Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Sunday, September 19, 2010

Davidoff on Federal Corporate Ownership in the Financial Crisis

Uncomfortable Embrace: Federal Corporate Ownership in the Midst of the Financial Crisis, by Steven M. Davidoff, University of Connecticut School of Law, was recently posted on SSRN.  Here is the abstract:

This essay traces the varying terms of all of the U.S. federal government’s corporate investments during the financial crisis and assesses the success of the government’s ownership experience. It concludes that government corporate ownership during the financial crisis achieved the government’s economic and social goals. It was a success. The government ultimately saved the financial system, stalled a financial panic, and averted a much more significant economic downturn.

The potential losses on the government’s corporate investments in the aggregate and individually pale in comparison to these avoided costs. Despite its success, the government often failed to negotiate financial and governance structures which were in the government's best interests, even allowing for legal, economic and time limitations. The government particularly and repeatedly refused to acquire equity stakes when it would have been commercially appropriate to do so, and otherwise failed to negotiate adequate control rights over its significant investments. The structure of government ownership consequently resulted in higher monetary losses than necessary, provided private benefits to undeserving actors, and may have encouraged public discontent and future moral hazard. These deleterious effects were exacerbated by the government’s “ownership by deal” approach under which different terms were negotiated for each significant investment.

U.S. government corporate ownership is likely to remain quite rare, but this essay concludes by drawing on the recent government ownership experience to set forth principles to guide the structure, monitoring and retention of private government investment to alleviate these issues in the future.

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