Uncle Sam is turning into Uncle CEO. But will the new corporate suit be a good fit?
By agreeing to bail out insurance giant American International Group and mortgage lenders Fannie Mae and Freddie Mac, the federal government has put itself in the unprecedented position of running huge private companies. In AIG's case, the government is the majority shareholder, acquiring 80 percent of the nation's biggest insurance company in exchange for up to $85 billion in loans over two years to keep the business out of bankruptcy as it is dismantled.
But some lawmakers and financial experts wonder whether U.S. officials are up to the task of directing large corporations through such turbulent times.
AIG, for instance, has 116,000 employees and does business in about 100 countries. Fannie Mae and Freddie Mac, meanwhile, together hold or guarantee $5.4 trillion of mortgages, about half of the nation's home loans outstanding.
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“The government does not have a core competency to run an insurance company of the magnitude of an AIG,” said David Walker, the former head of the Government Accountability Office, the congressional watchdog agency.
“It's clearly not going to be able to effectively manage AIG and do what needs to be done.”
Top Bush administration officials say they authorized the controversial bailouts to prevent corporate failures that could have crippled the U.S. economy. But many details of how the government actually will run the companies, and for how long, are still being worked out.
Some critics of the bailouts are heartened that federal officials moved quickly to place seasoned, private-sector executives into key leadership positions at AIG, Fannie Mae and Freddie Mac. For example, Edward Liddy, former chairman and chief executive of Allstate Corp., was installed as the new head of AIG, and told employees he didn't think the government intended to “hamstring” the company.
Yet questions remain about what influence federal officials such as Treasury Secretary Henry Paulson – who reportedly sought the ouster of AIG Chief Executive Robert Willumstad as a condition of the bailout – will exert over the companies, and what role politics might play in their operation.
“When you have these things going on behind closed doors, it's a little disconcerting,” said Dean Baker, co-director of the Center for Economic and Policy Research, a progressive think tank in Washington. “When you do have sell-offs of the parts of AIG, we want to make sure that is done on a fair-market basis. You don't want to have sweetheart deals.”
Still, given the dire financial problems faced by AIG, Fannie Mae and Freddie Mac, Baker said it won't be difficult for the federal government to improve on their management.
“It's hard to see how they could do worse,” he said.
Two weeks ago, the federal government seized control of Fannie Mae and Freddie Mac and replaced their CEOs and chairmen.
The Treasury Department plans to buy as much as $100 billion in stock in each of the companies, expanding their portfolios of mortgages and mortgage-backed securities until 2010, then slowly reducing their holdings.
To do that, the government placed the companies into a conservatorship run by the Federal Housing Finance Agency, a body created by Congress this summer. Paulson said having a government-appointed conservator was the only way he would commit taxpayer money to the bailout.
The agency's director, James Lockhart, appointed new CEOs and board chairmen, after consulting with the Treasury Department. The conservator cannot liquidate the companies, but otherwise has full power to run them. But the next president probably will appoint a new director of the agency, who will run the conservatorship, as well as a new Treasury secretary.
In the AIG bailout, the government received 80 percent of the stake in exchange for loans from the Federal Reserve that kept the company from bankruptcy. The Federal Reserve Board, which authorized the bailout, said the loan was designed to let the company sell some assets “in an orderly manner.”
The government appointed Liddy as CEO and probably will replace the board. The government will have veto power over major corporate decisions, including whether to pay dividends to shareholders.