Federal Intervention Pits 'Gets' vs. 'Get-Nots'
Originally Posted At The Wall Street Journal
By Bob David and Jon Hilsenrath
June 15, 2009
HAMBURG, Pa. -- Factory worker Dennis Davis recently stopped at the Cabela's store here to buy a $90 carrying case for the long-barreled Contender pistol he uses to shoot pesky groundhogs at his brother's farm. He paid with a store-issued credit card.
The U.S. government helped finance the transaction. Earlier this year, it recharged the credit-card operations of the Nebraska-based retailer of hunting and camping gear with nearly $400 million of federal financing.
Mr. Davis was surprised to hear about the government's helping hand, and hardly pleased. "Anything the federal government, or any government, sticks its nose in fails or makes things worse," he said as he made his way across the parking lot with his son.
True or not, what's undeniable is that the federal government has burrowed its way deep into the quotidian workings of American capitalism.
Since the onset of the financial crisis nine months ago, the government has become the nation's biggest mortgage lender, guaranteed nearly $3 trillion in money-market mutual-fund assets, commandeered and restructured two car companies, taken equity stakes in nearly 600 banks, lent more than $300 billion to blue-chip companies, supported the life-insurance industry and become a credit source for buyers of cars, tractors and even weapons for hunting.
The effects are rippling into nooks of the economy far beyond Wall Street and Detroit's troubled car industry. The massive intervention has shifted the way companies do business in a host of ways -- not all of them intended by the government. Increasingly, companies big and small are competing on the basis of their ability to tap government money. A divide is opening between gets and get-nots.
Thanks to federal loans, Cabela's Inc. didn't have to slash credit to its customers. But Genworth Financial Inc., a big insurer, failed to get bailout money, and has raised capital in other ways, such as cutting its dividend. Still other firms hope to gain an edge by steering clear of the government. UMB Financial Corp., a bank in Kansas City, Mo., is going after new customers by boasting that it hasn't taken any bailout money.
Geyser of Money
Government spending as a share of the economy has climbed to levels not seen since World War II. The geyser of money has turned Washington into an essential destination for more and more businesses. Spending on lobbying is up, as are luxury hotel bookings in the capital.
President Barack Obama has vowed to reduce the government's role in the private sector as soon as possible. Federal Reserve Chairman Ben Bernanke says most of the central bank's emergency programs will be unwound within a few years. But a recent Wall Street Journal poll of economists found that only 16% believed the federal government would be able to meet its goal of ending rescue programs soon without fundamentally altering the competitive landscape of the private sector.
The intervention helped stabilize the economy, but could slow growth in the long-run. Some economists and business leaders worry the intervention will result in rules that hamstring the way some businesses operate, and that it will sustain unproductive zombie firms and burden the next generation with debt or inflation.
Lawrence Summers, President Obama's chief economic adviser, says the administration has intervened in the private sector prudently. The Democratic White House and its Republican predecessor have said that without an aggressive government response, the nation might have faced an economic disaster on the scale of the Great Depression.
"Our approach to intervention in specific companies is recognizing the need to do what's absolutely necessary, but also recognizing that it's absolutely necessary to do no more than what is needed," says Mr. Summers.
The economic crisis, which began with turmoil in mortgage markets, washed over many companies when broader credit markets seized up. In March, the finance arm of Cabela's had $250 million in debt tied to store-issued credit cards coming due. But investors no longer had much appetite for new securities backed by credit-card debt, which is how Cabela's usually covered such obligations.
The Fed and the Treasury Department provided nearly $400 million to Cabela's credit-card operations through a program aimed at reviving the consumer-loan market -- the Term Asset-Backed Securities Loan Facility, or TALF. The program lends money to investors to buy securities backed by credit-card loans and other consumer debt.
"Had we not been able to refinance this [debt], we would have massively reduced credit limits and canceled cards," says Cabela's chief financial officer, Ralph Castner. Now, Cabela's is pushing customers to borrow more. On a recent morning, employees near the entrance of the store in Hamburg encouraged customers to sign up for new cards.
The prospect of dipping into buckets of federal money has ignited competitive scrambles in lots of industries. In the farm-equipment sector, Deere & Co.'s purchase of a thrift years ago qualified it in December for a government guarantee on $2 billion of its debt, through a Federal Deposit Insurance Corp. program to help banks access debt markets.
But the FDIC didn't cover competitors such as Caterpillar Inc. or smaller equipment providers. So the Equipment Leasing and Finance Association, a trade group, lobbied the Fed to expand the TALF program to sales of farm equipment and other machinery. The association's president, Kenneth Bentsen, a former Democratic congressman from Texas, met with the Fed's general counsel and followed up with phone calls and letters. The Fed eventually expanded TALF to cover Deere, Caterpillar and other equipment makers.
Some of the neediest companies don't qualify for such help. By law, the Fed's loans have to be well-secured, so for the most part the Fed can finance only borrowers with top credit ratings. That's hurting some smaller equipment-leasing firms that can't get the high ratings. They now have to pay as much as four percentage points more than higher-rated firms to borrow -- a gap about three percentage points greater than before the crisis, the firms say.
Balboa Capital Corp., an equipment-leasing company that doesn't qualify for Fed financing, is slashing expenses by about 25% to try to stay alive.
