Posted by Todd Zywicki:
J.W. Verret on the Risks of Public Ownership:
http://volokh.com/archives/archive_2009_03_01-2009_03_07.shtml#1236367681
My colleague J.W. Verret has an [1]interesting article on Forbes.com
on the dangers of public ownership of banks and why government
investment may be "self-defeating" in returning them to financial
health:
This is because governments have two unique qualities: immunity
from insider trading laws and a political interest in using their
shareholder power to pander to special interests.
A healthy share price makes for a healthy bank. But healthy share
prices require healthy profits. When governments become powerful
shareholders in companies, the profit motive is inevitably watered
down.
After European governments privatized government-run industries in
the 1980s they maintained powerful equity positions in the
privatized firms. Those companies were twice as likely to need to
subsequently obtain subsidies and bailouts at the public trough.
***
Another important consequence of the bailout is that Treasury's
access as a regulator to inside information about banks makes it
the ultimate inside trader of stocks in financial institutions.
Luckily for the federal government, it has sovereign immunity from
insider trading laws.
The market will significantly discount the value of banks in which
Treasury is a shareholder. Since the dominant player in that market
has the opportunity to engage in insider trading, it makes little
economic sense for other investors to buy bank shares. Why would
anyone want to play the game when they know the game is rigged?
To protect against insider trading liability, corporate executives
file "10b-5 plans" that detail future share sales. Treasury should
be bound to the same kind of plan to assure investors that it will
not use inside information to trade its shares.
References
1.
http://www.forbes.com/2009/03/04/bailout-bank-treasury-opinions-contributors_frozen_options.html.
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