Martin Cautions Banks on Merger Loans

The Federal Reserve Board is keeping a close eye on how corporate mergers are affecting the nation’s financial markets but does not favor denying credit for hostile takeovers, Fed Vice Chairman Preston Martin told a Senate panel Thursday.

Martin said the Fed “has actively urged banks to evaluate carefully loans used to finance buy-outs and other types of takeover transactions and to apply prudent standards in their credit decisions.”

And he said that federal examiners have been given specific guidelines to follow in evaluating loans used for leveraged buy-out financing of corporate mergers and takeovers.

While noting that federally chartered banks and thrift institutions are prohibited from purchasing so-called junk bonds used to finance many corporate takeovers, Martin said some state-chartered thrifts have purchased those securities because of the high interest rates they offer.

“Given the evident sensitivity of financial markets to the fortunes of individual banks and thrift institutions, I think it is incumbent upon supervisors at both the federal and state levels to keep a close eye on developments in this area,” he told the Senate Banking subcommittee on securities.

John S. R. Shad, chairman of the Securities and Exchange Commission, testified that his agency will not be resubmitting a legislative package it pushed last year--largely because it sees less use of the tactics that most concerned the commission, specifically “golden parachutes” and “greenmail.”

In a golden-parachute arrangement, an outgoing executive of a corporation being taken over is given a lucrative financial award in exchange for not blocking the takeover.

Greenmail refers to payments made to someone engineering a takeover attempt in exchange for them dropping the effort.

Shad said the Deficit Reduction Act passed last year contained some little-noticed provisions likely to reduce greenmail and golden- parachute payments because of the way the payments are taxed.

Moreover, he said, many corporations are changing their charters to include language on greenmail similar to what the SEC proposed last year.

Recycles Funds

The Fed’s Martin told the panel that mergers and acquisitions basically “do not absorb net real savings in the economy.”

“Proceeds from the transactions either are returned to bank accounts or reinvested in other instruments, thereby recycling the funds into the markets,” he said.

“We do not believe that arbitrary controls of uses of credit can be effective or desirable. Nor can a government agency determine, among thousands of mergers, which are good and which are bad,” Martin added.

At the same time, the Fed official emphasized that he was not implying that “we should be complacent about the implications of lending for mergers and takeovers.” He said it was prudent for Congress and various federal agencies to be reviewing some of the defensive and offensive weapons that have evolved in takeover wars.

“Also, a careful review should be given to features of the tax system that appear to encourage merger activity, and, in particular, those features that favor the use of debt financing,” Martin said.

Another witness, Joseph R. Wright Jr., deputy director of the Office of Management and Budget, reiterated the Reagan Adminstration’s opposition to legislation designed to block hostile takeovers.