The reason why I would regard this as bad practice by the bank is that a loan secured on the property being bought, with the debt being transferred to the company being bought, is inherently risky. It reduces the value of the company dramatically and makes the liklehood of failure that much more likely. Risks are bourne solely by the company being bought and the bank. Perelman managed to buy a company whre he carried none of the risk. Why would any banker agree to that?
Should the Bank have to realise the security, it is very unlikely that they would have fully recovered their loan. They almost never do. In effect they are speculating on what they see to be a rising market.
That type of speculation is the very thing which brought about the current crisis. In the case of Marvel the Bank did ok, becasue the business was able to work its way out of the difficulties, in many other cases that would not be true and many companies in the same position have and will continue to collapse.
The banks lent money to buy an asset, and in doing so dramatically reduced the value of that asset - a highly risky strategy. Old boring bankers would not have done this type of deal. There is also very good argument for regarding it as being at the very least unethical
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Date: 2009-09-04 10:57 am (UTC)Should the Bank have to realise the security, it is very unlikely that they would have fully recovered their loan. They almost never do. In effect they are speculating on what they see to be a rising market.
That type of speculation is the very thing which brought about the current crisis. In the case of Marvel the Bank did ok, becasue the business was able to work its way out of the difficulties, in many other cases that would not be true and many companies in the same position have and will continue to collapse.
The banks lent money to buy an asset, and in doing so dramatically reduced the value of that asset - a highly risky strategy. Old boring bankers would not have done this type of deal. There is also very good argument for regarding it as being at the very least unethical