Hiltzik: The perils of government stock ownership

Back in 1935, the drafters of Social Security told Congress of their plans to build up a government pension reserve that would reach $47 billion.

The number shocked lawmakers. It was nearly three times the outstanding federal debt of the time.

“What in heaven’s name are you going to do with $47 billion?” Sen. Arthur Vandenberg, Republican of Michigan, asked Arthur Altmeyer, one of the drafters.

“You could invest it in U.S. Steel and some of the large corporations,” Altmeyer suggested.

Vandenberg threw up his hands in horror. “That would be socialism!” he exclaimed.

Yet the idea of federal government investments in public corporation stock has never died. It walks among us like a zombie today, with the Trump administration talking about taking a 10% ownership stake in the chipmaker Intel and musing about creating a sovereign wealth fund akin to those established by Saudi Arabia, Singapore, Norway and other countries.

Here’s what history tells us about the virtues of this idea for the United States: There aren’t any.

Such funds “usually reflect the quality of governance of the states that sponsor them,” observed Steven Feldstein and Jodi Vittori of the Carnegie Endowment for International Peace in April. “Considering the Trump administration’s self-dealing and erosion of accountability, there is an acute risk that the U.S. SWF could become a source of graft to reward Trump’s friends, coerce political support for his priorities and bring personal enrichment.”

Leaving aside the quality of governance in Trump’s White House or legislators’ fears of “socialism,” the idea of federal investment in public companies has never found lasting favor on Capitol Hill, for it has been almost impossible for lawmakers to overcome the touchy economic, political and philosophical issues.

A federal fund with the authority to purchase corporate stock would be one of the largest and most potent investors in the market. As I wrote in 2005, when the idea of allowing Social Security to invest its trust fund in equities was under consideration again, the potential for conflicts of interest is inescapable.

The government might be a major shareholder in a corporation it was prosecuting for criminal activity. The government might end up on one side of an international issue as a member of a coalition of nations, and on the opposite side as a shareholder.

Its financial interests might stand in opposition to its social interests: In his 1999 State of the Union message, for example, President Clinton simultaneously threatened to sue the tobacco industry over its threat to public health, and advocated allowing Social Security to invest in all equities — tobacco included.

In 1935, Congress addressed the conundrum by mandating that the Social Security Administration invest its reserves only in U.S. Treasury securities, a rule that exists to this day.

Social Security’s would-be reformers periodically revive proposals to shift some of the program’s trust fund — which held more than $2.7 trillion in treasuries at the end of last year — into equities, pointing to their superior long-term returns compared with bonds. But those efforts have never come to fruition.

The federal government taking an equity stake in a public company wouldn’t be unprecedented. In 2009, the Obama administration acquired a 60.8% ownership of General Motors in return for almost $50 billion in bailout funds. The government also acquired a smaller stake in Chrysler, which was subsequently sold to Fiat.

The government sold the last of its GM holdings in 2013, booking a direct loss of about $10.5 billion. But its bailout has been deemed a success, given that it saved as many as 1.9 million jobs at GM, Chrysler and their suppliers.

The auto bailouts were emergency initiatives, taken to stave off what was shaping up as the auto industry’s imminent collapse. Obama made clear that these were temporary measures and that the government would sell off its stockholdings as soon as that was practicable. The government abjured any control over GM’s day-to-day operations, but it did orchestrate the exit of GM Chief Executive Rick Wagoner, oversaw the replacement of a majority of its board members and imposed compensation limits on its top executives.

The auto bailouts followed numerous examples of U.S. government takeovers, or attempted takeovers, of private businesses. In 1791, Congress authorized the government to take a 20% stake in the Bank of the United States, and in 1816, to take the same stake in the Second Bank of the United States. These are seen today as precursors to the creation of the Federal Reserve Bank as a central banking authority.

During the Great Depression, the Reconstruction Finance Corp., a Hoover creation that lived well into Franklin Roosevelt’s New Deal, took preferred shares in numerous impaired banks in return for capital infusions they needed to survive.

By the end of 1935, RFC-owned preferred stock amounted to nearly 40% of total bank common stock in the United States; the RFC’s hard-charging chairman, Texan Jesse Jones, was not shy about imposing “reasonable” compensation caps on its executives or replacing them when they faltered, or prodding their managements to make loans to private borrowers, a key element of FDR’s program of economic recovery.

