Bulge-bracket

This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed. (December 2007)

Bulge bracket is a phrase associated with finance, in particular the investment banking industry. It has both a common meaning and a more technical meaning. Historically, the two meanings were more closely linked than they are today.

In common phraseology

This article does not cite any references or sources. Please help improve this article by adding citations to reliable sources. Unverifiable material may be challenged and removed. (September 2008)

In common use, the term 'bulge bracket' refers loosely (in the US) to the group of investment banks considered to be the largest and most profitable in the world, as measured by various league table standings. Since the criteria for this judgment are unclear, there is often debate over which banks form part of the bulge bracket.

Ultimately it is a subjective term, sometimes based on Thomson Reuters League Tables^[1] or other deal and market share rankings. It is also a reference to the most prestigious institutions.

Firms considered part of the Bulge Bracket

Commonly, banks below are considered the undisputed examples:

• Bank of America
• Barclays Capital
• Citi
• Credit Suisse
• Deutsche Bank
• Goldman Sachs
• JPMorgan
• Morgan Stanley
• UBS

The largest bulge bracket firms on Wall Street, by market capitalization, included Goldman Sachs, Morgan Stanley and Merrill Lynch. This list is now set to shrink to none in 2008 as a result of the subprime mortgage crisis, with Bear Stearns being purchased by JPMorgan Chase, Lehman Brothers having filed for bankruptcy, Merrill Lynch being purchased by Bank of America, and Goldman Sachs and Morgan Stanley moving to become bank holding companies.

Other preeminent firms include:

• Macquarie Group
• Nomura Group
• RBS

Banks formerly part of the Bulge Bracket

• Kuhn, Loeb & Co. merged with Lehman Brothers in 1977, forming Lehman Brothers, Kuhn, Loeb Inc.
• Dillon, Read & Co. acquired by Swiss Bank Corporation in 1997.
• Salomon Brothers acquired by Travelers (eventually Citigroup) in 1998.
• First Boston acquired by Credit Suisse in 1988 and branded Credit Suisse First Boston, later renamed to Credit Suisse.
• Bear Stearns acquired by JPMorgan Chase in March 2008.
• Lehman Brothers declared bankruptcy in September 2008. The Asian and European operations were bought by Nomura. Barclays is in a deal to buy part of U.S. Lehman operations.
• Merrill Lynch was acquired by Bank of America in September 2008.

Prior to 2007-08 Subprime Mortgage Crisis

The five Bulge Bracket firms on Wall Street were, from largest to smallest; Goldman Sachs, Merrill Lynch Morgan Stanley, Lehman Brothers, and Bear Stearns.

Other rivals included JPMorgan, Citigroup, Credit Suisse, Deutsche Bank, and UBS all had strong investment banking divisions in the US.

Technical meaning

The term 'bulge bracket' also refers to the first group of investment banks listed on the "tombstone" (financial industry advertisement) notifying the public of a financial transaction or deal. In a public securities offering, within the underwriting syndicate, the bookrunning manager (the bank responsible for maintaining the order book when marketing the offering and therefore in control of allocation of securities to investors) appears above the others in the tombstone and on the cover of the prospectus. The font size of the name of this bank, or banks if there are co-bookrunning managers, is larger and it may "bulge" out.

History

The story of tombstone positions and the term "bulge bracket" is told in the "Tombstones" chapter of The House of Morgan by Ron Chernow.

Tombstone positions were a life-and-death matter for Wall Street firms. Those in higher layers, or brackets, received larger share allotments, while smaller firms struggled their way upwards. Within brackets, firms were listed alphabetically. During the Great Alphabet War of 1976, Halsey, Stuart adopted its parent's name, Bache, just to bootstrap up a few lines in tombstones.

According to Chernow, "[i]n the late 1960s and early 1970s, the top tier - called the bulge bracket - consisted of Morgan Stanley; First Boston; Kuhn, Loeb; and Dillon, Read." Morgan Stanley appeared above the other members of the bulge bracket by demanding and receiving the role of syndicate manager.

However, Morgan Stanley "queasily noted the rise of Salomon Brothers and Goldman Sachs, which were using their trading skills to chip away at the four dominant firms." In 1975, to more reflect economic reality, Morgan Stanley "kicked out the fading Kuhn, Loeb and Dillon, Read from the bulge bracket and brought in Merrill Lynch, Salomon Brothers and Goldman, Sachs." However, Morgan Stanley held onto its policy of appearing first by demanding the role of syndicate manager. Nevertheless, "[b]y the late 1970s, Morgan Stanley's sole-manager policy was a gilded anachronism."

For Morgan Stanley, the doomsday trumpet sounded in 1979. That year, IBM asked the firm to accept Salomon Brothers as co-manager on a $1-billion debt issue needed for a new generation of computers...After much resounding talk, nearly everybody [at Morgan Stanley] voted to defy IBM and demand sole management. Morgan Stanley was shocked when word came back that IBM hadn't budged in its demand: Salomon Brothers would head the issue, as planned. It was a landmark in Wall Street history: the golden chains [of Morgan dominance] were smashed.

References