"We're on the endangered list," says Phil Silva, Balboa's president.
Insurance companies have cooked up their own tactics to try to get into the federal money pot. Big insurers such as Lincoln National Corp. and Genworth Financial tried to buy small savings-and-loan associations in Indiana and Minnesota, hoping to qualify as banks and become eligible for bailout funds. Lincoln National sought permission from the FDIC to issue government-guaranteed debt. MetLife Inc. ramped up its borrowings from the Federal Home Loan Bank of New York, part of a nationwide lending cooperative.
Only some have succeeded. MetLife, which entered the crisis stronger than many rivals, was aided by the FHLB and FDIC, and had access to Treasury funds, which it says it doesn't need. Genworth failed to get regulatory approval to buy a thrift and get Treasury funds. It raised capital in other ways, including suspending its dividend and selling part of a Canadian business. Lincoln National got approval to buy a thrift but lost some access to a Fed commercial-paper lending program in February when its credit rating was lowered.
"What we're seeing now is greater differentiation among the companies in terms of their financial flexibility and actions that they can take to improve their capital and liquidity positions," says Robert Riegel, a Moody's Investors Service managing director.
Setting New Rules
Mr. Summers, the Obama economic aide, says the government isn't trying to pick winners and losers. "You have to distinguish between emergency cases and broader policies," he says. "In the case of broader policies, the effort is to set rules of the games that affect all companies, certainly not to choose between companies."
All the jockeying for money has energized Washington's lobbying industry. Overall spending on lobbying this year is on track to reach the $3.3 billion spent in 2008, according to the nonpartisan Center for Responsive Politics. The 2008 total was an 80% increase from the $1.8 billion spent in 2002, when businesses were fighting the Sarbanes-Oxley accounting and corporate-governance legislation.
The public is cooling a bit on the notion of a powerful government role. A Wall Street Journal/NBC News poll conducted at the end of April found Americans split 47% to 46% on whether the government should "do more to solve problems" rather than leave it "to businesses and individuals." Two months earlier, respondents had favored more government involvement by a margin of 11 percentage points.
Some businesses are trying to tap this antibailout sentiment. Worthington National Bank has erected billboards around Forth Worth, Texas, boasting that it hasn't been bailed out -- a shot at a crosstown rival that took federal cash.
Victor Stabio, chief executive of Hallador Petroleum Co., a Colorado coal and oil producer, recently got mail from UMB Financial, a bank in Kansas City, Mo., that advertised it hadn't taken a penny from the Treasury's Troubled Asset Relief Program, or TARP. Mr. Stabio says he was impressed. He moved $8 million of Hallador's money to UMB. "I didn't like the whole TARP program to start with," he says.
In addition to its lending, the government is showering money on the private sector through direct spending. Federal outlays are expected to swell to 28.1% of gross domestic product this year, a bigger percentage than any time since the 41.9% hit during World War II.
The $787 billion fiscal stimulus program is meant to favor certain sectors, including telecommunications, health and green energy. Companies are trolling for those dollars.
Gideon Ben-Efraim of Mountain View, Calif., says he is seeking money from Washington for the first time in his career as a telecommunications entrepreneur. His latest start-up, PureWave Networks Inc., a wireless telecom firm, scrapped plans to sell equipment initially in emerging markets. Instead, he retained the Washington law firm Patton Boggs to figure out how to tap the $7 billion the government is setting aside for broadband networks in the U.S. American Electric Power Co., a large utility based in Columbus, Ohio, is helping state officials get funding for a carbon-capture-and-storage demonstration project aimed at burning coal more cleanly.
The bailout help won't be available forever, which is only adding to the urgency. Fed Chairman Bernanke, asked to look ahead five years, says that by then "the government's financial interventions in the market will be largely liquidated." He is implementing a strategy to unwind the Fed's programs over time. Some are designed to end as markets recover.
Sticking to that timetable could be a challenge. Fed lending initiatives already have been extended well beyond their original expirations. Other Fed lending programs -- such as the TALF program and the rescue of American International Group Inc. -- involve making loans that could last five years or longer.
Fed's Portfolio
The Fed is accumulating a huge portfolio of mortgage-backed securities. Buying them helped push mortgage rates down. Selling them, if the Fed decides to do so, could meet political resistance because it would push rates up.
One of the most important pieces of the federal intervention is the rewriting of financial regulations, which the administration expects to propose this week. Under the plan, firms deemed "systemically important" would be regulated more heavily than other firms, to limit the chance they fail and threaten the broader economy.
Government backing could help banks, hedge funds, private-equity firms and others considered too-big-to-fail firms to gain an advantage by being able to borrow at rates below their smaller competitors. But there's a catch. The government could demand these big firms hold more capital or limit their dependence on debt, discouraging them from gambling with taxpayer backing. That would limit both their risk-taking and their potential profits.
Josef Ackermann, chief executive of Deutsche Bank AG and an economist, says business has itself to blame for the government's heavier hand because it spawned problems it couldn't handle. "A trusted third party was needed -- and I hate to say this as a market economist -- and that was the state," he said on a recent visit to the U.S. "The pendulum will probably swing back to a larger role for the state than is sensible for long-term growth."
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