CABINET COUNCIL ON ECONOMIC AFFAIRS - MINUTES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP87M00539R002303820019-1
• Release Decision: RIPPUB
• Original Classification: K
• Document Page Count: 26
• Document Creation Date: December 22, 2016
• Document Release Date: April 27, 2010
• Sequence Number: 19
• Publication Date: February 20, 1985
• Content Type: MEMO

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CABINET AFFAIRS STAFFING MEMORA
Date:- 2/20/85 Number: ---------- Due By:
Subject: Cabinet Council on Economic Affairs - Minutes
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Justice
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
USTR
Chief of Staff
GSA
EPA
NASA
OPM
VA
SBA
^
Attached for your information are the minutes of the
following Cabinet Council on Economic Affairs meetings;
January
15,
1985
January
22,
1985
January
24,
1985
January
29,
1985
^ Alfred H. Kingon ^ Don Clarey
Cabinet Secretary Q Tom Gibson
456-2823 ^ Larry Herbolsheimer
(Ground Floor, West Wing)
Associate Director
? Office of Cabinet Affairs
456-2800 (Room 129, OEOB)
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MINUTES
CABINET COUNCIL ON ECONOMIC AFFAIRS
January 15, 1985
8:45 a.m.
Roosevelt Room
Attendees: Messrs. Block, Brock, Ford, Niskanen, Verstandig,
Porter, Wallis, Jones, Burnley, Knapp, Poole,
Healey, Naylor, Khedouri, Ginsburg, Ballentine,
Breeden, Fitzwater, Gibson, Hall, Herbolsheimer, Li,
McAllister, McMinn, and Shepherd, Ms. McLaughlin,
and Ms. McCaffrey.
1. Report of the Working Group on Financial Institutions Reform
The council continued its review of a study of the deposit
insurance system prepared by the working Group on Financial
Institutions Reform. These reforms would adapt the deposit
insurance system to changes that have occurred in financial
markets and depository institutions since the 1930s when
Federal deposit insurance was established. Mr. Porter
stated that Secretary Regan, who was unable to attend the
meeting because of an unexpected change in his schedule this
morning, requested that the Council postpone final approval
of the Working Group's recommendations until a subsequent
meeting.
Assistant Secretary Healey recalled that during its previous
meeting the Council considered the two most fundamental
recommendations for reform, instituting variable risk-based
insurance premiums and increasing capital requirements, both
of which would be phased in over time. Mr. Healey
reiterated that instituting a risk-related system would: 1)
allow management to "choose" prospectively whether to pursue
riskier strategies knowing that they will be assessed a
higher deposit insurance premium; and 2) help disseminate
information on the riskiness of insured depository
institutions, mitigating the potential for "shocks" to the
financial system that result from seemingly sudden failure:;.
He noted that, in addition to being a traditionally popular
concept in theory, risk-related premiums were endorsed in
reports on the deposit insurance system submitted to
Congress by the FDIC and the FSLIC under the provisions of
the Garn-St. Germain Act of 1982. In addition, a majority
of the members of a panel of private and public sector
financial experts informally advising the Working Group
concluded that the Working Group's proposal could be
implemented using public data already available from
Federal regulators.
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Minutes
Cabinet Council on Economic Affairs
January 15, 1985
Page two
Mr. Healey then presented the remaining three
recommendations: 1) improving accounting and disclosure;
2) increasing the size and flexibility of the FDIC and FSLIC
funds; and 3) refining prudential supervision of insured
institutions.
Improving Accounting and Disclosure
Mr. Healey explained that insured banks and thrifts use
accounting standards in their quarterly financial statements
that often do not present a clear picture of their financial
status to regulators and the public. For example,
regulatory accounting principles (RAP) used by S&Ls tend to
overstate true net worth. He stated that the Working
Group's recommendation would permit no new RAP regulations
and phase out existing RAP regulations over time,
substituting consistent generally accepted accounting
principles (GAAP) in their place. In addition, the Working
Group recommends requiring greater management accountability
in the operations of insured institutions, including the
disclosure of "material events" to regulators and the
public. Mr. Healey noted that these reforms would not
increase the paperwork required of depository institutions.
