Adviser says US government could take equity stakes for company aid

Kudlow White house adviser

WASHINGTON: 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 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 US$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 stabilise the situation, ” writes Matt Rowe, chief investment officer of Headwaters Volatility, in an e-mail. “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.

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.

Kudlow’s comments on Wednesday about the GM bailout contrast with his assessment in 2009, when he called the Obama administration’s rescue of the automaker “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.

With US jobless claims poised for a historic surge as the coronavirus wreaks havoc on the economy, government action that appears to give a priority to corporations over households may be seen as politically unpalatable.

“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.”

“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.

However, an equity position may be less distasteful to taxpayers relative to other forms of financial assistance. — Bloomberg

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