Economic Madness

Encouraged by Alan Greenspan, chairman of the Federal Reserve Board, congressional leaders already are taking a close look at the increasing number and size of corporate takeovers, leveraged buyouts and acquisitions. So they should.

It is now certain that there will be hearings before the Senate Finance Committee under the chairmanship of Sen. Lloyd Bentsen (D-Tex.), and it is likely that there will also be hearings before the House Ways and Means Committee under the chairmanship of Rep. Dan Rostenkowski (D-Ill.). Furthermore, a Treasury Department study is expected to be completed in January, and the importance of the subject has been cited by Nicholas Brady, who will continue as secretary of the Treasury when George Bush becomes President in January.

The flurry of concern is understandable, given the accelerating pace of the financial dealings and the uncertainties that they have inspired in terms of extraordinary company debt burdens, climaxing with the $24.5-billion takeover of RJR Nabisco by Kohlberg Kravis Roberts & Co. But it is by no means clear that Congress can devise any legislative prescriptions that could be enacted with confidence that they would do more good than harm. There is substantial interest, nevertheless, in a reexamination of tax law that, as Greenspan himself said, “provides some incentives toward leverage.” Corporate interest payments on so-called junk bonds, often used to finance takeovers, are deductible from taxes, in contrast with stock dividends. It is an inequity that is probably best cured by ending the anomaly of taxes on dividends--a practice that is in effect double taxation.

Hearings on Capitol Hill could in themselves serve as a disincentive to the splurge of mergers and acquisitions by forcing corporate executives and takeover entrepreneurs to explain in public the economic “justifications” for their deals. This could serve to expose what is widely seen as the Greed Factor that may be driving at least some of the major moves. Close questioning of corporate managers could serve to reveal whether they have in fact met their good-faith obligations to stockholders. It is not easy to see how managers who use corporate assets, at enormous personal profit, to leverage acquisition of the companies that they manage can avoid conflicts of interest with other stockholders.

The focus also will be on banks, which are profiting from premium interest rates on money lent for the acquisitions and buyouts. One recent study showed that, in the 18 months ending in September, funding provided by 300 leading banks for leveraged buyouts totaled $62.5 billion, or 14% of their lending volume. These ventures will be examined in the context of their effect on more productive investments. And, as Bentsen has made clear, the Senate will be looking in particular at the role of one of the major buyers of junk bonds, the savings-and-loan institutions--an industry already in deep trouble--with expectations that it will require a bailout by the federal government that may reach as high as $100 billion.

Some investors, notably bondholders, already have been hurt in the leveraged buyouts. Some who have played the game from the inside have made remarkable profits out of all relationship to the conventional measures of economic value. Numerous financial institutions and those who advise them are earning extraordinary fees. Executives are making profits of almost unbelievable dimensions in insider leveraged buyouts, stirring the accusation of greed. Perhaps most important, there is no evidence that the merger-and-acquisition mania is strengthening the American economy, increasing its productivity, generating jobs or improving international competitiveness. Indeed, it will not be at all surprising should Congress find that the effect has been to the contrary--largely negative.