The government also exercises effective control over Fannie Mae and Freddie Mac, two government-sponsored mortgage companies, via a conservatorship implemented in 2008, when the housing crash heralded the outset of the Great Recession. Stock in both companies remains in private hands, but warrants allow the government to acquire up to 79.9% of the common stock of each. Those warrants haven’t been exercised, but they equate to firm government authority over the firms’ activities.

Trump’s proposed Intel investment would occur in a very different economic environment and have very different features from any of those precursors. The terms of the plan have been murky.

Commerce Secretary Howard Lutnick confirmed during an appearance on CNBC Tuesday that the government would demand Intel shares in return for the roughly $10 billion in funds allocated to Intel via the Biden-era CHIPS Act, which aimed to shore up America’s position in high-tech hardware.

“We’ll deliver the money, which was already committed under the Biden administration,” Lutnick said. “We’ll get equity in return for it.” He quoted Trump as saying, “If we’re going to give you the money, we want a piece of the action.”

A $10-billion stake would be about 10% of Intel’s shares. That would make the government the company’s largest shareholder, outstripping the stakes held by institutional investors Vanguard and BlackRock. Lutnick said the government wouldn’t exercise voting rights or involve itself in governance. But he didn’t talk about a time-limited ownership, or specify what corporate policies the Trump administration would favor. As it happens, Trump has publicly demanded the resignation Intel CEO Lip-Bu Tan, a Malaysian, over Tan’s ostensible connections to China.

Despite its stumbles in recent years, Intel doesn’t appear to be facing extinction, as the automakers arguably did in 2008 and 2009. Nor would Intel’s demise have anywhere near the impact on the U.S. economy that a GM collapse might have had amid the Great Recession.

Once the linchpin of the high-tech boom of the 1990s, Intel has plainly lost its mojo. As my colleague Queenie Wong reported, its strategic blunders have included missing out on the artificial intelligence investment boom that has made Nvidia, the maker of chips for AI development, a darling of today’s stock market.

Intel hasn’t commented on the White House’s interest in taking an equity stake, but Intel investors don’t appear to know what to make of the idea. Shares in the company gained about 7% on Aug. 19, after Bloomberg first reported on the possibility, but have since fallen back, despite news that the Japanese investment firm SoftBank would take a $2-billion stake in the company.

Intel shares fell 7% Wednesday in Nasdaq trading, closing at $23.54, a hair below their price prior to the Bloomberg report.

Whether Trump could resist jawboning Intel, or any other companies in which the government holds shares, into instituting policies he favors is doubtful. He has frequently tried to exert pressure on CEOs of companies in which the government has no ownership, after all.

That concern would be heightened if the administration has control over a sovereign wealth fund. Trump aired that proposal via an executive order in February. The order called on Lutnick and Treasury Secretary Scott Bessent to submit a plan by the beginning of May, but none has yet surfaced.

A U.S. sovereign wealth fund wouldn’t be based on the same principles as those of many other such ventures. “SWFs have traditionally been set up by states rich in natural resources to manage their budgetary surplus, diversify their economies, and protect their wealth for future generations,” observed the Carnegie Endowment’s Feldstein and Vittori. That’s the case with the funds of both Saudi Arabia and Norway. The U.S., however, “doesn’t have excess funds to put into a SWF,” Feldstein and Vittori write.

In a fact sheet accompanying the executive order, Trump mentioned $5.7 trillion in government assets, including “natural resource reserves.” He has also talked about profits from crypto investments and the government take from tariffs — though the latter are essentially a tax on American consumers, who might have different ideas about how to spend the money.

The Carnegie researchers note that the most successful sovereign wealth funds such as Norway’s “maintain operational independence and make investments based on rigorous financial criteria.” Neither quality is a hallmark of the Trump administration.

Feldstein and Vittori point out that by building a U.S. fund via tariff income or income from Trump’s “gold card” proposal, which would give rich foreigners the right to live in the U.S. for a $5-million fee, might allow Trump to evade Congress’s constitutional monopoly on raising and spending money and even allow him to manage the fund behind closed doors.

Still, it would be up to Congress to establish the fund and oversee its operations. Will the lawmakers accept their responsibility? If not, Trump’s idea is a dangerous one. “Giving a president who aspires to be a king a potent financial weapon with ill-defined purposes and methods,” Feldstein and Vittori write, “presents a grave risk to American democracy.”