Buyout Ben

18 May 2007

The Fed chairman is worried about the risks of lending to LBOs. The dangers are certainly increasing. However, regulators failed to restrain the subprime bubble. A buyout bust would have a greater impact on the financial system.

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Federal Reserve Chairman Ben Bernanke, in response to a question at a Chicago conference on Thursday, commented: "There are some significant risks associated with the financing of private equity, including bridge loans, [and] we are looking at that… I urge banks to closely evaluate the risk that they're taking not only in the context of a highly liquid, benign financial environment, but in one that might conceivably be less liquid and benign."

In his prepared speech, Bernanke commented on subprime mortgage regulation: Rules are useful if they can be drawn sharply, with bright lines, and address practices that are never, or almost never, legitimate. Sometimes, however, specific lending practices that may be viewed as inappropriate in some circumstances are appropriate in others, and the conditions under which those practices are appropriate cannot be sharply delineated in advance. In such cases, supervisory guidance that establishes principles or guidelines is, when applicable, probably the better approach.

In a speech earlier in the week, New York Fed President Timothy Geithner said, "We are...looking carefully at...the management of the bridge exposures institutions run in leveraged lending, leveraged buyout and mergerandacquisition financing."

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