Business | Investment
Is Uncle Sam a good performer?
doubts raised about competency of officials to run battered corporations
- By Jim Puzzanghera, Los Angeles Times-Washington Post News Service
- Published: 23:32 September 26, 2008
Uncle Sam is turning into Uncle CEO. But will the new corporate suit be a good fit?
By agreeing to bail out insurance giant American International Group (AIG) and mortgage lenders Fannie Mae and Freddie Mac, the federal government has put itself in the unprecedented position of running huge private companies. In the case of AIG, the government is the majority shareholder, acquiring 80 per cent of the nation's biggest insurance company in exchange for as much as $85 billion (Dh312.63 billion) in loans over two years to keep the business out of bankruptcy as it is dismantled.
But some lawmakers and financial experts wonder if US officials are up to the task of directing large corporations through such turbulent times. AIG, for instance, has 116,000 employees and does business in about 100 countries. Fannie Mae and Freddie Mac, meanwhile, together hold or guarantee $5.4 trillion of mortgages, about half of the nation's home loans outstanding.
"The government does not have a core competency to run an insurance company of the magnitude of an AIG," said David Walker, the former head of the Government Accountability Office, the congressional watchdog agency. "It's clearly not going to be able to effectively manage AIG and do what needs to be done."
Top Bush administration officials say they authorised the controversial bailouts to prevent corporate failures that could have crippled the US economy. But many details about how the government actually will run the companies, and for how long, are still being worked out.
Some critics of the bailouts are heartened that federal officials moved quickly to place seasoned, private-sector executives into key leadership positions at AIG, Fannie Mae and Freddie Mac. For example, Edward M. Liddy, former chairman and chief executive of Allstate Corp., was installed as the new head of AIG, and told employees he didn't think the government intended to "hamstring" the company.
Yet questions remain about what influence federal officials such as Treasury Secretary Henry M. Paulson Jr - who reportedly sought the ouster of AIG Chief Executive Robert Willumstad as a condition of the bailout - will exert over the companies, and what role politics might play in their operation.
"When you have these things going on behind closed doors, it's a little disconcerting," said Dean Baker, co-director of the Centre for Economic and Policy Research, a progressive think tank in Washington, D.C. "When you do have sell-offs of the parts of AIG, we want to make sure that is done on a fair-market basis. You don't want to have sweetheart deals."
Still, given the dire financial problems faced by AIG, Fannie Mae and Freddie Mac, Baker said it won't be difficult for the federal government to improve on their management.
"It's hard to see how they could do worse," he said.
The history of federal bailouts has been generally good, said Benton E. Gup, a fin-ance professor at the University of Alabama and author of a 2003 book, Too Big to Fail: Policies and Practices in Government Bailouts. The government even turned a $313 million profit on stock options it received when it provided $1.5 billion in loan guarantees to automaker Chrysler Corp. in 1980, he noted.
In those earlier bailouts, however, the government did not take control of the companies. It simply provided guarantees for loans. The Federal Reserve and Treasury did the same thing in March when they authorised $29 billion in loan guarantees to JPMorgan Chase & Co. to facilitate its purchase of struggling brokerage Bear Stearns Cos.
But the bailouts of AIG, Fannie Mae and Freddie Mac are new territory, fuelled by an effort to avoid global financial disaster.
'Government guarantee'
"They are not taking over because they believe they can manage them better, but rather because it's a way to provide a government guarantee," said Pablo Spiller, a professor of business and technology at the University of California, Berkeley. "This is the biggest financial crisis in the last 80 years."
The subprime mortgage mess crippled Fannie Mae and Freddie Mac, private companies known as government-sponsored enterprises because they were chartered by the federal government. Many investors believed these companies - which buy mortgages from savings and loans, banks and other lenders to generate more cash for those lenders to make more home loans - had the implicit financial backing of Washington.
Two weeks ago, the federal government seized control of the companies and replaced their CEOs and chairmen. The Treasury Department plans to buy as much as $100 billion in stock in each of the companies, expanding their portfolios of mortgages and mortgage-backed securities until 2010, then slowly reducing their holdings. To do that, the government placed Fannie Mae and Freddie Mac into a conservatorship run by the Federal Housing Finance Agency, a body created by Congress this summer. Paulson said having a government-appointed conservator was the only way he would commit taxpayer money to the bailout.
The agency's director, James B. Lockhart, appointed new CEOs and board chairmen, after consulting with the Treasury Department. The conservator cannot liquidate the companies, but otherwise has full power to run them. But the next president probably will appoint a new director of the agency, who will run the conservatorship, as well as a new Treasury secretary.
In the AIG bailout, the government received 80 percent of the stake in exchange for loans from the Federal Reserve that kept the company from bankruptcy. The Federal Reserve Board, which authorised the bailout, said the loan was designed to let the company sell some assets "in an orderly manner."
The government appointed Liddy as CEO and probably will replace the board. The government will have veto power over major corporate decisions, including whether to pay dividends to shareholders.
Sen. Charles Schumer of New York said Liddy's hiring was a good sign.
"They've appointed a very capable executive who was the head of another major insurance company," Schumer said. "Most of the parts of AIG are still making money. ... So the idea is to keep the mainstay, this biggest American insurance company, still working."
State-level regulation
Insurance is regulated at the state level, so the sale of assets by AIG would have to be approved by the industry regulator in the state it is based. The National Association of Insurance Commissioners has formed a working group to assist federal officials with the sales of AIG properties.
"We want to make sure they don't damage the health of the insurance properties," said California Insurance Commissioner Steve Poizner, a member of the working group. Five AIG companies are headquartered in the state, and 25 others do business there.
Daniel J. Mitchell, a senior fellow at the Cato Institute, a libertarian Washington, D.C., think tank, opposed the AIG bailout. But he said US officials were making responsible decisions about how to run the companies.
"It appears like they're doing the wrong thing in the best way possible," he said. "I assume that it's going to be somewhat akin to a company going into receivership, and we're not going to have the government so much running the company as giving approval process for the people who are left to run the company."
So far, it does not appear that political affiliation has played a role in placing executives at the companies.
Liddy has given money to the campaigns of President Bush and Republican presidential nominee John McCain, according to contribution data from the Centre for Responsive Politics. David M. Moffett, the new Freddie Mac CEO, and a former chief financial officer of US Bancorp, has contributed to GOP congressional candidates.
But new Fannie Mae CEO Herbert M. Allison Jr, who was chairman of investment firm TIAA-CREF, has contributed to Republicans and Democrats, including presidential nominee Barack Obama. New Fannie Mae Chairman Philip Laskawy, who served as chairman and CEO of Ernst & Young, has given the bulk of his contributions to Democrats. And new Freddie Mac Chairman John Koskinen, the former president of the US Soccer Foundation, worked in the Clinton White House.
Still it is said politics is bound to play a role in how federal officials run the companies.
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