alternatives to government regulations in the financial sector j.d. han for money (and banking) eco...
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Alternatives to Government Regulations in the Financial
SectorJ.D. Han for Money (and Banking)
Eco 2154 PPP #4
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We all know that Information Asymmetry is an intrinsic problem to the financial industry.
How can we help the Market Economy solve its own problems?
What are the market-endogenous, as opposed to exogenous government intervention, solutions to Information Asymmetry?
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1) Information Market
Information Revolution may resolve Information Free Rider Problem
Then there occurs a Perfect Market of Information which will (almost) resolve Information Asymmetry
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2) Mergers and Acquisitions will lead to More Information
Disclosures• M & A targets Firms with severe problems
of Principal and Agent (a Moral Hazard), and tries to correct them.
• M & A process reveals Moral Hazard problems of the target firm.
• M & A uses Leveraged Buy Out (LBO) with bonds, and replaces equities with bonds which carry more management monitoring through restrictive covenant.
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3) New Forms of Financing rises for Close Management Monitoring: Private Equity• Private Equity is complex and elusive.
• What it does? One major function is Mezzanine Financing (preferred stocks, and subordinated bonds) combines Equities and Bonds with best of both worlds – Lenders can constantly and closely monitor management.
• related (confusingly) with Venture Capital (relatively new), Merchant Banking (as old as in 16th century)
• Japanese Banking, European Banking, and U.S. Financial Trusts(J.P. Morgan) before Glass-Steagall Act of 1933
• Gramm-Leach-Bliley Act of 1999 allows Financial Holding Company to become lenders(no meddling with management) as well as share-holders( who can do management monitoring), and boosts Private Equity(Merchant Banking)
• Performances in terms of Returns and Safety(Risk) are superior.
• The only problem is “social equity issue” or “protection of small investors” who go alongside with giants – U.S. has unique legal system to protect them: “Lender’s Liability and Equitable Surbordination”
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• We should facilitate Information Revolution, and allows for active M & As and new forms of innovative financing formats.
• In reality, the government often tries to suppress them.
• Obama-Biden’s basic tone of objection to these pro-market evolutions may be wrong.