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’s 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 on 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.
Volte Face
Kudlow himself was among the critics of government intervention more than a decade back. In 2009, he called the Obama administration’s rescue of GM “an attack on free-market capitalism.”
“Call it Bailout Nation or Ownership Nation, it’s an unprecedented degree of government command, control, and planning, all in the name of a tough economic downturn,” Kudlow wrote on CNBC’s website.
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.
Slippery Slope?
“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 over-leveraged companies that got over-leveraged 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.
TARP Precedent
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, who is 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.
War Footing
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.”
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