Edmund L. Andrews and David E. Sanger have an article in The New York Times today that is sure to infuriate some people, including me. Here’s one excerpt:
“Far from eagerly micromanaging the companies the government owns, Mr. Obama and his economic team have often labored mightily to avoid exercising control even when government money was the only thing keeping some companies afloat.
“A few weeks ago, there were anguished grimaces inside the Treasury Department as the new chief executive of A.I.G., Robert H. Benmosche, whose roughly $9 million pay package is 22 times greater than Mr. Obama’s, ridiculed officials in Washington — his majority shareholders — as ‘crazies.’
“Causing even more unease to policymakers, Mr. Benmosche insisted that A.I.G. — one of the worst offenders in the risk-taking that sent the nation over the edge last year — would not rush to sell its businesses at fire-sale prices, despite pressure from Fed and Treasury officials, who are desperate to have the insurer repay its $180 billion government bailout.
“But in the end, according to one senior official, ‘no one called him and told him to shut up,’ and no one has pulled rank and told him to sell assets as soon as possible to repay the loans.
“A similar hands-off decision was made about the auto companies. Shortly after General Motors and Chrysler emerged from bankruptcy, some members of the administration’s auto task force argued that the group should not go out of business until it was confident that a new management team in Detroit had a handle on what needed to be done.
“But Mr. Summers strongly rejected that approach, and the Treasury secretary, Timothy F. Geithner, agreed.
“‘The argument was that if the president said he wasn’t elected to run G.M., then we couldn’t hire a new board and then try to run any aspect of it,’ one participant in the discussions said. The auto task force took off for summer vacation in July, and it never returned.”
The political argument for this position makes sense. Basically, Obama and his administration are afraid of being charged with “socialism” or “big government,” so they are doing what they can to defuse this charge. (Not that that will help given the way political rhetoric is thrown around these days.)
I’m not sure the policy argument makes as much sense. Think about GM, for example. The Treasury Department owns 60% of GM. In the private sector, if you were a private equity fund manager who owned 60% of a deeply troubled company, and you didn’t play an active role in its reconstruction, your investors would accuse you of being negligent. In a turnaround situation, the majority investor is supposed to be actively involved, especially when he’s doing it with other people’s money, since he has a fiduciary obligation to those other people. Yet the administration is going out of its way to not be involved in GM. This is from the June 1 fact sheet:
“As a common shareholder, the government will only vote on core governance issues, including the selection of a company’s board of directors and major corporate events or transactions. While protecting taxpayer resources, the government intends to be extremely disciplined as to how it intends to use even these limited rights.”
The phrase “common shareholder” is probably intended to emphasize the fact that the government is a shareholder, not the board or management, but it conveniently overlooks the fact that the government owns 60% of the common shares – which most majority owners usually use to install a majority of the board of directors.
Leaving political arguments aside, what are the possible justifications for this policy? One is that an active government presence will scare away new private investors. I think we can safely dismiss that fear in the case of GM, at least for the next year or so, since those new private investors do not exist.
Another possible justification is that government involvement will become a channel for political influence from Congress. But this was not true, for example, of the administration’s automotive task force, which operated independently of Congress.
The other possible justification is that the government is somehow incompetent in a way that a private equity investor – say, Cerberus, the previous owner of Chrysler – is not. I know there are many people who think this is the case. But first of all, even if you are the Treasury Secretary and you happen to think that the people who work for you are incompetent, there are still other solutions; for example, you could hire KKR to be the trustee for your 60% stake in GM and act on your behalf, rather than just turning your back on your multi-billion-dollar investment of taxpayer money. (I’m not recommending this, just pointing it out as an option.)
And more importantly, why is President Obama – the man who, last Wednesday night, said, “[Our predecessors] also understood that the danger of too much government is matched by the perils of too little; that without the leavening hand of wise policy, markets can crash, monopolies can stifle competition, and the vulnerable can be exploited” – subscribing to the anti-government caricature of right-wing talk radio? Does he really think that the federal government, and the dozens of talented people he hired and appointed, is too incompetent to do what any twenty-something Ivy League graduate with the connections necessary to raise a $100 million fund can do?