Alternatives to Government Regulations in the Financial Sector J.D. Han for Money (and Banking) Eco 2154 PPP #4

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?

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

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.

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 16 th 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”

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.Obama-Biden’s basic tone of objection to these pro-market evolutions