The bulge bracket comprises the world's largest and most profitable multi-national investment banking firms whose clients are usually large corporations, institutions, and governments. These banking institutions typically facilitate the most global capital movement and underwrite most financial contracts. Although there is often debate among financial reporters and economists as to which investment bank belongs in the bulge bracket, 11 specific banks are widely regarded as the sole members. They are historically and in modern usage listed in alphabetical order as: Bank of America Merrill Lynch, Barclays Investment Bank, Citi Group, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and UBS.
The name "bulge bracket" comes from the aforementioned bank's financial transactions, when recorded statistically, to "bulge out" from other banks. In other words, if one were to graph the value of the financial activity of these companies, their combined values would look similar to a bell curve. During the 19th century, the largest of these banks were printed in financial reports with larger fonts in effect creating a "bulge" effect. Apart from its usage with investment banks, the name has been used to describe other financial services and management consulting companies as well as various law practices to highlight a perceived size or profitability.
History
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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 â€" called the bulge bracket â€" 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." 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.
Name
The name comes from the way investment banks are listed on the "tombstone", or public notification of a financial transaction. The bank responsible for control of allocation of securities to investors, known as the bookrunning manager is listed above the others 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. Moreover, the name "bulge bracket" also comes from the aforementioned bank's financial transactions, when recorded statistically, to "bulge out" from other banks. In other words, if one were to graph the value of the financial activity of these companies, their combined values would look similar to a bell curve.
Modern usage
Bulge bracket banks usually provide both advisory and financing banking services, as well as the sales, market making, and research on a broad array of financial products including equities, credit, rates, commodities, and their derivatives. They are also heavily involved in the invention of new financial products, such as mortgage-backed securities in the 1980s, credit default swaps in the 1990s, mortgage-backed securities (MBS) and collateralized debt obligations (CDO) in the 2000s and today, carbon emission trading and insurance-linked products. Bulge bracket firms are usually primary dealers in U.S. treasury securities. Bulge bracket banks are also global in the sense that they have a strong presence in all three of the world's major regions: The Americas, EMEA, and Asia-Pacific.
Membership
There is often debate over which banks are considered to belong to the bulge bracket. Membership implies prestige, but there are no precise criteria for inclusion, and financial power is transient. Various rankings are often cited, such as Thomson Reuters League Tables, Bloomberg 20, or other league tables. By most standard accounts, there are 11 investment banks considered to comprise the "bulge bracket". They are, in alphabetical order:
The stand-alone companies of Merrill Lynch, Salomon Brothers, and First Boston were acquired by Bank of America, Citi Group, and Credit Suisse, respectively, during the 2008 financial crisis.
Other usage
By extension, the international business world refers to service providers as "bulge bracket" such as "bulge bracket law firms" when they are capable of servicing global clients thanks to their global presence. Just like bulge bracket banks, bulge bracket service providers have a strong presence in all three of the world's major regions: The Americas, EMEA, and Asia-Pacific. Typical bulge bracket law firms are firms such as Dechert, Orrick, Allen & Overy, Baker & McKenzie, Fidal, DLA Piper, Clifford Chance, White & Case, Holland & Knight, and Hogan Lovells. Typical bulge bracket management consulting firms are McKinsey & Company, Boston Consulting Group, and Bain & Company.
See also
- List of investment banks
- Too big to fail
Notes
References
