Trump equity stakes pose these risks to U.S. companies and markets
The Trump administration’s portfolio of stocks in US companies has reached a scale unprecedented outside of economic crisis or wartime.
Management has acquired shares or signed agreements with at least 10 companies, most of which are publicly traded. The government announced its latest investment USA Rare EarthAt the end of January.
Democrats have also considered taking stakes in U.S. industries in the past. But the Trump administration’s approach carries risks for both the companies involved and the broader markets in which they operate.
“This is an invisible barrier for startups and new market entrants,” said Scott Lincicome, an international trade attorney affiliated with the Cato Institute. “Why would you want to enter a market where you know your chief competitor is backed by the U.S. government?”
Most of the investments are made in USA Rare Earth and Multi-Purpose Materialsbut they also include major industrial and technology companies like U.S. Steel. Intel.
Senior administration officials such as Commerce Secretary Howard Lutnick and Interior Secretary Doug Burgum have argued that the U.S. government is investing in strategic industries to reduce dependence on Tawain for semiconductors and China for critical minerals.
Peter Harrell, who served as senior director for international economics under President Joe Biden, said in the past the U.S. has taken equity stakes in companies as part of bailouts with the understanding that the investments are temporary and that the government will exit its position once the company is financially viable again.
For example, President Barack Obama received a share from this project. General Engines During the 2008 financial crisis, President Franklin Roosevelt took a stake in the banking industry during the Great Depression.
But Lincicome said the Trump administration appears to be acquiring open-ended ownership interests that the U.S. government is unlikely to part with. He said it sets a precedent that future Democratic presidents can use to make direct investments in their preferred industries, such as wind and solar.
“I don’t yet see a clear and coherent reason why stocks are needed,” Lincicome said. Federal support such as loans, government contracts and other awards that ownership stakes fall short of is widely available, he said.
After the US took its stake in Intel, Lutnick told CNBC that President Donald Trump wants American taxpayers to benefit when the government gives money to companies.
But Harrell and Lincicome said the administration’s approach creates political, legal and business risks for the companies involved. This also raises potential conflict of interest concerns, they said.
CNBC has reached out to the White House for comment.
Political, legal risk
The Trump administration’s approach is a major ideological departure for the Republican Party, which has traditionally advocated free market capitalism and condemned government intervention. Democrats have typically been the party of industrial policy and intervention in markets.
For example, Senator Bernie Sanders and Senator Elizabeth Warren gave a presentation. change Biden’s CHIPS Act, which would allow the government to take stakes in companies that accept federal funding for semiconductor manufacturing. The measure ultimately died in the Senate.
Democrats have also promoted the idea of a national infrastructure development bank. At least one proposal for such an organization in 2021 would allow the government to take equity stakes in infrastructure projects. And Biden has considered starting a sovereign wealth fund.
These approaches were based on legislation passed by Congress. But Harrell said the legal basis for the Trump administration’s investments is a gray area. Management appears to be relying on the logic that it can buy shares because the law doesn’t explicitly prohibit it and companies agree to deals, he said.
Harrell said the lack of a clear legal basis makes companies vulnerable to lawsuits from competitors. They are also likely to face political scrutiny if power changes hands in Washington, he said.
“If Democrats take control of one or both chambers of Congress in November, a group of the CEOs of these companies will be brought before committees to answer questions about how these deals are going,” he said.
Companies such as MP Materials have acknowledged these risks in applications. Securities and Exchange Commission. The Pentagon’s deal with MP includes a floor price and purchase agreement in addition to an equity stake.
MP warned investors that they could face “government audits, investigations, congressional reviews” and “investigations regarding conflicts of interest.” He also warned that the agreement faces “litigation risk” and is vulnerable to “changes in the federal administration and related executive and legislative priorities.”
Harrell also said Congress has not put in place clear barriers that would minimize potential conflicts of interest and cronyism in the Trump administration’s approach. One concern, he said, is that the government may favor companies in which it has a stake in areas such as permitting and contracting.
USA Rare Earth was required to raise at least $500 million in private funds as a condition of its agreement with the government. Commerce Secretary Lutnick’s former firm, Cantor Fitzgerald, led the placement of this fund. Lutnick left Cantor when he joined the Trump administration and transferred his share to their children in the company.
Risk of misallocation of capital
Harrell said equity stakes also raise the question of whether the government can be trusted to make the right bets on companies and technologies that will be successful over the long term.
Lincicome said a bad bet would lead to capital flowing into less competitive companies, and investors were already speculating about which companies the government would invest in next.
“This is a direct misallocation of capital,” he said.
Business decisions can also become politicized, he said. Large companies may decide to do business with government-backed firms to curry favor with the administration, Lincicome said.
In the case of US Steel, the federal government has a management stake in the company, called a golden share, rather than an economic interest. The White House intervened last September. Stop US Steel Decided to stop production at Granite City facility in Illinois
“That’s your worst-case scenario; you have politicians in Washington driving important business decisions based on political considerations and not what’s best for the long-term health of the company,” Lincicome said.
U.S. Rare Earth CEO Barbara Humpton told CNBC in a January interview that the government made the decision. he derives “economic interest, not management interest” in his work. Lutnick told CNBC last August that shares in Intel have no voting rights and do not include management rights.
“Maybe they don’t have formal voting rights,” Lincicome said of the government’s equity stakes. “But they have a phone and they can pick up the phone and call. They have the ability to influence decisions that don’t show up on paper or in the power of attorney.”
Harrell and Lincicome said a Democratic president could force companies with government shares to adopt progressive policies, such as capping executive pay or using unionized labor.
Institutional silence
Senior executives have expressed almost no public criticism of the Trump administration’s risk-taking. Citadel CEO Ken Griffin said this week that some executives were quietly opposed to the hands-off approach.
“When the U.S. government started getting involved in corporate America in a nepotistic sort of way, I know most of the CEOs I was friends with found that incredibly distasteful,” Griffin said. Wall StreetJournal on Tuesday.
The number of government shares is likely to increase. Lutnick told CNBC last August that the Pentagon was considering taking stakes in major defense companies. LockheedMartin. Trump said in January that he “will not allow” defense companies to issue dividends or share buybacks until they ramp up production of military equipment.
Before the US took its stake in Intel, Trump said CEO Lip-Bu Tan was “extremely conflicted” and called for his resignation over his ties to Chinese companies. The comments sparked a short-lived selloff in Intel shares. Other company executives are likely worried about going against management and being punished, Lincicome said.
“The best outcome for your shareholders here is to remain silent,” he said.
