Nationalized Treasure

I. Introduction

On February 27, 2009, the United States government announced that it was taking measures that could result in it taking as much as a 36% equity stake in Citigroup, Inc.[1] This would make the federal government the largest shareholder in Citibank.[2] By converting $25 billion in preferred shares into common stock, the federal government hoped that the move would stabilize Citibank in a tumultuous market.[3] As a result of this move, a number of people have voiced a growing concern over the federal government taking further steps to nationalize other major financial institutions.[4]

Through taking a 36% stake in Citigroup, the federal government did not fully nationalize Citibank.  As a result, Citibank is now caught between the private markets and governmental interests. While nationalization could seriously undermine confidence in the financial system, as Bank of America Chief Executive Officer Kenneth Lewis suggests,[5] this scenario poses some unique potential difficulties that financial institutions such as Citigroup might face. In reality, this move may ultimately serve to further destabilize Citibank. Using the recent AIG bonus scandal as a baseline, this paper will descriptively analyze how political and business interests can come into conflict under these circumstances and how these conflicts affect the corporate governance of these institutions.

II. Forced Statesmanship

In his seminal article, The Higher Criticism of the Modern Corporation, Professor Henry Manne discussed a concept known as “business statesmanship.[6] Essentially, business statesmanship refers to actions taken on the part of firms and managers that sacrificed profits in order to carry out good deeds, such as through making charitable donations.[7] However, executive efficiency does not automatically imply these managers were skilled in determining how their firms could best carry out those profit-sacrificing missions.[8] In other words, managers are chosen for their ability to make their firms profitable; they do not necessarily have the necessary expertise to meet the goals of those profit-sacrificing missions. This conclusion is logical, given that managers have a duty to operate their firms for profitable purposes.[9]

In a previous article, I discussed some of the issues with sovereign wealth funds; primarily those issues resulting from these funds acting as the investment arms of sovereign entities.[10] One of the primary concerns underlying sovereign wealth funds is that these entities will use sovereign wealth funds for political purposes, rather than for the creation of profit.[11] Having political actors in the markets represents a shift from market capitalism to state capitalism, where commercial motives become mixed with or replaced with political motives.[12]

Where political motives and commercial motives become mixed, an issue comes up under the business statesmanship model. Political motives and commercial motives can be in opposition to one another. A course of action that makes a firm profitable may not be politically desirable. Conversely, a politically beneficial course of action may not be profitable. This not only creates a problem with managers, who may not have the expertise necessary to effectively meet those political goals, but also with politicians, who may not have the expertise and incentives necessary to make a firm profitable. Much like managers may lack statesmanship, politicians may lack business acumen. The results in these situations can be catastrophic for firms that are subject to political influence.

III. The March of the Bonus Army

The recent controversy with American International Group (AIG) is one example of where political and profit-driven motivations can come into conflict. On September 16, 2008, AIG announced that the Federal Reserve Bank of New York was providing AIG with an $85 billion secured revolving credit facility in order to resolve a liquidity crisis facing AIG.[13] In return for this facility, the federal government received warrants that could be converted into nearly 80% of AIG’s common stock.[14] A little over a month later, AIG had used $90.3 billion from the credit line.[15] In spite of these loans, AIG posted a $61.7 billion loss for the fourth quarter of 2008, which was a record for the largest quarterly loss in United States history.[16]

All of these events came to a head in March 2009. On Sunday, March 22nd, AIG executives were slated to receive $165 million in bonus payouts.[17] When reports of those payouts were leaked, the political response was ferocious. Iowa Senator Charles Grassley suggested the AIG executives should take “the Japanese approach”: resignation or suicide.[18] President Barack Obama promised that his Administration would take every measure possible to prevent AIG from paying those bonuses,[19] despite the fact that a successful lawsuit initiated by AIG employees under Connecticut’s wage act could have resulted in $330 million in damages for abrogation of those contracts.[20]

Things only got worse for AIG managers from there. New York Attorney General subpoenaed AIG for information on the bonuses, revealing that, while these bonuses were paid out to 73 people for retention purposes, 11 of the people had left AIG.[21] Furthermore, on March 19th, the House of Representatives approved a 90% tax on bonuses paid to employees of firms earning more than $250,000 that have received federal government bailout money, including employees of AIG.[22] Death threats to AIG executives became sadly common.[23] The negative publicity surrounding these bonuses became so bad that, as of March 24, 15 of the 20 top bonus recipients at AIG gave back their bonuses.[24]

IV. Fair Consideration

This series of events illustrates how business and political interests can come into conflict. On the one hand, AIG can claim that it had legitimate business arguments for paying out these bonuses. First, AIG originally made these bonuses in order to retain their managers. While they were facing a liquidity crisis, they needed to keep their managers aboard to help plug the holes in their sinking ship; rather than have their managers abandon ship. Replacing these managers would have been a costly and difficult endeavor, given the bad press AIG received at the end of 2008. Second, if AIG broke these contracts, they would have faced lawsuits that would have caused them to incur damages and substantial legal costs.  Both of these reasons would have substantially detracted from their profits.

