THE DIVISION OF INVESTMENT BANKING FEES IN A SYNDICATE

You are the lead underwriter among a syndicate of five investment banks composed of yourself, the syndicate co-manager, and syndicate members 3, 4, and 5. Your syndicate finds a deal worth $100 million in fees. You must submit a proposal as to how the fees should be divided, and the syndicate then votes by majority rule. Your syndicate is rational and democratic in the sense that the division of fees will be decided based upon maximization of absolute gain in this single deal, and the members also have reputational reasons in future deals (where the lower-ranked members hope to achieve more influence and get a higher-ranked position) to abide by a majority decision. If your proposal is rejected by vote of the syndicate, you are displaced as lead underwriter, removed altogether from the deal making, and replaced by the co-manager who then makes a proposal to the remaining four. If his deal is rejected, he too is removed, and syndicate member 3 makes a proposal to the three firms remaining, and so on.

Questions

1. What should you as the lead underwriter offer and to whom? [Hint: Employ the methods of sequential game reasoning. Start at the endgame and work backward.]

2. Is there anything unusual about the divison of these fees across the syndicate?

3. Why would any investment bank volunteer to be a syndicate co-manager?