Thanks again to Eugene and the rest of the folks in the Volokh community for the opportunity to discuss Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice. I have had a lot of fun this week. If you enjoyed these topics, look for the rest of the Treasury Inc. series next year, and please feel free to drop by my new home, Truth on the Market, where I will start blogging this week. [...]
Author Archive | J.W. Verret, guest-blogging
It has been a rare opportunity to share with this forum my new paper, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, forthcoming with the Yale Journal on Regulation and available here. This week we have enjoyed a rigorous discussion about the implications of the government as a shareholder in the financial services and automotive industries.
As I expected from the Volokh community, the comments have offered a rigorous intellectual contribution to my work, and for many of the commentators I recommend reading the full paper for answers to their insightful questions. For this post, I will shift to the implications of Treasury Inc. for the federal budget, the subject of an in-process paper forthcoming with the Louisiana Law Review that will also be the focus of my comments at this years Federalist Society National Lawyer’s Convention.
Government deficits and debt have captured national attention in the last few months owing to their role in the venomous debate over health care reform. Our nation’s debt is officially $11 trillion. Yet the government’s accounting practices for its ownership in the automotive and financial sectors omit a big slice of the real national debt and annual budget deficit.
When Peter Orszag ran the Congressional Budget Office, he fought the Bush administration over consolidating Fannie and Freddie’s debt into the national budget. His position was that two principles of government accounting require consolidation. Principle one, we control these companies; principle two, we guarantee their debt. For more, take a look at, after I testified on this issue here, this press release from the Congressional House Oversight Committee about how I discovered the problem described in this post.
The Treasury disputes its control of TARP companies. Yet the government tells GM what kind of cars to build and [...]
We have been discussing my new paper, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, which you can download here. In my last post I made the case that the government is a control shareholder in many of the banks and automotive companies that accepted TARP bailout cash. So why does that matter? In corporate law shareholders determined to be in control of the corporation have the same duties to other shareholders as executives or members of the board of directors. Control shareholders cannot use their power to force the corporation into business decisions that will harm the value of the company for the other shareholders. In securities law, control shareholders are even jointly liable with the company for violations of the securities laws.
The government’s sovereign immunity throws a wrench into this dynamic. I won’t bore you with all the sovereign immunity analysis in the paper, but let me just say that the government takes a belt-and-suspenders approach to sovereign immunity protection for the bailout. The Tucker Act, which waives sovereign immunity for some torts by the government, doesn’t seem to fit, because fiduciary duty violations aren’t traditionally understood to be torts. Takings clause litigation, generally a difficult test to pass, would seem especially difficult here in light of the many objectives articulated by the government in the bailout legislation. Section 3 of the Securities Exchange Act, passed in 1934, includes a specific exemption for the federal government from, among other things, insider trading laws.
Does this matter? What could the government do that would be so pernicious to the value of Citigroup’s shares? Let me list a few examples. Citigroup funds Mergers and Acquisitions activity, which often results in layoffs of excess employees or factory closings at target companies to make them run more [...]
In my last post I opened a discussion about my new paper, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, which you can download here. My thesis is that corporate law and theory goes haywire when the government, while enjoying sovereign immunity protection from corporate and securities law, takes control of a company by owning shares. But does the government really control TARP companies?
When Treasury initially sold Congress on the bailout, the plan was to create all sorts of nifty market-oriented structures to reinvigorate the market for troubled assets. But once the government got the money, it used most of the first $300 Billion to buy stock in over 600 troubled banks (from Citigroup and Bank of America to your local First State bank). Eric Posner warned us about this sort of surprise. Some of the stock is non-voting preferred stock that gives Treasury the ability to appoint directors in certain circumstances, for other companies like Citigroup the stock is voting common equity. The share purchase program was later extended to the automotive sector by Tim Geithner. The question is whether the government is a controlling shareholder based on its percentage of share ownership, the fact that the government regulates banks, and the fact that it loans them a lot of money.
Control is an elusive concept. What does it mean to control something? Is it the power to dictate demands, to encourage, to threaten, or maybe the power to destroy something if you wanted? Some forms of control require force. Then again, sometimes control can be exhibited more powerfully through a sublime and unspoken understanding, the Godfather-esque “I give him an offer, he don’t refuse.” It is a question not lent to easy answers, and yet corporate and securities law is riddled with special [...]
As a longtime fan of The Volokh Conspiracy, it’s a particular honor to join you today. I admit spending much class time in law school surfing Volokh rather than taking notes, and it was often a wiser investment (not true for my students of course). The financial crisis has made it an exciting time to teach corporate law and financial regulation inside the beltway. My recent focus has been Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice, a paper coming out next semester in the Yale Journal on Regulation about how the government’s new role as a shareholder requires a paradigm shift for corporate law. The plan is for this to be the first in a Treasury Inc. series looking into strange consequences of government shareholdings for administrative law, federal budget accounting, theory of the firm, and public choice theory.
Most of the debate over the bailout has been whether we should have bailed out the finance and automotive sectors in the first place, done something else, or done nothing at all. Fascinating question, and it is fun watching the economists fight that one out, but that’s not the question that interests me. My focus is the tectonic shifts in corporate theory and practice that result as companies have given the Treasury and the Federal Reserve equity stakes in exchange for TARP bailout money. To sum up my position: the theory and practice of corporate and securities law are unprepared for the presence of a control shareholder, like the government, that also enjoys sovereign immunity from the federal securities laws and state corporation law.
The six central theories of corporate law, which at times stand in mutual and vigorous opposition, all break down in the presence of an immune control shareholder. Debates about whether we should give [...]