Bank mergers and American bank competitiveness

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Economist, September 7 at 82.Google Scholar

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Pension fund assets, which now exceed two trillion dollars, include nearly a quarter of all equity securities and half of all corporate debt. The pension fund, now the dominant player in the world of institutional investing, scarcely existed a century ago, and was unimportant until the latter half of this century. In 1950, pension plans accounted for only 15.3% of the total holdings of institutional investors; by 1983 pension fund holdings had risen to 58.5% of institutional investments. R. Ippolito, Pensions, Economics, and Public Policy 157 (1986).Google Scholar

See Macey und Miller, “Good Finance, Bad Economies: An Analysis of the Fraud on the Market Theory,” 42 Stan. L. Rev. 1059 (1990).Google Scholar

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Id.at 653. We wish, however, to emphasize that the reduction in bank monitoring in trading markets is replaced by market mechanisms such as the market for corporate control, incentive-based compensation packages for managers, and competition in internal labor markets.Google Scholar

Typically, commercial paper matures in 90 days or less.Google Scholar

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The Glass-Steagall Act, officially designated the Banking Act of 1933, is the popular name of Ch. 89, 48 Stat. 162 (codified in amended in scattered sections of 12 U.S.C.).Google Scholar

Section 16 is codified at 12 U.S.C. §16 of Glass-Steagall applicable to state banks that are members of the Federal Reserve System.Google Scholar

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The Securities Act of 1933 ’ 3(a)(3), 15 U.S.C. §77c(a)(3)(1988) exempts from the registration, prospectus delivery, and anti-fraud provisions of the Act notes, drafts, bills of exchange, and bankers’ acceptances arising out of a current transaction that have a maturity at the time of issuance of less than nine months.Google Scholar

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This phenomenon is easy to illustrate. Suppose at the time a loan has been made, a borrower has all of its assets in an investment with a 1.0 probability of returning $1000 at the end of the investment period. Suppose further that $500 of this $1000 must be used to repay the principal and interest which is due to the firms fixed claimants at the end of the investment period. In this expected value for the shareholders is the residual, or $1000 - $500 = $500. Next, suppose the borrower shifts its investments into a riskier investment, one with a.5 chance of a $2000 payoff, and a.5 chance of a $300 pay off. This investment is worse for the fixed claimants because now the investment has an expected value of $400 instead of $500. The expected value of $400 results from the fact that if the second investment does well and produces a return of $2000, the fixed claimants will be paid in full their $500, while if the investment does poorly and returns only $300, the fixed claimants will be paid only $300. The expected value of this investment is therefore $400 ($500X.5 + $300 X.5 = $400). On the other hand, the shareholders prefer the second investment because it increases their expected return from $500 to $1000 ($2000 X.5 + $0 X.5 = $1000). Thus shareholders have an incentive to shift from the first investment to the second investment after a loan has been made.Google Scholar

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See Daniel R. Fischel, “The Economics of Lender Liability,” 99 Yale L. J 131, 140–42 (1989) (discussing various interpretations of the duty of good faith and relevance of this duty in deterring opportunistic behavior by both lenders and borrowers).Google Scholar

See e.g. Farah Mfg. Co,678 S.W. 2d at 690.Google Scholar

See e.g, K.M.C. Co 757 F. 2d at 759–63.Google Scholar

See Fleet Factors Corp.901 F.2d at 1557–68 (noting that a creditor may incur liability for a borrower’s affairs if its participation in management indicates ability to intervene in the corporation’s affairs). But see In re Gergsoe Metal Corp., 910 F.2d 668, 672 (9th Cir. 1990) (stating that “some actual management of the facility” is required to establish liability of secured creditor for a borrower’s affairs).Google Scholar

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