by Robert Weissman
Citigroup is among the world’s largest financial institutions. As of July, it is also one-third owned by the U.S. government. Without the various subsidies and guarantees — totaling hundreds of billions of dollars — made available to Citigroup, it is very likely the bank would be insolvent. Many believe that — even with the government supports — with an honest accounting, it would be insolvent today. In the case of the failure of Citigroup, it would be taken over by the Federal Deposit Insurance Corporation (FDIC) which has a long record of “resolving” failed banks — albeit not banks of the size and reach of Citi.
The existing government stake in Citi, and the lingering prospect that the government might have to up its control share still further, raise the questions: Should the government exercise its ownership powers? And if so, how?
In the government-managed bankruptcies of General Motors and Chrysler — which has made the government the majority shareholder in GM — the Obama administration has explicitly adopted the position that it will act only as a business investor would. It has advanced this principle with regard to other ownership positions acquired in major businesses amidst the financial crisis. In this framework, the government is either a passive investor, or interested only in the return to profitability of the companies in which it holds an ownership stake.
This approach has a political appeal, as it protects the administration from claims that it is leveraging its investment intervention to advance narrow political interests. It operates from the premise that the government should sell its stake as soon as possible, and that such investment is only appropriate in emergency situations. It aims to alleviate concerns of those with an ideological opposition to government involvement in the economy.
Yet the failure to exercise an ownership stake comes with significant costs. Although the ownership power only applies to individual firms — and not to an entire industry — it is far greater than regulatory authority. The government-as-owner does not need to establish prohibitions or set boundaries on permissible activity; nor does it need to incentivize desirable activity. The government-as-owner can simply instruct its firms to do and not do certain things.
The Colossus
MNM for more