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Highlights

The increase in leveraged buyouts (LBO) of U.S. companies by private equity funds prior to the slowdown in mid-2007 has raised questions about the potential impact of these deals. Some praise LBOs for creating new governance structures for companies and providing longer term investment opportunities for investors. Others criticize LBOs for causing job losses and burdening companies with too much debt. This report addresses the (1) effect of recent private equity LBOs on acquired companies and employment, (2) impact of LBOs jointly undertaken by two or more private equity funds on competition, (3) Securities and Exchange Commission's (SEC) oversight of private equity funds and their advisers, and (4) regulatory oversight of commercial and investment banks that have financed recent LBOs. GAO reviewed academic research, analyzed recent LBO data, conducted case studies, reviewed regulators' policy documents and examinations, and interviewed regulatory and industry officials, and academics.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Office of the Comptroller of the Currency Given that the financial markets are increasingly interconnected and in light of the risks that have been highlighted by the financial market turmoil of the last year, the heads of the Federal Reserve, Office of the Comptroller of the Currency, and SEC should give increased attention to ensuring that their oversight of leveraged lending at their regulated institutions takes into consideration systemic risk implications raised by changes in the broader financial markets, as a whole.
Closed - Implemented
In our September 2008 report, we observed that recent events in the financial markets involving leveraged loans underscored the potential for systemic risk to arise not only from the disruption at a major institution but also from the transmission of a disruption in a financial market to other financial markets. We noted that the failure of regulators to understand and consider market interconnections and their potential systemic risk implications could limit their regulatory effectiveness and ability to address issues when they occur. In that regard, we recommended that the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC) give increased attention to ensure that their oversight of regulated institutions takes into consideration systemic risk implications raised by financial markets. Since we issued our report, the regulators have participated in multilateral supervisory groups, in part to address market interconnections and their systemic risk implications. For example, the Federal Reserve, OCC, and SEC participated in the Financial Stability Forum's April 2009 report, which examined the forces that contributed to procyclicality in the financial system and developed recommendations to improve macroprudential (or system wide) regulations. Similarly, the Federal Reserve and OCC participated in the Basel Committee on Banking Supervision's May 2009 report, which examined the interaction between credit and market risk, given that the current crisis illustrated how the two risks can reinforce each other and generate large losses. Finally, the regulators have been involved in regulatory reform proposals to create an organization tasked with overseeing systemic risk in the U.S. financial system.
United States Securities and Exchange Commission Given that the financial markets are increasingly interconnected and in light of the risks that have been highlighted by the financial market turmoil of the last year, the heads of the Federal Reserve, Office of the Comptroller of the Currency, and SEC should give increased attention to ensuring that their oversight of leveraged lending at their regulated institutions takes into consideration systemic risk implications raised by changes in the broader financial markets, as a whole.
Closed - Implemented
In our September 2008 report, we observed that recent events in the financial markets involving leveraged loans underscored the potential for systemic risk to arise not only from the disruption at a major institution but also from the transmission of a disruption in a financial market to other financial markets. We noted that the failure of regulators to fully understand and consider market interconnections and their potential systemic risk implications could limit their regulatory effectiveness and ability to address issues when they occur. In that regard, we recommended that the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC) give increased attention to ensure that their oversight of regulated institutions takes into consideration systemic risk implications raised by financial markets. Since we issued our report, the regulators have participated in multilateral supervisory groups, in part to address market interconnections and their systemic risk implications. For example, the Federal Reserve, OCC, and SEC participated in the Financial Stability Forum's April 2009 report, which examined the forces that contributed to procyclicality in the financial system and developed recommendations to improve macroprudential (or system wide) regulations. Similarly, the Federal Reserve and OCC participated in the Basel Committee on Banking Supervision's May 2009 report, which examined the interaction between credit and market risk, given that the current crisis illustrated how the two risks can reinforce each other and generate large losses. Finally, the regulators have been involved in regulatory reform proposals to create an organization tasked with overseeing systemic risk in the U.S. financial system.
Federal Reserve System Given that the financial markets are increasingly interconnected and in light of the risks that have been highlighted by the financial market turmoil of the last year, the heads of the Federal Reserve, Office of the Comptroller of the Currency, and SEC should give increased attention to ensuring that their oversight of leveraged lending at their regulated institutions takes into consideration systemic risk implications raised by changes in the broader financial markets, as a whole.
Closed - Implemented
In our September 2008 report, we observed that recent events in the financial markets involving leveraged loans underscored the potential for systemic risk to arise not only from the disruption at a major institution but also from the transmission of a disruption in a financial market to other financial markets. We noted that the failure of regulators to understand and consider market interconnections and their potential systemic risk implications could limit their regulatory effectiveness and ability to address issues when they occur. In that regard, we recommended that the Federal Reserve, Office of the Comptroller of the Currency (OCC), and Securities and Exchange Commission (SEC) give increased attention to ensure that their oversight of regulated institutions takes into consideration systemic risk implications raised by financial markets. Since we issued our report, the regulators have participated in multilateral supervisory groups, in part to address market interconnections and their systemic risk implications. For example, the Federal Reserve, OCC, and SEC participated in the Financial Stability Forum's April 2009 report, which examined the forces that contributed to procyclicality in the financial system and developed recommendations to improve macroprudential (or system wide) regulations. Similarly, the Federal Reserve and OCC participated in the Basel Committee on Banking Supervision's May 2009 report, which examined the interaction between credit and market risk, given that the current crisis illustrated how the two risks can reinforce each other and generate large losses. Finally, the regulators have been involved in regulatory reform proposals to create an organization tasked with overseeing systemic risk in the U.S. financial system.

Full Report