Increasing the Size and Flexibility of the Insurance Funds
Mr. Healey reported that there has never been a systematic
review of the adequacy of the FDIC and FSLIC funds. Given
economic changes and the apparent decline in the size of the
FSLIC fund -- absolutely and as a percentage of assets held
aggregately by S&Ls -- there is a genuine need to do so.
The Working Group recommends that the Administration and
Federal regulators review the relative size of the FDIC and
FSLIC funds to determine the need for and urgency of
increasing the funds. In addition, the Working Group
recommends that the Administration work with the regulators
to develop additional tools for handling failures in an
equitable manner.
Refining Prudential Supervision of Insured Institutions
Mr. Healey explained that the extraordinary growth in the
size of S&Ls, in particular, indicated to the Working Group
that Federal regulators may not have sufficient staff and
procedures to examine and identify effectively those
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Minutes
Cabinet Council on Economic Affairs
January 15, 1985
Page three
institutions posing the greatest risk to the financial
system. The Working Group recommends that the
Administration work with the regulators to determine what
additional resources are needed to encourage stability and
reduce costs in the long term.
The Council's discussion focused on: net worth and changes
in interest rates as indicators of institutions' financial
condition; the liability of private auditors in bank
failures; the negative true net worth of some insured
institutions using regulatory accounting principles; the
expiration this October of the "net worth certificate"
program for S&Ls; and the possibility that increasing
capital requirements to strengthen the stability of the
system will lead to more concentrated banking and thrift
industries.
2. Economic Conditions in the Agriculture Industry
Secretary Block and Under Secretary Naylor presented an
update on financial conditions in the agriculture sector.
There are potential increases in rural bank and farm
failures in the next six months to two years, assuming
economic conditions remain constant. Secretary Block noted
that the intent of the update was to indicate the pressures
due to farm credit conditions that nay affect the
deliberations on the 1985 Farm Bill.
The sharp devaluation of farmland which has occurred since
1981 has contributed heavily to the current farm credit
problems. Declining land values and eeuipr..ent equity have
resulted in high debt to asset ratios for approximately
178,000 commercial-scale "family" farms (representing less
than eight percent of all farms, but one fourth of
commercial family-owned farms) concentrated in the Corn
Belt, Lake States, and the Northern Plains.
Mr. Naylor suggested that the FmHA and the cooperative Farm
Credit System will experience increased stress during the
coming weeks. The first failure of a district regional
(Spokane) Farm Credit Bank is expected to occur next week.
The cooperative system appears capable of absorbing the
Spokane failure and has not asked to use its Treasury
borrowing authority. Mr. Naylor concluded that these
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Minutes
Cabinet Council on, Economic Affairs
January 15, 1985
Page four
problems raise the central issue of how the agribusiness
industry will manage the necessary adjustnent to declining
farm values and how this process will affect the 1985 Farm
Bill.
The Council's discussion focused on the origins of farm
equity and credit problems and the likely pressures on the
Federal Government to underwrite the inevitable "write-down"
of farmland values. Mr. Porter stated that Secretary Regan
asked the Working Group on Federal Credit Policy to study
immediately the magnitude of the problem and assess its
likely impact on the overall economy, and on the farm and
banking sectors in particular.
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MINUTES
CABINET COUNCIL ON ECONOMIC AFFAIRS
January 22, 1985
8:45 a.m.
Roosevelt Room
Attendees: Messrs. Regan, Block, Niskanen, Porter, Wright,
Wallis, Brown, Burnley, Sprinkel, Ballentine, Gibson,
Haraf, Hawley, Herbolsheimer, Hull, Knapp, Platt, and
Li, and Ms. McLaughlin.
1. Financial Market Developments and Monetary Policy
The Working Group on Financial Market Developments and
Monetary Policy presented a report on investment patterns
and 1985 money growth targets. Mr. Ballentine presented a
paper reviewing recent domestic and foreign investment
flows. Gross domestic. fixed, especially nonresidential, -
investment has experienced unusually strong growth during
the recent recovery and expansion. However, net domestic
fixed investment, which equals gross domestic fixed
investment less depreciation, has not grown as strongly
because of the shift in investment to shorter-lived assets
and commensurately higher depreciation. Real domestic fixed
investment relative to Net National Product (NNP) has
recovered only to its postwar average.
