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Should Treasury Get an Equity Stake in Bailed-out Companies?

Bloomberg reports that Chris Dodd‘s alternative bailout plan includes a provision for the government to get an equity stake in firms that take bailout funds:

The legislation requires Treasury to take an equity stake equal to the purchase price of the assets being bought. If the company isn’t publicly traded, the government would take senior debt instead, placing it in the front of the line of debt holders for repayment in the event of a bankruptcy.

Under the plan, the government would be required to obtain an equity stake equal to the value of the debt that is purchased from the companies, including those whose shares are not publicly traded. The Treasury secretary would also be required to issue weekly public reports on the amount of assets bought and sold by the U.S.

On the one hand, the effect is to convert the bailout into a form of convertible debt. The government’s equity stake the Chrysler bailout turned out to be pretty profitable.

On the other hand, I’m philosophically skeptical of such plans. Even though any resulting state ownership of private companies probably would be only temporary, the idea of government ownership of the means of production still gives me the proverbial willies.

In the Chrysler bailout, moreover, the government was not both lender and equity stakeholder. Instead, the government guaranteed private loans and insisted that Chrysler come up with additional private loans and internal cost savings. Here the government is going to be both lender and equity stakeholder, which both increases the risks to the taxpayer and potentially encourages a much larger government role in the acquired firms. After all, it’s basic economics that the more risk you take, the more control you want.

Finally, the Chrysler bailout was one firm. How many firms would the government end up owning under the Dodd plan? Representing what percentage of the American economy? And for how long.