U.S. in Control: Its Goal To Fix, Not Run, Firms
A Reluctant Role as Main Shareholder

By Steven Mufson
Washington Post Staff Writer
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.

The administration has also worked closely on rescue plans with GM and Chrysler, essentially acting as private-equity firms or investment banks would in negotiating detailed financial terms and restructuring. As one person familiar with administration deliberations said, if the government is thinking of lending $6 billion to Chrysler, the administration "needs to feel sure that the business plan passes muster."

Yet many analysts worry that the administration and Congress will try to influence the carmakers' decisions on issues like plant closings or their commitment to fuel-efficient or electric vehicles that might not be profitable.

"It seems like GM is operating under the assumption that the government will behave more like a sovereign wealth fund and be relatively hands off," Barclays Capital auto analyst Brian A. Johnson said. "But is it realistic to think that a Chinese- or Dubai-style sovereign wealth fund can really exist in Washington? Can you really run it the same way a private investor would? It's difficult to imagine that it would be the same."

The history of government nationalization has been mixed. In the United States, the federal Home Owners Loan Corp. that took over failed real estate in 1933 came under congressional pressure to sell off properties earlier -- and less profitably -- than it might have otherwise. But in the early 1990s, the Resolution Trust Corp. successfully took over hundreds of insolvent savings and loan institutions, dismantled them and sold the assets at little cost to taxpayers and with little economic disruption.

The federal government has stepped in at other times, too. In the 1970s, it created Conrail to take over bankrupt railroads including the Pennsylvania Railroad. Conrail pared losses and was sold to the public in the late 1980s.

Some economists point to Europe as an ominous example of state ownership. "In Italy, we did that in the 1930s and it took until the mid-'90s to sell them back," said Luigi Zingales, a finance professor at the University of Chicago. "The corruption that comes with government ownership is not something that comes overnight. But the moment you own 50 percent, you start to push for some political deals and this pressure becomes comes more and more. It's a slippery slope that is very difficult to resist."

Mitterrand himself eventually reversed course as the French currency sank and investors fled, returning many of the businesses under state control to the private sector.

Staff writer Zachary A. Goldfarb contributed to this report.

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