Moreover, much of the new investment in the U.S. is owned by
foreigners. After adjusting net domestic fixed investment
for foreign investment, U.S.-owned net investment relative
to NNP has grown at the slowest rate since World War II.
The Council discussed the effects of the 1981 Economic
Recovery Tax Act (ERTA) on gross, net, and foreign
investment. Council members noted that ERTA provided a
greater stimulus at the margin for investment than for
savings. The corresponding foreign capital inflows
contributed to the large trade deficits. The Council also
discussed how economic data accounts for U.S. investment
abroad as to whether it is financed by foreign debt or U.S.
equity.
Mr. Sprinkel presented a paper reviewing recent financial
and economic developments and the 1985 money growth.targets.
Interest rates have declined significantly. Short rates
have fallen about 300 basis points since early September,
while long rates have declined about 100 basis points.
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Minutes
Cabinet Council on Economic Affairs
January 22, 1985
Page two
narrow early in the year and wider toward the end, which
risks greater volatility in money growth.
Recent economic data suggest a strengthening of the economy
in the months ahead.
Early next month, the Federal Open Market Committee (FOMC)
will determine the 1985 money growth target ranges. There
are several problems with the current method of target
setting. First, if it follows past practice, the FOMC will
base the 1985 target ranges on actual data for the fourth
quarter of 1984. Given the slow growth of Ml since midyear,
this practice will result in the base of the 1985 target
cone being set artificially low.
Second, using target "cones" results in target ranges being
Mr. Sprinkel proposed two policy options to address these
problems. First, the Federal Reserve could eliminate the
problem of base-drift by anchoring the 1985 targets at the
midpoint of the target range for the fourth quarter of 1984.
Second, the target cone concept could be replaced with a
band of plus or minus 1 percent around a single target rate
of 5.5. percent. The Federal Reserve staff has indicated'
they believe this degree of accuracy is possible for Ml
targeting.
The Council discussed the advantages and disadvantages of
various widths of a target band. Council members noted that
a wider band increases the risk of long periods of little or
excessive money growth. On the other hand, a narrower band
increases the risk that money growth may be outside the
Federal Reserve's target range, which could increase market
uncertainty.
The Council discussed the ability of the Federal Reserve to
control money growth. Mr. Sprinkel noted that the Federal
Reserve can control money growth or the federal funds rate,
but not both simultaneously.
The Council agreed to recommend that the Administration in
congressional testimony in February propose: 1) setting
targets based on the midpoint of the target range of the
prior year's fourth quarter; and 2) replacing the target
cone with a target band without recommending a specific
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Minutes
Cabinet Council on Economic Affairs
January 22, 1985
Page three
width. Instead, the testimony should present the arguments
for and against a ?1 percent or ?l1 percent band.
The Chairman Pro Tempore requested the Working Group on
Financial Market Developments and Monetary Policy to review
what approaches the Federal Reserve could take to address
perceived changes in velocity growth.
Council members discussed the need to develop a strategy for
achieving a spending limitation-balanced budget
constitutional amendment. The Chairman Pro Tempore
requested that several options for a strategy be developed
for Council consideration.
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MINUTES
CABINET COUNCIL ON ECONOMIC AFFAIRS
January 24, 1985
8:45 a.m.
Roosevelt Room
Attendees: Messrs. Regan, Block, Baldrige, Brock, Stockman,
tliskanen, Svahn, Oglesby, Verstandig, Porter, Wright,
Wallis, Burnley, Ballentine, Baroody, Breeden,
Fitzwater, Gibson, Ginsburg, Herbolsheimer, Khedouri,
Knapp, Lilly, Naylor, Niehenke, Spears, Li, and Ms.
Risque.
Economic Impact of Farm Credit Conditions
Mr. Ballentine presented a report of the Federal Credit
Policy Working Group on the current farm debt problem and
various farm debt relief proposals. He reviewed the current
Federal credit programs helping farmers, the major elements
of the September 1984 initiative, the current status of farm
debt, and the various farm debt relief proposals that have
been or will be introduced in the Congress. He noted that
much of the farm debt problem could be attributed to the
natural response of the economy to correct for
overinvestment in assets, which has taken place not only in
the farm sector, but other sectors as well.. The
Administration faces two broad options: 1) to maintain the
current policy by relying on the September initiative as
announced; or 2) to attempt to devise a new policy
initiative by amending the September program.
