Answer:
No, you're probably among a lot of company. The origin and history of merchant banking date to Europe in the Middle Ages, when the great European banking houses began to finance the ocean-going shipping trade. The obvious problem in such financing for traditional bankers was one of risk and reward in a business that could be affected by weather, pirates, desertion and economics. The bankers' response was to tailor a financial structure that included traditional debt, combined with equity interests in the parent companies, the ships, and their cargoes.
The modern equivalent of this concept is a combination of commercial banking and some form of equity and/or revenue participation. Subsequent to the banking laws that were passed in this country in the 1920s and 1930s, such equity participation has been largely unavailable to commercial bankers. However, under the new guidelines such activities are now permissible.
I would opine that this regulatory change is a tremendous and justifiable boon to commercial bankers. I would strongly argue that most, if not all, small business loans, real estate development loans, and speculative home construction loans are not justifiable debt-only financings. The reason is that these are partner risks that should command a partner's reward. Just because commercial bankers have honed their skills so well as to make these activities profitable does not refute the argument that such bankers should be entitled to equity and/or revenue participations in the successful projects that they finance. These new merchant banking rules finally allow bankers to get exactly that.
First published on BankersOnline.com 1/15/01
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