September 19, 2005
Regulatory Arbitrage: The Latest Wrinkle
The financial community is getting extremely adept at taking advantage of regulatory glitches. The latest wrinkle is the success of those who buy floundering companies with large pension plans and increase the value of their purchase by causing the company to punt the pension plans to the federal government (the Pension Benefit Guaranty Corporation). The purchasers (e.g. Robert Miller of Bethlehem Steel, Federal-Mogul, and now Delphi) push their companies into bankruptcy and force the PBGC to pick up their underfunded pension plans. The companies restructure, emerge from bankruptcy and are resold. The turn around artists are taking advantage of a poorly designed government program that was not designed to bail out companies but is amenable to the strategy. The new bankruptcy law taking effect in October makes the strategy a bit less attractive (e.g., it limits executive compensation) but does not stop it. The lesson for government is broader than the PBGC program. Eager financial wizards with cash can adroitly exploit poorly designed legislation and, for example, leave the government on the hook for debts that it never intended to guarantee. Government will have to take more care in drafting business legislation (the PBGC legislation was a rushed mess, passed during the Nixon impeachment days) and be faster to correct legislation that is being exploited.....or just pass less of this stuff to begin with.
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