The Council discussed the causes of the rise in farm land
values in the 1970's and the decline in land values in the
1980's. Although land values in general have declined from
their 1981 values, they are still higher than their 1975
levels and they have increased at a faster rate over the
1975-1984 period than inflation. In addition, the
government sector accounted for over 80 percent of the
increase in farm real estate loans outstanding from 1975 to
1983.
Council members noted that the decline in farm land values
since 1981 is a result of fundamental economic changes, in
particular, a move from the high inflationary environment of
the late 1970's to a lower inflation environment of the
1980's.
The Council reviewed specific elements of the September
initiative, placing the initiative in the context of
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#4inutes
Cabinet Council on Economic Affairs
January 24, 1985
Page two
continuing Federal Government credit programs helping
farmers. In addition, the Council discussed the potential
impact of any expansion of farm credit programs on the
overall budget situation.
Council members discussed the concentration of the farm
debt problem in certain regions. The farm debt problem does
not appear as serious in the Southeast because the Farmers
Home Administration effectively controls the lending market
there. The Council noted that much of the farm debt problem
is in the Corn Belt, Lake States, and the Northern Plains.
The Council discussed what actions the States could take to
address the problem. Council members noted that some farm
States prohibit foreign or corporate investment in farm
land, which reduces its liquidity and exacerbates the
decline in land value.
The Chairman Pro Tempore asked that several task forces be
established to develop solutions to the different aspects of
the farm debt problem. The Council will review this issue
again next week.
II
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. 1
MINUTES
CABINET COUNCIL ON ECONOMIC AFFAIRS
January 29, 1985
8:45 a.m.
Roosevelt Room
Attendees: The Vice President, Messrs. Regan, Block, Baldrige,
Brock, Stockman, Ford, Niskanen, Svahn, Oglesby,
Verstandig, Porter, Wright, Healey, Naylor, Baroody,
Breeden, Donatelli, Gibson, Gingrich, Jones,
Khedouri, Knapp, McMinn, Rhodes, Spears, Thompson,
and Li, and Ms. Risque.
1. Economic Impact of Farm Credit Conditions
Mr. Healey presented a report on the impact of the farm debt
problem on commercial banks. Agricultural banks are defined
as those banks whose agricultural loans constitute 25
percent or more of total loans. Although agricultural banks
account for about 30 percent of the total number of
commercial banks, they account for only about 5.2 percent of
all bank assets. Agricultural banks considered by the
Federal Deposit Insurance Corporation to be problem banks
constitute about 37 percent of all banks in the U.S, but
only 2.2 percent of the roughly 14,000 insured banks in the
U.S. Most of these problem agricultural banks are
concentrated in six States: Iowa, Illinois, Kansas,
Minnesota, Nebraska, and Missouri.
Agricultural banks generally are more highly capitalized
than nonagricultural banks. While their greater capital
better enables agricultural banks to handle loan losses, the
potential for agricultural loan losses has increased and is
expected to worsen. It was noted that although the
condition of many agricultural banks is serious, the
problems afflicting the savings and loan associations and
energy lenders several years ago were greater in scope.
Mr. Healey also noted that the bank regulators are
consistently treating banks with large agricultural
portfolios. In addition, the seasonal borrowing facility at
the Federal Reserve discount window is currently operating,
although the scope of its use has remained relatively
limited.
Mr. Naylor presented a paper outlining proposed revisions by
the Working Group in Farm Credit Conditions in the September
1984 agricultural debt restructuring initiative.
 .yJ
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Minutes
Cabinet Council on Economic Affairs
January 29, 1985
Page two
Regulations for the September initiative were issued on an
emergency basis subject to a 30-day comment period. There
were two proposed changes in the program: 1) permitting
lenders to grant interest rate concessions instead of
writing down 10 percent of the principal; and 2) reducing
the cash flow requirement by eliminating the 10 percent
reserve.
