Brady Hints at Intervention on Takeovers

Treasury Secretary Nicholas F. Brady suggested today that unless the investment community stems the tide of debt-financed corporate takeovers the government will step in.

“It is the finest tradition of our democratic system that government look first to the people themselves for solutions and only act--but do act--when it is clear the people cannot solve the problem themselves,” he said.

Brady told the Senate Finance Committee the Bush Administration favors eliminating or reducing taxes on corporate dividends as a way to reduce leveraged buyouts or LBOs.

He acknowledged that the federal budget deficit likely precludes that.

However, his testimony was the clearest indication yet that the new Administration views the multibillion-dollar debt-financed takeovers as a possible threat to the U.S. economy and is willing to take action to stem them.

“I have a feeling that we are headed in the wrong direction when so much of our young talent and the nation’s financial resources are aimed at financial engineering while the rest of the world is laying the foundation for the future,” he said.

Brady said he would prefer that “the gladiators in the arena,” the investment bankers, corporate and insurance executives and pension fund managers who issue and trade in high-interest, high-risk junk bonds, come up with evidence that the resulting debt burdens are not harmful, or otherwise that they suggest proposals for addressing them.

While companies acquired through leveraged buyouts often lack the cash flow to pay interest on the junk bonds that financed the deals, the bankers, underwriters and fund managers in the transactions make millions of dollars in fees, Brady complained.

“Sadly, these same parties may have relatively little, if any, investment in the long-term success of the new enterprise,” he said.