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.
Technical meaning
The term 'bulge bracket' 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.
In common phraseology
The term 'bulge bracket' frequently refers to the group of investment banks considered to be the largest and most profitable in the world[1]. They 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, and today, carbon emission trading and insurance-linked products. There is often debate over which banks are considered to belong to the bulge bracket, because membership implies prestige, because there are no precise criteria for inclusion, and because financial power is transient. Various rankings are often cited, such as Thomson Reuters League Tables[2] or other league tables.
Prior to 2007-08 Subprime Mortgage Crisis
The ten Bulge Bracket firms on Wall Street prior to late 2008 were, alphabetically: Bear Stearns, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, and UBS.
This list shrank to nine as a result of the 2008 subprime mortgage crisis, with Bear Stearns being purchased by JPMorgan Chase, Lehman Brothers having filed for bankruptcy (later having their core US investment bank acquired by Barclays), Merrill Lynch being purchased by Bank of America. Barclays Capital and Bank of America Merrill Lynch gained Bulge Bracket status after their acquisitions. Meanwhile, Wells Fargo's acquisition of Wachovia and its strong growth resulted in an arguable Bulge Bracket role with future outlook to be determined.
Banks formerly part of the Bulge Bracket
- Bear Stearns, acquired by JPMorgan Chase in March 2008.
- Dillon, Read & Co., acquired by Swiss Bank Corporation (eventually UBS) in 1997.
- First Boston, acquired by Credit Suisse in 1988 and branded Credit Suisse First Boston, later renamed to Credit Suisse.
- Kuhn, Loeb & Co., merged with Lehman Brothers in 1977, forming Lehman Brothers, Kuhn, Loeb Inc.
- Lehman Brothers, declared bankrupt in September 2008. The Asian and European operations were bought by Nomura. Barclays acquired the North American Lehman operations.
- Merrill Lynch, acquired by Bank of America in September 2008.
- Salomon Brothers, acquired by Travelers Group (eventually Citigroup) in 1998.
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.
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