Truth on the Market

Lots of interesting news items that merit attention, and that more importantly give me an opportunity to link to my scholarship.  The GM IPO is getting hot, and the government will be selling some of its holdings in GM, though certainly not the lion’s share of its 60% ownership.  The New Jersey pension recently entered into a settlement agreement with the SEC over fraudulent disclosures to investors about its pension underfunding.  What do these two events have in common?  My Treasury Inc. paper, that’s what.

If you want to understand these developments, read my paper in the Yale Journal on Regulation this summer, Treasury Inc.: How the Bailout Reshapes Corporate Theory and Practice.  There I describe how the government is a controlling shareholder in bailout entities from GM, Citi, and AIG to many of the other 600 banks taking TARP cash.  I also argue that when the government is a shareholder, very low ownership percentages can provide for control.  Even more importantly, the government is a unique type of shareholder: one with nearly absolute sovereign immunity.  This immunity applies for both the federal securities laws and state corporate law.

The short lesson for corporate theory is that all of the central theories of the corporation, from director and shareholder primacy to team production or even “progressive corporate law” break down with the presence of an immune control shareholder.  The short lesson for corporate practice is that a number of weird things can also happen, including that the government can engage in insider trading with reckless abandon.  And despite Henry Manne’s work considering the futility of insider trading laws, he also argues that insider trading by the government is a problem that is worth addressing.

Erik Gerding provides his usual well considered analysis of the New Jersey fraud, and asks the question:

[W]ould the SEC ever bring charges against the U.S. Treasury? Might certain federal programs be underfunded, and fixing the gap might be impossible for the country “without raising taxes, cutting other services or otherwise affecting its budget”?

There is a technical answer.  Section 3(c) of the Securities Exchange Act of 1934 provides that “No provision of this title shall apply to, or be deemed to include, any executive department or independent establishment of the United States.”  So, in addition to the immunity it already enjoys, the ’34 Act provides immunity from the ’34 Act for the federal analogue to the New Jersey problem, and it also gives the federal government immunity from the control shareholder and insider trading liability provisions of the ’34 Act for trading in its TARP shares.  I don’t know about you, but as a shareholder I would never buy into a company with a control shareholder that enjoyed sovereign immunity from the federal securities laws and state corporate law.  But that’s just me.