Loading...

Kudlow Says Government Could Take Equity Stakes in Companies That Want Aid

March 19, 2020by Justin Sink and Luke Kawa, Bloomberg News (TNS)

WASHINGTON — The White House’s top economic adviser, Larry Kudlow, said the administration may consider asking for an equity stake in corporations that want coronavirus aid from taxpayers.

“One of the ideas is, if we provide assistance, we might take an equity position,” Kudlow said Wednesday at the White House, adding that the 2008 bailout of General Motors had been a good deal for the federal government.

But Kudlow cautioned that the idea was just one of many, and that the ultimate form of the coronavirus stimulus legislation would depend on what emerged from negotiations with Congress. “This thing is one day at a time,” he said.

Kudlow also said the administration could “up the ante” beyond its $1.3 trillion stimulus proposal if the economic impact of the coronavirus is worse than anticipated.

“We’ll do whatever it takes,” Kudlow said.

The access to credit, and even solvency, of much of corporate America is top of mind for Wall Street. As such, a federal backstop could help break the fever that has gripped equity markets during their fastest descent into a bear market in history.

“The government could step in and take equity stakes in Boeing, United etc. and take substantial preferred equity positions to stabilize the situation,” writes Matt Rowe, chief investment officer of Headwaters Volatility, in an email Wednesday. “We need a risk-transfer to stop this liquidity spiral.”

While deeply controversial politically, taxpayer backstops for the financial, automotive and housing-finance industries during the 2007-09 crisis were a key component of averting another Great Depression. While there were losses in some cases, equity stakes helped the government come out ahead on many of the transactions.

The enormous stresses on public finances if major employers fail could help bolster the case for decisive action. From mounting unemployment benefits and Medicaid outlays to forgone tax revenue, staying on the sidelines also could incur massive cost. The hit to would-be retirees who lose benefits tied to onetime employers could also be a consideration for Washington.

Against that, there’s the potential for political risk. During the financial crisis, some Republicans decried a tilt toward European-style socialism. The current crisis coincides with the — albeit fading — candidacy of Bernie Sanders, and his democratic socialist platform.

“This is a very big slippery slope because the ownership of private capital by government is not traditionally consistent with capitalism,” said Kevin Caron, portfolio manager for Washington Crossing. “This is a politically charged topic.”

With U.S. jobless claims poised for a historic surge as the coronavirus wreaks havoc on the economy, government action that appears to prioritize corporations over households may be seen as politically unpalatable.

“I don’t think government bailouts of overleveraged companies that got overleveraged via share buybacks at all-time highs, enriching executives and hedge fund investors, will sit well with the American people,” tweeted Jeffrey Gundlach, chief executive office at DoubleLine Capital.

However, an equity position may be less distasteful to taxpayers relative to other forms of financial assistance.

That tactic was used as a component of the Troubled Asset Relief Program, which was run by Neel Kashkari, now president of the Federal Reserve Bank of Minneapolis. The government took preferred equity positions in a host of financial institutions. The program ultimately turned a profit on those, thanks in part to the equity stakes.

General Motors earned the quip “Government Motors” in the financial crisis, with the U.S.’s investment in the firm converted to a 61% stake in 2009. The position was gradually wound down years after the crisis.

That such extreme measures are being considered by the White House is a testament to the magnitude of the public health crisis and its threat to the longest-ever U.S. expansion.

President Donald Trump has referred to the U.S. waging a war against the coronavirus, and that language may also pertain here. At many points in U.S. history, including the world wars, industries deemed to be essential to the military effort were commandeered by the authorities.

While the analogy may be imperfect, General Motors Co. Chief Executive Officer Mary Barra has offered to manufacture hospital ventilators in some auto factories, according to Kudlow. Boeing Co. has strategic importance to the U.S. government via a host of military contracts.

“I like how they’re thinking a little bit outside of the box,” said Chris Zaccarelli, chief investment officer for Independent Advisor Alliance. “Something big and bold like that could potentially be what turns the market around — but clearly the key component is getting through the public health crisis of the coronavirus as well as what’s likely to be a recession.”

———

©2020 Bloomberg News

Distributed by Tribune Content Agency, LLC.

In The News

Health

Voting

Business

January 28, 2023
by Dan McCue
The Rise of Contractors Screams Out for a Rethinking of Policy

WASHINGTON — Hard as it may be to believe, a revolution really did take place while we were all inside,... Read More

WASHINGTON — Hard as it may be to believe, a revolution really did take place while we were all inside, hoping the dark, early shadow of COVID-19 would somehow pass us by.  According to Liz Wilke, principal economist with Gusto, a payroll, benefits and HR platform... Read More

January 25, 2023
by Tom Ramstack
Justice Dept. Sues Google Again Alleging Monopolistic Ad Tactics

A Justice Department lawsuit filed Tuesday against Google accuses the internet giant of illegally acting like a monopoly with its... Read More

A Justice Department lawsuit filed Tuesday against Google accuses the internet giant of illegally acting like a monopoly with its digital advertising technology. The lawsuit filed in federal court in Virginia seeks a court order to break up Google’s grip on online advertising sales and to... Read More

January 24, 2023
by Tom Ramstack
Attorneys General Challenge Social Responsibility Policies for Investing

Some state attorneys general are continuing a conservative backlash against investment strategies that emphasize social responsibility with a challenge to... Read More

Some state attorneys general are continuing a conservative backlash against investment strategies that emphasize social responsibility with a challenge to two corporate advisory companies. A letter written last week to the two companies says forcing social responsibility onto investors could be irresponsible, perhaps shortchanging them when... Read More

January 23, 2023
by Dan McCue
EVs Take Center Stage at Washington Auto Show

WASHINGTON — Forget a weeklong vote to get a House speaker, when all is said and done, the biggest news... Read More

WASHINGTON — Forget a weeklong vote to get a House speaker, when all is said and done, the biggest news of the month may well be how electric vehicles dominated center stage at the Washington, D.C., Auto Show. The annual event returned to the Washington Convention... Read More

Elon Musk Depicted as Liar, Visionary in Tesla Tweet Trial

SAN FRANCISCO (AP) — Elon Musk was depicted Wednesday as either a liar who callously jeopardized the savings of “regular... Read More

SAN FRANCISCO (AP) — Elon Musk was depicted Wednesday as either a liar who callously jeopardized the savings of “regular people" or a well-intentioned visionary as attorneys delivered opening statements at a trial focused on a Tesla buyout that never happened. Lawyers on opposing sides drew... Read More

January 5, 2023
by Dan McCue
Offshore Wind Project Nets $24.1M in Tax Incentives

EAST SETAUKET, N.Y. — A project aimed at transforming a warehouse into a support facility for a pending offshore wind... Read More

EAST SETAUKET, N.Y. — A project aimed at transforming a warehouse into a support facility for a pending offshore wind project has netted $24.1 million in tax breaks from the Town of Brookhaven in New York state. The sales, use and real property tax exemptions are... Read More

News From The Well