U.S. in Control: Its Goal To Fix, Not Run, Firms
Wednesday, April 29, 2009
When it comes to justifying state control of big corporations, Barack Obama is no Francois Mitterrand.
When France's late president nationalized huge swaths of the country's financial and industrial base in the 1980s, he made no apologies. Seizing a dozen industrial conglomerates and three banks, Mitterrand insisted that government control was in the interest of the economy. He asserted that the state, which already owned much of the nation's energy and transport industries, was best able to allocate resources.
Today the Obama administration finds itself in control of many of the pillars of U.S. finance and industry, but it is playing its role reluctantly. Obama's goal is to fix them, not run them, the White House says. With regard to GM, for example, one official said this week that the administration's "goal is to exert as little influence as possible" and "to exit as quickly as possible."
Yet the Obama administration, on behalf of American taxpayers, has become -- or will soon become -- the controlling shareholder of General Motors and Chrysler, mortgage behemoths Freddie Mac and Fannie Mae, and insurance giant AIG, not to mention the 29 banks taken over this year by the Federal Deposit Insurance Corp. And that puts the president in the awkward position of balancing public policy goals with the financial interests of taxpayers as investors in these ailing corporations.
"I think it's going to have to be both," said Dean Baker, director of the Center for Economic and Policy Research. The president "shouldn't seek to micromanage by deciding what cars to make if he were CEO." On the other hand, Baker added, the administration "can't escape responsibility for whatever actions the companies do. It can't wash its hands."
"In many ways, we are in uncharted and potentially treacherous water here," said N. Gregory Mankiw, a professor of economics at Harvard University who was chairman of former president George W. Bush's Council of Economic Advisers. "It is almost inconceivable that the political process will be good at corporate governance. The most one can hope for is that this period will be temporary, that the federal government will sell off its equity stake to private investors as soon as possible."
Only two years ago, the federal government might not have needed to play this role. Private equity was riding high. When the private-equity firm Cerberus Capital Management bought Chrysler, for example, its chairman, John Snow, explained that "carpenters fix up old houses and rebuild them. Likewise, Cerberus fixes up underperforming companies and rebuilds them."
Today, the federal government is using some of the same techniques and strategies as the much-maligned private-equity firms, albeit with much more muscle. "We're in deal mode," said one person familiar with the administration's deliberations on restructuring the automobile companies, but who spoke on condition of anonymity. "What's going on behind the scenes is very much like any deal. People are scattered in many different rooms . . . There is a lot of paper flying about."
While the Obama administration has disavowed interest in managing the companies it owns, it has intervened on key issues and behaved like an active investor. It has ousted top executives such as GM chief executive G. Richard Wagoner Jr., limited pay packages after embarrassing disclosures about bonuses paid at AIG, and bent corporate policies at Fannie Mae and Freddie Mac toward public policy goals in housing.
Having committed $400 billion to Fannie Mae and Freddie Mac, the government is directing them to carry out big parts of the Obama administration's Homeowner Affordability and Stability Plan, a $75 billion effort launched last month. The program aims to restructure mortgages that borrowers cannot afford, bolster the sagging housing market and bring down interest rates on home loans.
Fannie Mae and Freddie Mac have little option but to implement the policy. A regulator, the Federal Housing Finance Agency, took charge of the companies last September and has appointed their boards and chief executives. Soon after the takeover, the regulator appointed "liaisons" to shadow top executives. It signs off on major decisions about how much to charge for mortgages and more mundane decisions such as whether executives can attend conferences.
But the choices the government is making for the companies potentially stand in the way of returning them to profitability, the companies have said. Executives must choose between making decisions that benefit the housing market or save taxpayer dollars. "These initiatives are likely to have a significant adverse effect on our financial results or condition," Freddie Mac warned in its regulatory disclosure.