One option is to maintain the reserve requirement, but to
permit lenders the option of granting interest rate
concessions as long as the following conditions were met:
1) the total Government guarantee exposure of any resulting
restructured loan will remain the same as that provided
under the initiative as announced in September; 2) the farm
operator will receive sufficient reduction in the debt
payment structure under the restructured loans to ensure a
reasonable cash flow plus a 10 percent reserve during the
term of the loan; 3) the financial institution applying for
a Federal guarantee may not recover from the operator
concessions in principal and/or interest payments granted as
part of the terms of the loan restructuring; and 4) the
present value of the interest rate reductions is equivalent
to the value of the principal writedown.
The Council discussed the overall context of the farm debt
problem and the appropriate role for the Federal Government,
concluding that the Federal Government cannot and should not
attempt to resist fundamental economic forces that are
restructuring the farming and other sectors. However,
Council members noted the importance of preventing the farm
debt problem from damaging the prospects for enacting a
market-oriented 1985 Farm Bill. Ccuncil members also noted
that additional Federal credit guarantees could have an
impact on the ability to restructure the price support
system next year.
The Council discussed the likely demand for Federal
guarantees if an interest writedown were allowed as an
alternative to a principal writedown. Council members noted
that the demand may increase significantly because of the
increased attractiveness of an interest rate writedown to
lenders. The Council also discussed whether the program
directs funds toward the most needy borrowers.
The Cabinet Council will consider the issue further at its
meeting on Thursday.
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STAT
Executive Secretary
3637 neap 8 Jan_ t! 85
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InL ?VU1I is nvvJL
WASHINGTON
Date: 1/25/85 Number: 169124CA Due By:
ALL CABINET MEMBERS
Vice President
State
Treasury
Defense
Attorney General
Interior
cif Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
Affairs Planning Meeting - 1/29/85
Farm Credit Conditions
Action
FYI
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..........................................................................................
Executive Secretary for:
CCCT
CCEA
CCFA
CCHR
CCLP
CCMA
CCNRE
There will be a Cabinet Council on Economic Affairs Planning
Meeting on Tuesday, January 29, 1985, at 8:45 A.M. in the
Roosevelt Room.
The agenda and background paper for the second agenda item
are attached.
^ Craig L. Fuller ^ Don Clarey
Assistant to the President 0 Tom Gibson
for Cabinet Affairs ^ Larry Herbolsheimer
Baker
Deaver
Darman (For WH Staffing)
Mc Farlane
Svahn
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THE WHITE HOUSE
WASHINGTON
J
anuary 25, 1985
FROM: ROGER B. PORTER f,
SUBJECT: Agenda and Paper for the January 29 Meeting
The agenda and paper for the January 29 meeting of the
Cabinet Council on Economic Affairs are attached. The meeting is
scheduled for 8:45 a.m. in the Roosevelt Room.
The Council is scheduled to consider two agenda items:
economic impact of farm credit conditions and regional impacts of
the recovery. The Council will continue its review from the
January 24 meeting of the economic impact of-farm credit
conditions. No papers will be circulated in advance of the
meeting.
The Council will also consider the regional impacts of the
recovery. A paper from Sidney Jones reviewing this issue is
attached. The paper examines differences in the recent economic
performance of the various regions in the U.S.
!I
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 THE WHITF Hf hicF
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Date: Number: `v""`-- Due By:
Subject: Cabinet Council on Economic Affairs Planning Meeting - January.24, 1985
Rpt
8:45 A.M. - Roosevelt Room TOPICS: o Working Group on orp . a eoverss
Economic Impact of Farm Credit Cond.
ALL CABINET MEMBERS n
Vice President
State
Treasury
Defense
Attorney General
Interior
Agriculture
Commerce
Labor
HHS
HUD
Transportation
Energy
Education
Counsellor
CEA
CEQ
O5TP
Baker
Deaver
Darman (For WH Staffing)
Mc Farlane
Svahn
Chapman
GSA
EPA
NASA
OPM
VA
SBA
REMARKS:
Executive Secretary for:
CCCT
CCEA
CCFA
CCHR
CCLP
CCMA
CCNRE
There will be a Cabinet Council on Economic Affairs Planning
Meeting on Thursday, January 24, 1985, at 8:45 A.M. in the
Roosevelt Room.
