Wednesday, December 17, 2008

Government Intervention's Effects On Risk & Private Capital

Monday's Wall Street Journal featured a very interesting piece in its 'Heard On The Street' column. Entitled "Auto Bailout's Hidden Danger," David Reilly pointed out an insidious aspect of a possible Federal pre-bankruptcy package for the Detroit-based auto makers.

Simply put, Reilly notes that, with Federal involvement causing new uncertainty in the order of creditor seniority for GM and Ford and, in some sense, Cerebrus/Chrysler, such an aid package may further chill any hope of private investment in the sector.

In a manner very similar to that now brought to light by Amity Schlaes concerning FDR's New Deal, such government intervention also brings with it the fear and risk of subsequent Federal legislation which changes the terms of seniority of creditors, or the rights of the Federal government.

For example, it is now recognized that FDR's federalization of power generation, via the TVA, drove investor capital out of that sector for decades.

When the newly-arrived rescuer of a company or sector also has the power to rewrite the laws governing recovery of investment or allocation of loss, it will come as no surprise that private capital may well steer clear of that company or sector permanently.

It's not a trivial matter. Consider what Treasury 'help' did to investors of all the major commercial banks, not to mention AIG. What investor would now be so foolish as to invest in that sector, save for short-term trading gains?

It's a very undesirable, unintended consequence of Federal 'help' for an industrial sector which would, in the end, be so much better-served by joining the rest of American business in using the available Chapter 11 bankruptcy process.

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