Who Runs The Government’s Portfolio? (C)(GM)(AIG)

The federal government will end up owning bits and pieces of businesses including banks, car companies and insurance firms as it puts money into industries weakened by the recession. The Achilles Heel of this investing strategy is that there is no central authority watching the “portfolio” and no publicly articulated statement about when the holdings will be valuable enough to sell. Essentially, the taxpayer has nothing to tell him about the planned returns on his investments.

Investments in the car and banking industries are long term whether the government likes it or not. The restructuring of those sectors may take years.  Selling federal ownership in companies already weakened by the economy or a series of poor management decisions would undermine the public’s tenuous trust in institutions such as GM (GM) and Citigroup (C). The American taxpayer may be faced with a decade in which there is no return for the government’s assistance which was meant to keep critical portions of the economy from collapsing.

AIG (AIG) is the best example of a company with a huge obligation to the government, one which is not likely to be relieved for years if it is relieved at all. Taxpayers have put $180 billion toward keeping AIG in business and have an 80% equity stake in return. AIG says it will not need more government money, but it lost $4.35 billion in the first quarter of this year and a breathtaking $61.7 billion in the final quarter of 2008. It is probable that the taxpayers will never get all of their money back, but AIG does have divisions that are worth several billion dollars. If there is a timetable for selling those, the public has not been informed.  AIG may say it cannot predict the future, but someone at AIG has a document with the company’s plans.

There has been a great deal of advocacy of government transparency over the last several months. Citizens are supposed to have access to information on where their tax dollars are going and what the benefits are for the economy. There is , however, no place for people to go to see the entire “portfolio” of US government investments with expectations of what they will yield and when. It is easy to say that predictions for individual companies across such a broad spectrum of industries are impossible.  When the Treasury or Fed put capital into individual companies or into the purchase of securities in the open market, they use internal models for what they expect in returns. That is the only way for the government to measure whether pieces of the stimulus package are working. In every case when there is a specific sum put into the market there is certainly an estimated return, both an amount and a timeline.

There is an alternative theory about what the government’s expectations are for getting taxpayer money back and perhaps in some cases even a profit on their investment. That theory is that the agencies investing the money have only a vague set of forecasts for returns and, under pain of death, could not supply a detailed accounting of predictions for how government investments will pay out. The process of stimulating the economy may, indeed, have no specific goals other than to move GDP back to the positive growth rate in the budget and stimulus bills and the recovery in employment that is laid out by the Office of Management and Budget. That would mean that the approach to salvaging the economy is freewheeling and subject to only the nonspecific measurements of success.

The Treasury is in the process of auctioning hundreds of billions of dollars in debt and this will continue until the government no longer needs capital to run the country and save the world. IRS receipts are already running well below the Administration’s forecast. The interest rate that the government will have to pay for money may go up as investors become less comfortable with the federal deficit. The Chinese government, which is the most important single purchaser of US paper, has expressed concern about the profligacy of American spending. No one can tell what the Omega is for government borrowing, but that will certainly be tested over the next year.

It might be wise for the Administration to disclose exactly where taxpayer money is going and what the expectations are for that money to make its way back into the bank accounts of American citizens. The forecasts may be wrong the same way that most private enterprise forecasts are, but Americans would at least have a set of assumptions against which they could measure progress. The benefit of keeping people in the dark is that it pushes the day when accountability will become an issue into the future. That may make the process of governing easier, but it will eventually just make angry taxpayers angrier.

Douglas A. McIntyre