In the late 1990s, when the stock market was hot hot hot, there was a lot of talk about how the U.S. had become “shareholder nation.” This wasn’t total nonsense–stock ownership had broadened over the course of the 1980s and 1990s, mainly through the intermediaries of mutual funds and 401(k)s. But it was still restricted to only about half of American households.
Nothing like today, that is, when we’re all about to become shareholders. As part of its bailouts of Fannie Mae, Freddie Mac and AIG, the U.S. government received warrants to buy 79.99% of each of the companies. And now the Treasury Department seems to be coming around to the idea, espoused here and about a zillion other places, of insisting on an equity stake in the financial companies that partake of its plan to buy up toxic mortgage securities. Reports the Wall Street Journal:
While details are still being worked out, both sides have also agreed to a measure that would allow — but not require — the Treasury to take an equity stake in a financial institution that sells assets to the government. Whether it did so might be dependent on the size of the capital injection the government makes when it buys the assets, according to a person familiar with the matter.
This is only reasonable. If taxpayers are going to save the financial system by buying up risky securities that no one wants, they ought to share in some of the upside at the companies thus bailed out.
Having advocated this, though, I am realizing that it’s going to be an awfully complicated business. Taking over a failed financial institution is something with which our government has a significant amount of experience. Minority ownership is something else, and it raises a lot of weird questions.
1) Do we want this share ownership to be a temporary thing? Or has the experience of the past few months taught us that private owners aren’t to be trusted with the commanding heights of the financial system?
2) Do we, as a nation, think bank stocks are a good investment right now?
3) How will we resolve the conflict between wanting the banks in which we invest to make a lot of money and not wanting them to charge us $500 for turning in our credit card payment a day late?
4) How do we decide when to sell?
5) Who decides when to sell?
6) Are we going to be buying into foreign banks too? That would mean that we’d be borrowing money from foreigners to buy their banks. Would they put up with that?
7) What about the evidence that, as Rafael La Porta, Florencio Lopez-de-Silanes and Andrei Shleifer reported (pdf) in 2000, “government ownership of banks is associated with slower subsequent financial development … [and] lower subsequent growth of per capita income”?
8) Does this mean we all get to go to bank shareholder meetings?
I’m pretty sure the answer to 8 is no. On the rest I really have no idea. This is very strange territory we’re entering.