arenas and make a final assessment of their future. Specifically, we will explore—using the tools of competitive strategy analysis—the following areas:      

A look at the competitive dynamics of the industry—utilizing various strategy models, e.g., the five forces (porter), C-A-P (Walter) The strategic positioning of financial organizations Getting one’s strategy right—back to the “winning” strategies The future of risk-taking activities The future of capital-raising activities The future of bank-funding/lending activities

Reading Assignment: “RWS” Chapter 17 “GB” Chapters 14 & 15 Case Assignment: “BB” Citigroup 1998-2009 “BB” ABN Amro Final Examination (afternoon)

Course Information Course Prerequisites Students registering for this course should have had previous courses in basic economics, accounting and financial analysis at the undergraduate or graduate level. Prerequisites can be waived by consent of the instructor.

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Global Banking and Capital Markets – Course Syllabus Pedagogy The course is conducted over six-classes—each containing two sessions. The course begins on Saturday July 2, 2010 and is completed on Saturday August 6, 2010. Classes run from 09.00am to 04.00pm. Suitable breaks will be given for coffee and lunch. Also, class activities will occur throughout each day facilitating movement and discussion among the participants. It is strongly recommended that you attend classes. The course is case-oriented, and includes extensive classroom participation; requiring students to apply principles developed in class to actual international commercial and investment banking situations. The case discussions are interspersed with lectures to explain the technical aspects of the activities covered by the cases. The course does not involve routine lectures on material presented in the readings. All readings and case preparation should have been completed prior to the class for which they are assigned. Most of the course material is posted on Blackboard “BB,” where you can download a copy of this outline, reading assignments, cases, and copies of exhibits used in class. Students should carefully read and be prepared to discuss all assigned cases, and will be called-on in class to present their case findings – the cases will also be covered on the mid-term and final exams. Each student will be expected to participate actively in class discussion. Students who do not participate will be graded less favorably than those who do. Required Text Books Roy C. Smith and Ingo Walter, Global Banking, Second Edition (New York: Oxford University Press, 2003)—Denoted “GB.” Viral Acharya, Thomas Cooley, Matthew Richardson and Ingo Walter (Eds.), Regulating Wall Street (New York: John Wiley, 2011)—Denoted “RWS.” Besides designated readings in the required texts, there will be other readings and market updates posted to “BB.” Examinations There will be a 90-minute mid-term examination on July 23, 2011 (morning), which will cover the first half of the course; and, a 90-minute final examination on August 6, 2011 (afternoon) which will cover the second half of the course. Both exams will deal with all of the assigned readings, cases, and classroom discussions.

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Global Banking and Capital Markets – Course Syllabus Grading Mid-term exam – 50% Final Exam – 50% Classroom participation – Up to + 1 letter grade Instructor Frederick C. Militello, Jr. is an adjunct professor of finance. Over the years, he has taught many courses for Stern including international financial management and global banking and capital markets. Appointments are always possible and are best made by email: [email protected] Frederick C. Militello, Jr., is CEO/Senior Thought Leader of Future Change Management, LLC. He is also an adjunct GBS professor of finance – global markets and strategies at New York University’s Leonard N. Stern School of Business. Frederick is an experienced speaker, facilitator, author, professor, executive coach and advisor with more than thirty-years of experience. He has been a leading practitioner and thought leader to financial executives around the world. Specifically: - He has held numerous senior executive positions such as vice president, division executive and managing director for the Chase Manhattan Bank responsible for their global corporate consulting and merchant banking activities. Frederick has also held financial positions for US Steel Corporation, Mobil Oil Corporation, the Bank of Boston International and the American Stock Exchange. He has also been founder and co-owner of two Wall Street financial/educational advisory practices. - He has written many books in the field of finance including: . Leverage Competencies: What Financial Executives Need to Lead; . The Empowered Organization: Redefining the Roles and Practices of Finance; . Integrity-Based Financial Leadership and Ethical Behavior; . Reassessing Corporate Banking Relationships: Issues, Practices and New Directions; . Foreign Exchange Risk Management: A Survey of Corporate Practices.

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Global Banking and Capital Markets – Course Syllabus - Over the years, his clients have included some of the world’s largest corporations including Apple Computer, McDonald’s, Monsanto, Sandoz, Gillette, etc., as well as well-known financial organizations around the world—both in developed and emerging markets. - He has been a speaker and Chair Person for educational organizations including the BelgianAmerican Chamber of Commerce, Management Centre Europe, the American Management Association, the Rotterdam School of Management, the Vlerick Gent Leuven School of Management and the Financial Executives International. - As a scholar he was awarded the Wall Street Journal Student Achievement Award in Economics and is a professional member of the World Future Society and Strategic Planning Society. - Educated in New York, Frederick studied at Pace and Columbia Universities earning advanced degrees in economics and international economics. - He has sat on boards for numerous not-for-profit organizations such as the Children’s Media Project and the Durham Historic Preservation Commission (Chair). He is married for almost twenty-five years, has three daughters, one granddaughter and lives on their family-run horse farm.

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