Breakdown of the Public-Private Distinction: Implications for the Administrative State

David Leitch, Ford Motor Company
Old model: private entity regulated by public entity. E.g., Ford Motor is regulated by NHTSA.
New model: public entity as not just regulator but also part owner of private entity. E.g., GM.
Of course, the basic regulatory model has always been subject to distinctions that blur the public/private divide. There have been government-created and government-controlled corporations before. But after WWII, Congress passed legislation (the Government Corporation Control Act) to cut back on these entities somewhat and to clarify their status.
Let’s look at recent events and GM. The basis for the government takeover of GM was TARP, which has a broad definition of a financial institution.
Government injected $50 billion into GM, required it to go through bankruptcy, fired the CEO, converted the government’s debt to an equity stake, allocated ownership shares, and secured the right to name four members of GM’s board.
Two observations:
1. This was all done on the thinnest of legal reeds. Congress declined to pass an auto bailout bill. So what the administration did was a raw exercise of governmental power, with TARP as a blank check. (This ties back to Judge Douglas Ginsburg’s speech, delivered earlier in the conference (as the Olson Lecture), re: the non-delegation doctrine.)
2. What controls are there upon government ownership of GM? Government ownership of GM raises a thicket of difficult questions. Can the government favor the company that it now owns a big chunk of? What checks should be placed on the government in its role as GM owner?
David Berenbaum, National Community Reinvestment Coalition
Who will be regulated by whom, under what authority?
There is basically no private mortgage industry at this time. It’s all government entities.
We need to promote responsible lending.
Things are going to get worse. The option ARM bubble is about to hit, between 2010 and 2011. Mortgage payments hovering around $1200-$1300 a month are going to be adjusting upward to around $1900 a month. Many of the affected borrowers are white, middle class to affluent families. (It’s incorrect to blame the subprime mortgage crisis on lending to minorities; only a small portion of mortgages that resulted in default fall into this category.)
David Zaring, University of Pennsylvania
(Offers the joke re: D.C. as Hollywood for ugly people, to laughter.)
Should we worry so much about the blurring of the public/private line?
Are government bureaucrats that different from corporate bureaucrats? Could it benefit the government to have more of a private bent?
Good news: the initial response to the financial crisis seems to have worked.
Three issues:
1. Executive compensation. Pay czar Kenneth Feinberg is reducing pay packages and trying to make them vest in a long-term way. But note that his authority extends to just seven companies that received extraordinary assistance from the government. And what he’s doing is not any more objectionable than a private equity investor holding accountable the executives of under-performing portfolio companies.
2. Resolution authority. This is striking power claimed by the government. But it has asked in various contexts before (e.g., FDIC), and constitutionally it has been upheld on numerous occasions. (Perhaps there should be an auction process before a company is seized that would give its owners the chance to buy it back.)
3. Investment management by government supervisors. The concept is that government may prevent a bank from repaying its TARP money before it achieves a certain level of capital adequacy, or government may stay invested in a company until it has maximized the net asset value on its investment. This does not seem like a radical notion.
J.W. Verret, George Mason
Government has effectively become a control shareholder in several companies — and it’s something you generally don’t want to be. More scrutiny and more restrictions come with this position. And note that you don’t need majority ownership to be a control shareholder. Government in Citigroup has under a 40 percent stake, but it is surely a control shareholder.
If you’re a control shareholder, you have fiduciary duties to other shareholders to maximize value, as well as potential liability under the securities laws. (But the government may be able to claim sovereign immunity.)
Also note that the government can engage in insider trading with respect to the equity stakes it owns pursuant to TARP.
Another big issue: off-balance-sheet subsidies. If government is acting like a private sector investor, should these stakes be reflected in the budget?
I’ve been involved in proposed legislation that would provide guidance re: how government should act with respect to its ownership stake in TARP companies.
For more discussion, see my paper.
Q-and-A
Q: Isn’t there a tension between government’s political interests and its interest in maximizing its investment in companies?
A (Leitch): This needs to be regulated through the rule of law. There have to be more standards, reflected in legislation.
Q (to Zaring): Shouldn’t we be worried about the erosion of this public/private divide?
A (Zaring): There have been some successes arising out of recent government involvement in the economy. E.g., TARP companies repaying their money to government with interest (profit for government). And there is a lot of public scrutiny of government action that will prevent abuse.
Q: What does the future hold for the economy?
A (Berenbaum): I don’t think we’re through this yet. We have upwards of 10 million at-risk consumers. Programs that help out just 1 or 2 million aren’t enough. This is why we at NCRC are interested in bulk solutions.
Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice [SSRN]
2009 National Lawyers Convention Schedule [Federalist Society for Law and Public Policy]
FedSoc LiveBlog: Breakdown of the Public-Private Distinction: Implications for the Administrative State [Josh Blackman’s Blog]
Earlier: Regulation of Financial Institutions
Free Speech: The Fairness Doctrine