The Wall Street Journal had an interesting piece suggesting that banks pay a premium for takeovers that bring their size up $100 billion. Maybe if the writeoffs get a bit bigger, Too Big To Fail status may pay off.
Two Federal Reserve economists, "Elijah Brewer III and Julapa Jagtiani, combed through 13 years of banking merger data to establish whether banks were willing to pay extra premiums to attain TBTF [Too Big To Fail] status, which they concluded was around $100 billion in assets."
"... the researchers found that premiums shot up when a bank did a deal that vaulted it over the $100 billion asset threshold. Overall, the nine banks that did such deals paid an additional $14 billion to $16.5 billion to get to that gold-plated TBTF status."
""It's more than Too Big To Fail. It includes all the benefits of being so big and powerful. These may not just be benefits from being bailed out, but being able to talk to the White House and Congress," Ms. Jagtiani said in an interview. "There is a lot of subsidy provided to really large banks," she added, noting that the study was the opinion of the authors and not the Federal Reserve. "It seems like we may be encouraging misallocation of resources." She did caution that "at the Federal Reserve, we don't have a list of Too Big To Fail banks"."
Cimilluca, Dana. 2007. "Can Banks Grow Too Big To Fail? Research Finds Lenders Would Pay More to Cross $100 Billion Threshold." (12 December): p. C 2.
http://online.wsj.com/article/SB119743338212123099.html
Not to mention the huge subsidies mostly to corporate management in the process of a leveraged buyout of another corporation.
ReplyDeleteLeverage buy outs (LBOs) are not subject to regulation. So who knows what the risk is?
Is it true, as I understand, that the US Government also gives special tax rates of less than 10% for LBOs (capital gains)?
Then there is the associated proliferation of junk bonds (high risk investment money), much of which is sourced from pension funds.
Many of these companies - not necessarily banks - are stripped of assets (over a 3-4 year period) and the employees outsourced and offshored. Jobs are lost and established companies destroyed. The big winners are the managers who engineer the buyouts, and who can earn billions in just one year.
Of course, the long-term interests of investors, employees, customers, and suppliers are ignored.
After asset stripping and outsourcing (and even if this doesn't occur), these companies are laden with debt, a big problem now that borrowing costs have risen and an economic downturn is underway.
Another interesting piece of information. I enjoyed Railroading Economics, by the way, and intend to read it a second time.
ReplyDeleteThank you, Eleanor.
ReplyDeleteHere's a link to their paper.
ReplyDelete