Elgar Financial Law and Practice series
Chapter 9: THE MARKET FOR CORPORATE CONTROL IN THE BANKING INDUSTRY
Failures of monitoring the performance of financial institutions led to overexposure to high-risk investments and the ultimate collapse of various financial firms marking the beginning of the financial crisis emerging in the autumn of 2008. The fact that the market for corporate control did not lead to share price reductions and subsequent takeovers of financial firms where there was in fact poor risk management and inadequate oversight by the board is an indication of a dysfunctional mergers and acquisitions (M & A) market. Failures in risk-management systems and weaknesses in board composition were a few of the causes of the collapse of several financial institutions. There were however no early signs of such corporate governance inefficiencies. The 2009 Turner Review provides that bank credit default swap (CDS) prices before the crash of 2007 did not provide forewarning of the events that would follow and were only moderately successful in indicating the relative riskiness of different institutions. Bank shares had similarly failed to indicate that risks were increasing and on the contrary delivered positive signals reassuring managers that their aggressive growth strategies were value creating. The non-effective function of the market for corporate control in the banking industry is interlinked with the unfair results stemming from the governmental bail-outs of financial firms which followed. The financial crisis had caused ‘[g]overnments and central banks around the world [to spend] more than $11 trillion to support the financial sector and about $6 trillion on fiscal stimulus programs’.
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