RETURN TO:
^ Craig L. Fuller
Assistant to the President
^ Don Claret' Tom Gibson ^ Larry Herbolsheimer
for Cabinet Affairs nffira of r2F.inn+ AKgirs
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CABINET AFFAIRS STAFFING MEMORANDUM
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THE WHITE HOUSE
January 22, 1985
MEMORANDUM FOR THE CABINET COUNCIL ON ECONOMIC AFFAIRS
FROM: ROGER B. PORTER A-Zo
SUBJECT: Agenda and Paper for the January 24 Meeting.
The agenda and paper for the January 24 meeting of the
Cabinet Council on Economic Affairs are attached. The meeting is
scheduled for 8:45 a.m. in the Roosevelt Room.
The Council is scheduled to consider two agenda items:
corporate takeovers and the economic impact of farm credit
conditions. The Council last considered corporate takeovers at
its meeting on July 24, 1984, when it established an interagency
working group to determine the extent of the problem of abuses in
tender offers and what approach would best address potential
abuses. The Working Group has held a number of meetings
examining the data and developing an Administration position on
possible corporate takeover legislation. A paper from Doug
Ginsburg, chairman of the Working Group on Corporate Takeovers,
is attached.
The second agenda item is the economic impact of farm credit
conditions. A paper on this agenda item will be circulated
tomorrow.
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CABINET COUNCIL ON ECONOMIC AFFAIRS
January 24, 1985
8:45 a.m.
Roosevelt Room
1. Report of the Working Group on Corporate Takeovers
(CM # 481)
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EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND BUDGET
WASHINGTON. D.C. 20503
JAN 2 2 1985
FROM: Douglas H. Ginsburg
Administrator for Info mation
and Regulatory Affairs
The Working Group on Corporate Takeover Legislation has drafted
a proposed Administration position for the CCEA's consideration.
We anticipate that corporate takeovers will receive early
attention in the Congress, and that the Administration will
want to be ready to present its views. The proposed position
is attached to this memorandum; an annotated version is at Tab A.
This proposed position was developed and reviewed by represent-
atives of the Departments of the Treasury, Justice, Commerce,
and Labor, the Vice President's Office, the Council of Economic
Advisers, the Office of Policy Development, and the Office of
Management and Budget.
The Cabinet Council established this working group last July
to consider the advisability of Federal legislation then being
proposed in both the House and Senate to regulate corporate
behavior during takeover attempts. On September 25, Secretary
Regan sent a letter to Chairman Dingell opposing H.R. 5693
(Tab B). On October 2, Thomas Healey opposed new legislation
in a statement to the Senate Banking Committee (Tab C). Both
documents were circulated to the Working Group in draft form and
the proposed Administration position reflects much of what has
already been said in those documents. None of the bills we
opposed was enacted last year, although H.R. 5693 was reported
out of the Committee on Energy and Commerce, and two of its
provisions were attached to the banking bill that passed the
Senate.
Both Senator D'Amato and Congressman Wirth intend to hold
extensive hearings on corporate takeovers this year. Senator
D'Amato's subcommittee plans to begin in February.. Congressman
Wirth may begin hearings by late February. Both chairmen expect
to focus on "broader" issues surrounding takeovers -- such as
whether takeovers are good for the economy and whether the
business judgment rule is adequate to deal with takeovers -- in
addition to relatively specific proposals, such as greenmail. and
golden parachutes.
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Having reviewed the analytical and empirical evidence relating to
these issues, the Working Group proposes that the Administration
continue to oppose any Federal legislation dealing with corporate'
takeovers. We should look first to competitive markets and
second to the traditional'role of the States in corporate
governance to deal with such problems as do arise. Federal
legislation should be a last resort, used only if the markets
and State law fail to deal with these problems.
Our fundamental conclusion is that there is no compelling
evidence of such a failure and, as a result, new Federal
legislation is both unnecessary and unwise. On the contrary,
although some questions have yet to be answered, the evidence
that does exist indicates that our historic reliance on the
markets, State law, and the courts to deal with problems of
corporate governance continues to serve the country very well.
Attached are several key documents. We commend especially to
your attention the draft Chapter 6 of the 1985 Economic Report
of the President (Tab D), for an overview of the subject matter.
