Separation of Bank and State: Consolidating Bailed-Out Companies into the U.S. Debt Ceiling and Government Financial Statements

ABSTRACT Existing legal and economic theory presumes a clear line between private firms and government regulating agencies. It generally assumes that corporations maximize profit in the factor markets and government regulators alleviate externalities in those markets. The circumstances of the financial crisis of 2008 have altered this existing dynamic. As a result of the bailout, the government now holds a controlling equity interest in many of the nation's largest financial and automotive companies. As a prime example, the government owns a 34% voting, and thereby effectively controlling, equity interest in Citigroup, the nation's largest bank. This Article examines economic theory and evidence of government ownership in private firms and finds that government ownership and control correlates with overwhelming costs to firm efficiency as governments push the firms they control to subsidize influential interest groups. As the government does not want to lose its ability to subsidize these groups, the usual product markets and the market for corporate control that would otherwise maintain profitable enterprises are largely muted. Part of the explanation for the government's interest in using its control over private firms to serve interest groups is the government's ability to do so off-budget. As such, this Article argues that laws governing the debt ceiling of the United States and the financial statements of the United States should be changed to take into account a realistic perspective of the government's obligations that accompany its ownership in private firms through the Troubled Asset Relief Program ("TARP") bailout. This perspective should consolidate the financial position of firms controlled by the U.S. government, including their debt, net revenue, and other financial operations, into the financial systems and laws which govern the approval process and disclosure of the U.S. government's finances. In doing so, this Article argues that the reforms proposed can partially internalize the costs of interest group pressure to abuse the government's ownership and can also facilitate the legislature's constitutional requirement to oversee appropriations and debt repayment of the United States. As a secondary thesis, this Article argues that consolidation of the controlled firms will also present a more accurate picture to users of government financial statements. TABLE OF CONTENTS I. INTRODUCTION 393 II. GOVERNMENT CONTROL OF COMPANIES UNDER THE TARP BAILOUT 397 A. History of the TARP Bailout 397 B. The Government's Control Through TARP 399 III. ECONOMIC THEORY AND EVIDENCE OF GOVERNMENT-OWNED COMPANIES 403 A. Theory of Government Owned Firms 405 B. Evidence of Government Owned Firms 410 IV. INTERNATIONAL BUDGETARY LAW AND ACCOUNTING APPROACHES TO GOVERNMENT CONTROLLED CORPORATIONS 416 V. STATUTORY AUTHORIZATION FOR THE NATIONAL DEBT CEILING 421 VI. THE FINANCIAL STATEMENTS OF THE UNITED STATES ........ 430 A. Economists as Users of Financial Statements 439 VII. CONCLUSION 442 I. INTRODUCTION The essence of finance is the art of balancing equity and debt to fund the production of the goods and services that drive economic growth. This system presumes the existence of two distinct institutions. The first institution is a collection of firms owned by diversified residual equity holders that manage productive resources with a streamlined objective of maximizing shareholder wealth. …