![]() "It's enough to buy a very small proportion of a loan to get private information," says University of Chicago Booth School of Business professor Regina Wittenberg-Moerman. Moreover, press reports note that hedge funds tend to purchase very small amounts of syndicated loans mainly to access a borrower's confidential information. Hedge funds, for instance, are typically much smaller than banks, so it would not be unusual for employees who trade equities and those who trade syndicated loans to sit beside each other or for the same employee to trade both. More recently, however, non-bank institutional investors have joined banks as major participants in syndicated lending groups and there is a concern that Chinese walls in these institutions may be less effective in preventing information leaks. Big banks, in particular, may be more successful at separating the activities of the private lending group from the equity group because of their size and considerable experience in handling loans. These banks have so-called "Chinese walls" so that traders, salespeople, and analysts on the public securities side do not receive private information even if it is available somewhere else in the same organization. Historically, private lending has been under the purview of banks. This suspicion has been growing in recent years as private lending practices in the United States have changed dramatically along with the explosive growth of the syndicated loan market. Thus, syndicate members who are privy to this inside information might be tempted to use it to trade the borrowing company's stocks to their advantage. ![]() The information is usually confidential and could potentially change the current price of a company's stocks. When a group of lenders-often called a syndicate- provides loans to companies, borrowers typically have to share information with lenders about their financial performance and future plans. Participating in a syndicated loan may be far more valuable to institutional investors than simply the return on lending money.
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