The recent Harvard Business Review article by Micheal Jensen
(Tab E) is a shorter overview in a journalistic style. Also
included for more background are:
o Tab F -- "The Market for Corporate Control: The Scientific
Evidence," by Michael Jensen and Richard Ruback. This
survey of the scientific literature indicates that corporate
takeovers generate significant positive gains and that those
gains do not come from the creation of market power. The
article also summarizes the evidence regarding specific
practices.
o Tab G -- "Do Targets Gain From Defeating Tender Offers?" by
Frank Easterbrook and Gregg Jarrell?(Easterbrook was recently
nominated by the President to the Seventh Circuit Court of
Appeals; Jarrell is currently the SEC's Chief Economist).
This recent study concludes that successful defensive tactics
by management have deprived shareholders of gains between
15 and 52% of the value of their shares and that the stock
prices of firms that defeat offers and remain independent
do not recover.
o Tab H -- "Do Acquirers Benefit From Corporate Acquisitions?"
by Gregg Jarrell. This technical paper, which will be
published shortly,' demonstrates that acquiring firms'
shareholders (not just target shareholders) also receive
substantial gains as a result of mergers and takeovers.
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0 Tab I -- Norlin Corporation v. Rooney, Pace Inc., et.al.,
(2d Cir..1984). This significant new decision holds that
a board of directors may, under the business judgment rule,
oppose an acquisition if it decides that opposing the
acquisition is in the interests of the company and
shareholders. However, the duty of loyalty requires the
board to demonstrate that any actions it takes are fair
and reasonable.
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PROPOSED ADMINISTRATION POSITION
CORPORATE TAKEOVERS
I. Corporate takeovers perform several beneficial functions
and are generally good for the economy.
II. The Williams Act represents a compromise between the
desire to afford target shareholders and managements a
reasonable period of time in which-to evaluate offers, and
the needs of the competitive markets in securities and in
corporate control to operate with a minimum of government
regulatory interference. We have seen no evidence that
the existing provisions of the Williams Act are
insufficient to achieve their purpose.
'III. Various limitations on bidder activities have been
proposed, but no need for additional restrictions on
bidders has yet been' demonstrated.
IV. Target company shareholders need and have protection from
abuses by target managements in conjunction with contests
for corporate control.
V. State law, enforceable in the courts, governs the
permissible terms of corporate charters, management
contracts, and managers' and directors' fiduciary
obligations, each of which may be used to prevent
management abuses.
VI. Unless there is compelling evidence of a serious market
failure of national dimensions, unchecked by the states
or the courts, the Federal Government should take no step
towards the establishment of Federal corporation law to
govern relationships between shareholders and managers.
VII. While matters of corporation law have properly been the
subject of state rather than Federal jurisdiction, the
Federal Government should play an informational role by
making public the best information about critical issues
that shareholders are likely to face in corporate change
of control contests.
VIII. The Federal Government should also carefully consider the
unintended effects that other Federal policy decisions may
have on merger and acquisition activity. To the extent
that these Federal decisions encourage more or less merger
and acquisition activity than otherwise would have taken
place in a free market, resources may be misallocated.
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A Proposed Administration Position--annotated
B Letter from Secretary Regan to Chairman Dingell,
September 25, 1984
C Thomas Healey's Statement for the Senate Committee on
Banking, Housing and Urban Affairs, October 2, 1984
D Council of Economic Advisers; "The Market for
Corporate Control;" Economic Report of the
President, 1985, draft Chapter 6
E Michael C. Jensen, "Takeovers: folklore and
science," Harvard Business Review, November-December
1984, p. 109
F Michael C. Jensen and Richard S. Ruback, "The Market
for Corporate Control, The Scientific Evidence,"
Journal of Financial Economics, April 19'83, p. 5
G Frank H. Easterbrook and Gregg A. Jarrell, "Do
Targets Gain From Defeating Tender Offers?"
New York University Law Review, May 1984, p. 277
H Gregg A. Jarrell, "Do Acquirers Benefit from
Corporate Acquisitions?" University of Chicago
Working Paper, March 1983
I Norlin Corp. V. Rooney, Pace Inc, et.al, (2nd Cir.
1984)