Taxpayers should get a big chunk of bailed-out companies

The Baltimore Sun

Now that American taxpayers are about to set up the biggest-ever vulture investment fund, let's make sure they get the same kind of action as Wall Street's traditional carrion fowl.

Vulture investors swoop in where other investors fear to go, providing cash to panicked sellers and keeping shaky markets from falling even further. But they have a price: a large share of the upside when things get back to normal.

Washington should demand nothing less from the banking institutions it is about to rescue. That means substantial government ownership of pieces of any company that gets bailed out.

Isn't government ownership of business unprecedented? In this country, at this scale, absolutely.

Won't it harm existing shareholders if government takes over a big portion of the stock? Harm is what's supposed to happen to owners of a loser company.

Isn't this socialism? There is no better word. But the United States long ago gave up any claim to being a purely free market. Government has been handing out business loans like candy for decades. What is a share of stock but a loan with a share of the profits?

Besides, there is ample precedent. When the U.S. government guaranteed a $1.5 billon loan for Chrysler in 1980, it got warrants on Chrysler shares and ended up making money on the deal. (Warrants are like stock options.)

Taxpayers own warrants for 80 percent of the stock in mortgage giants Fannie Mae and Freddie Mac, thanks to a bailout announced two weeks ago. The New York Federal Reserve holds warrants for 80 percent of American International Group under the AIG bailout terms disclosed last week.

But as presented over the weekend, the Bush administration's newest bailout plan contained no such taxpayer upside. Instead, the government's $700 million slush fund would write blank checks to buy mortgage bonds and financial assets and receive nothing in return.

By letting banking companies sell troubled assets for more than they could otherwise, the fund would suffuse them with taxpayer money almost as effectively as a with direct injection. But instead of equity ownership in the banks, the government would end up holding a bunch of subprime mortgage paper. We know what that's worth.

Yesterday, administration officials were reported to be receptive to giving taxpayers new ownership stakes and banning "golden parachute" severance packages for executives at firms that get bailed out. By obtaining stakes in Fannie, Freddie and AIG, Treasury Secretary Henry M. Paulson Jr. has already done fairly well by taxpayers and should be amenable to similar features in the new package.

It's the least he can do.

With a debt that will soon reach as high as $11 trillion, the country is heading into the same kind of financial danger as the companies it is trying to rescue. If we're not careful, there'll soon be a bank run on the United States of America, which will take the form of a plunging dollar and high interest rates.

There is no way taxpayers will make money on this bailout the way they did with Chrysler. People who say so are putting lipstick on a vulture. But at least with ownership stakes, they won't lose as much.

So the socialization of business proceeds. Not long ago, free marketeers fretted about government pension funds owning minority corporate stakes.

Now government essentially owns AIG, the world's biggest insurance company. Since it took control of Fannie and Freddie, the government guarantees $5 trillion in U.S. mortgages.

Washington is seizing what the Soviet Union's Vladimir Lenin liked to call "the commanding heights" of the economy.

Free marketeers and big-business advocates must be rending their garments. But there's not much they can say. The financial industry brought this on itself. Let's hope, however, that Uncle Sam's J.D. Rockefeller costume is only temporary.

The best-known vulture investor in Baltimore is Wilbur Ross, who bought Bethlehem Steel's Sparrows Point mill and other assets out of bankruptcy and flipped them for a huge profit. Ross likes to say he's a phoenix, not a vulture, because he creates rebirth.

Whatever. Let's just make sure that, when the bird rises from the carcasses, taxpayers are strapped in for the ride.

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