April 20, 2009

Does Government as Majority Shareholder Create a Conflict of Interest?

Yesterday's NYT had a story about how the administration is considering converting its preferred stock (loans) to banks into common stock. This would reduce the banks' debt load and make them more solvent (at least on paper) by "recapitalizing" them.

But there seems to be some fear that this could create a conflict of interest for the government, as the article concludes with this cryptic statement:
"The Treasury would also become a major shareholder, and perhaps even the controlling shareholder, in some financial institutions. That could lead to increasingly difficult conflicts of interest for the government, as policy makers juggle broad economic objectives with the narrower responsibility to maximize the value of their bank shares on behalf of taxpayers. Those are exactly the kinds of conflicts that Treasury and Fed officials were trying to avoid when they first began injecting capital into banks last fall."
The only potential conflict of interest I can imagine here is that the government-as-shareholder might not vote in any way that could give a single bank an advantage over others, thereby stifling competition.

Still, I don't see how a common shareholder, even a majority-holding one, could effect much change without being an activist shareholder. Such bully-shareholders are often liabilities. And the government, because of its interest in stability, would be that much less likely to be one.

This smells suspiciously like unfounded paranoia of a socialist boogieman.

1 comment:

  1. Well yeah, it does create a conflict of interest...from the point of view of the bank executives. There's a conflict of interest between irresponsible short-term profit and upholding the public good while enhancing long-term stability. If you're anyone but one of these executives, the increased government involvement in bank management shakes out as an unequivocally good thing. Well, at least they didn't elevate that "conflict of interest" point to the lede, instead throwing it in at the end.

    This point is nothing but pure, unadulterated concern trolling. Shame on the NYT and Edmund Andrews for slipping it in without a rebuttal.