How to Restructure Corporate Finance

The current year’s election cycle has generated quite a bit of interest in both personal, and corporate finance.  Much debate on this topic has centered around the corporate tax rates in the United States versus other parts of the world.  The genesis of this discussion can be traced back to the financial crisis of 2007 where a number of banks began to collapse, and the banking system itself was in jeopardy of imploding.

Corporate finance is by nature, of course, more complex than individual finance.  Corporations have stacks of regulations and government red tape to comply with, whereas individuals do not.  Any restructuring of corporate finance should take into consideration the components of a corporate balance sheet, which includes assets, liabilities, and future earning potential.

• Consider how businesses leverage their assets.  A general lack of liquidity in the banking system was one of the main catalysts of a stimulus package passed by Congress in 2008.  When a corporation does not have enough liquid capital to back up the debt that they hold, that corporation is over leveraged.  This creates a situation where those companies could not repay their outstanding debt, and this in the case of banks specifically, caused new loan origination to tighten considerably.  Once the markets were locked up, the result was the entire national banking system in financial chaos. 


• Prohibit banks from paying of excessive executive bonuses.  Many consumers marveled at how large companies could have such lopsidedly poor balance sheets and still pay substantial bonuses to its executives.  The government could pass regulation that ties liquidity to the ability of banks to pay bonuses.  Bonus amounts could also be capped in order to help maintain a certain level of liquidity.  These types of regulation would help ensure that banks maintain appropriate levels of cash, and that only banks that can afford to actually pay out bonuses. 


• Give incentive to corporations to make adjustments to how they carry their current debt obligations.  These obligations should be in line with their current ability to pay down those obligations.  Anyone who manages a budget knows that this is a basic tenant for financial success.  Any household that spends more than they take in, or becomes overextended with debt obligations, cannot be maintained.  In order to make appropriate adjustments, medium to long term debt obligations should be restructured.   This restructuring should be designed in order to allow corporations more time to re-pay thus, decreasing the chance of default.