Reagan Reviewing ‘Junk Bond’ Financing : Need Full Story on Insider Cases Before Changing Law, Baker Says

Wall Street’s insider trading scandal has forced the Reagan Administration to conduct an intense examination of corporate takeovers and mergers financed by junk bonds, Treasury Secretary James A. Baker III disclosed Thursday.

However, Baker told the Senate Budget Committee, no changes in securities law have been proposed yet, because officials are waiting “until we know what other shoes will drop” in the government’s investigations of stockbrokers and investment bankers. “We don’t know the full story now,” he said.

The Administration review was spurred by the case of Ivan F. Boesky, who was forced to pay $100 million in fines for illegal profits he made using secret information to buy stocks in companies that later became takeover targets.

Many of these takeover campaigns are financed by “junk bonds,” which carry a higher yield but more risk than ordinary bonds. If the takeover bid for a company succeeds, some of the firm’s assets often are sold to generate funds to make payments on the bonds.

Concern a Year Ago

The Administration’s concern about such financing was heightened by the flood of mergers a year ago, Baker said, but it decided against intervening at that time. “We did not feel there should be legislation outlawing junk bonds,” he told the committee.

Since then, however, Baker and other top officials have decided to “re-examine the issues in the light of what has happened,” he said. The Boesky scandal and related investigations by the Securities and Exchange Commission have focused new attention on insider trading, junk bonds and other such tools, including “greenmail” and “poison pills,” Baker said.

“Greenmail” is payment to someone who promises to drop his takeover attempt. In such a case, the corporate target usually buys back its stock from the raider at a hefty premium over the market value.

A company hoping to discourage raiders may adopt a “poison pill” defense, stacking the voting rights or the rules for a merger to make it impossible for a takeover bid to succeed.

“What we’ve got now is cannibalism” in which speculators are poised to jump on a company, Sen. Pete V. Domenici (R-N.M.) said. Many firms are ripe targets, “waiting for T. Boone, my former good friend,” Domenici said, referring to corporate raider T. Boone Pickens Jr., who has made huge profits in buying and selling the shares of companies involved in takeover fights.

Sen. Frank R. Lautenberg (D-N.J.), defended takeover bids as a way to protect shareholders and keep management efficient.

When companies “do not deploy resources effectively, they damn well better be prepared to be taken over,” he said. “There is no freer market than the stock market. I don’t think any management should be protected. If you stop corporate takeovers, you increase the lazy factor in corporate management across this country.”

Summit Meeting

During the hearing, Democrats repeated their call for a summit meeting at which congressional leaders and the White House would negotiate a new federal budget.

But Baker said that the President “simply would not participate” in such a session, if potential tax increases were on the agenda.

“The deficit should be reduced by reducing the scope of government, rather than through tax rate increases,” Baker said. The President’s budget, which includes a $108-billion deficit for the fiscal year starting Oct. 1, “shows that eliminating the deficit is possible without raising taxes, without sacrificing our defense preparedness and without cutting into the safety net for the poor and elderly,” he said.