The Federal Reserve Board, under attack from the Reagan administration, yesterday temporarily postponed a final decision on a proposal designed to restrict the use of junk bonds in corporate takeovers.
The Fed said it will take final action on the proposal at a public meeting on Jan. 8. Earlier this month, the Fed had stated that, subject to review of public comment, the proposal would take effect on Jan. 1.
The Fed's announcement that it would delay its decision came 48 hours after the Justice Department, speaking on behalf of the Reagan administration, filed a brief Monday opposing the proposed curb on junk-bond financing.
There was no indication yesterday, however, that the Fed and the administration might be near an agreement on the issue.
"The board issued the interpretation for public comment on Dec. 6 with the intention of taking final action by Dec. 31, 1985," the Fed said yesterday. "More than 80 letters of comment were received by the board through the Dec. 23 deadline. In order to permit full discussion of the extensive public comment by all available board members, this matter will be considered at a board meeting, open to the public, scheduled for Jan. 8."
Junk bonds are risky, high-yield securities that are rated below investment grade by the bond-rating agencies. Their use became controversial after the Wall Street firm of Drexel Burnham Lambert Inc. began using them to help individual raiders such as T. Boone Pickens Jr. launch multibillion-dollar hostile takeover bids for giant corporations.
The Fed proposal would restrict the use of junk bonds by limiting the amount of borrowing in certain corporate takeovers to a maximum of 50 percent. The move reflects the concern of Fed Chairman Paul A. Volcker that too much debt is being used to finance takeovers.
The Fed reiterated in its statement yesterday that the proposal would apply only to situations where a shell company -- a company with no assets and no business function other than to hold the stock of a takeover target -- borrows to buy a target company's stock. In such situations, the Fed proposal would restrict the shell company's borrowings to 50 percent of the value of the takeover bid.
The Fed has said it has the authority to take this step because existing regulations restrict borrowing to purchase stock to 50 percent. The Fed has said it is merely clarifying a regulation, following requests by several companies that became the targets of junk-bond-financed takeover bids.
The admininistration, which opposes any rules that would make takeovers more difficult, disagrees. In its filing Monday, the Justice Department, with the support of the Departments of Treasury, Commerce and Labor, the Council of Economic Advisers and the Office of Management and Budget, said the Fed had exceeded its authority in proposing the new restrictions.