Abstract
In this paper we attempt to elaborate on the observation that “the common environmental feature that underlies mergers and acquisitions throughout the U.S. economy is increased competition.”1 Motivating this paper is the sharp contrast between the high cost of bank mergers and acquisitions and the large number of such transactions. The existing legal rules and regulations that govern bank mergers and acquisitions make such transactions very costly. The legal environment dramatically increases the transaction costs of mergers and acquisitions and especially of hostile takeovers in the field of banking.
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Notes
The Bank Merger Wave of the 90s: Nine Case Studies“, Charles W. Calomiris and Jason Karceski, Office for Banking Research, University of Illinois, Urbana/ Champaign, 1995.
The Economist, September 7, 1996, at 82.
Economist, September 7 at 82.
Macey und Miller, “Bank Failures, Risk Monitoring, and the Market for Bank Control,” 88 Columbia Law Review 1153 (1988).
Dewey, “Mergers and Cartels: Some Reservations About Policy,” 51 American Economic Review Paper and Prat, 255, 257 (1961).
Henry Manne, “Mergers and the Market for Corporate Control,” 73 Journal of Political Economy, 110, 112–13 (1965).
Id. at Ill.
Haddock, Macey und McChesney, “Property Rights in Assets and Resistance to Tender Offers,” 73 Virginia Law Review, 701, 709 (1987).
Calomiris and Karceski, The Bank Merger Wave of the 90s: Nine Case Studies (1996).
Diamond and Dybvig, “Bank Runs, Deposit Insurance, and Liquidity,” 91 J. Pol. Econ 401, 403 (1983) (“Banks are able to transform illiquid assets (into liquid assets) by offering liabilities with a different, smoother pattern of returns… Illiquidity of assets provides the rationale... for the existence of banks…”).
d. at 402.
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).
See Macey und Miller, “Good Finance, Bad Economies: An Analysis of the Fraud on the Market Theory,” 42 Stan. L. Rev. 1059 (1990).
Macey und Haddock, “Shirking at the SEC. The Failure of the National Market System,” 1985 U. Ill. L. Rev 315 (describing the origins of the NYSE).
R. Sobel, Inside Wall Street 67 (1982).
Macey und Haddock, supra note 14, at 329–330.
Easterbrook, “Two Agency-Cost Explanation of Dividends,” 74 Am. Econ. Rev. 650, 654 (1984).
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.
Typically, commercial paper matures in 90 days or less.
Litt, Macey, Miller und Rubin, “Politics, Bureaucracies and Financial Markets: Bank Entry into Commercial Paper Underwriting in the United States and Japan,” 139 U. Pa. L. Rev. 369, 375 (1990).
Id.
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.).
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.
U.S.C. §77 et. seq. (1988).
Note, “A Conduct Oriented Approach to the Glass-Steagall Act,” 91 Yale L. J 102, 115 (1981) (Jonathan R. Macey, author, citing J.P. Judd, “Competition Between Commercial Paper Markets and Commercial Banks,” 39, 48 (Staff Paper, Federal Reserve Bank of San Francisco, on file with the Yale Law Journal))
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.
Litt, Macey, Miller und Rubin supra note 20, at 378.
Id. at 379.
Id.
Haraf und Kushmeider, “Redefining Financial Markets,” in Restructuring Banking and Financial Services in America 3 (1988).
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.
Macey und Miller, supra note 13, at 206.
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).
See e.g. Farah Mfg. Co,678 S.W. 2d at 690.
See e.g, K.M.C. Co 757 F. 2d at 759–63.
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).
In re American Lumber Co., 5 B.R. 470 (Bankr. D. Minn. 1980).
Id. at 478.
Mark J Roe, “Political and Legal Restraints on Ownership and Control of Public Companies,” 27 J. Fin. Econ 7, 9–21 (1990) (describing how law constrains financial institutions’ role in the corporate structure).
Lise Simmons, “Banking: D’Amato Introduces Sweeping Legislation Aimed at Financial Services Modernization,” 1995 Daily Report for Executives (BNA) No. 23 (February 3, 1995), available in Lexis, News Library, Curnws File.
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Macey, J.R., Miller, G.P. (1998). Bank mergers and American bank competitiveness. In: Amihud, Y., Miller, G. (eds) Bank Mergers & Acquisitions. The New York University Salomon Center Series on Financial Markets and Institutions, vol 3. Springer, Boston, MA. https://doi.org/10.1007/978-1-4757-2799-9_8
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DOI: https://doi.org/10.1007/978-1-4757-2799-9_8
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