On the other hand, Congress and other groups had legitimate political arguments behind preventing AIG from paying out these bonuses. AIG received tens of billions of dollars from the federal government to save them from a possible bankruptcy. This money did not come without strings attached. While all of AIG’s managers were not responsible for AIG’s massive losses, many of those managers made poor business decisions and at least some blame could be assigned to them. Given that 11 of the managers who received these bonuses left AIG, these bonuses may not have been simply for retention purposes. The public outcry over these bonuses suggested that these bonuses either reflected poor business decisions adversely affecting taxpayers or that the bonuses were self-serving. In either case, the taxpayers were the ones who ultimately paid these bonuses. Politicians representing their constituents, if not pandering to them, had numerous reasons to decry those bonuses.

In the end, the political interests prevailed. Many of AIG’s executives returned their bonuses. Congress is on the verge of passing a 90% tax on comparable bonuses paid to employees of firms receiving federal bailout money. There is nothing keeping these political interests from once again exercising their influence, both direct and indirect, over AIG. The current managers at AIG have numerous incentives to leave if they wish to avoid this political influence. People who could be future managers of AIG have similar incentives to avoid seeking work with AIG. Considering the tremendous resources at the disposal of political actors, commercial interests will probably not come out on top in any conflict between the two. By skewing corporate governance away from profit maximization and towards meeting political goals, this influence could seriously alter current incentives and norms within the corporate governance of firms receiving federal money. Statesmanship may become the new reality at those firms.

V. Conclusion

This article is not about whether political or business interests are equitable, legitimate, or just. Instead, this is an article about what happens when the focus of a firm shifts from profitability to satisfying political goals. While the federal government might think it is stabilizing financial markets through purchasing these shares in Citigroup, it is opening the door to a whole host of problems that could detract from Citigroup’s profitability. The federal government could take measures that would seriously harm Citigroup and financial markets across the world. As illustrated by the AIG bonus flap, these conflicts can seriously alter the incentives of managers. This shift away from profitability could similarly reshape the incentives of shareholders and creditors. Corporate governance structures that are in place at firms subject to political influence may not be able to adequately handle the effects of conflicts between profit and politics.

This is a serious issue which private firms and the federal government need to take into consideration as the federal government continues to increase its involvement in the actions of private firms. The AIG bonus scandal may have only been a sign of things to come.

[1] Martin Crutsinger, Citigroup Reaches Aid Deal with Government, Associated Press via Yahoo! Finance, Feb. 27, 2009,

[2] Id.

[3] Id.

[4] See, e.g., Kenneth Lewis, Op-Ed, Some Myths about Banks, Wall St. J., Mar. 9, 2009,

[5] Id.

[6] Henry Manne, The “Higher Criticism” of the Modern Corporation, 62 Colum. L. Rev. 399, 413 (1962).

[7] Id. at 416-417.

[8] Id. at 414.

[9] See, e.g., Dodge v. Ford Motor Co., 170 N.W. 668 (Mich. 1919).

[10] Patrick Schuette, Tamed Tigers: Sovereign Wealth Funds as Passive Investors, Ill. Bus. L. J. (Nov. 2008),

[11] Paul Rose, Sovereigns as Shareholders, 87 N.C. L. Rev. 101, 111 (forthcoming 2008).

[12] Id. at 113.

[13] AIG Statement on Announcement by Federal Reserve Board of $85 Billion Secured Revolving Credit Facility, American International Group, Inc., Sept. 16, 2008 (last visited Mar. 30, 2009).

[14] Edmund L. Andrews, Michael J. de la Merced, and Mary Williams Walsh, Fed’s $85 Billion Loan Rescues Insurer, N.Y. Times, Sept. 16, 2008,

[15] Hugh Son, AIG Tapped $90.3 Billion from Government Credit Line, Bloomberg, Oct. 24, 2008,

[16] AIG Reports Record $61.7 Billion Loss, BBC News, Mar. 2, 2009,

[17] Tom Raum, Obama: AIG Can’t Justify ‘Outrage’ of Exec Bonuses, Associated Press via Yahoo! Finance, Mar. 16, 2009,

[18] Nigel Duara, Senator Suggests AIG Execs Should Kill Themselves, Associated Press via Yahoo! News, Mar. 17, 2009,

[19] Id.

[20] Alice Gomstyn and Lauren Pearle, Could Be Worse: AIG Double Bonus Jeopardy, ABC News, Mar. 17, 2009,

[21] Posting of Michael J. de la Merced to The New York Times Dealbook Blog, (Mar. 16, 2009, 4:34 PM EST).

[22] The U.S. Senate is currently considering a similar measure.  It should be noted that the Constitutionality of this tax is in question, but that issue will not be determined until this tax has been tested in the courts.  Carl Hulse and David Herszenhorn, House Approves 90% Tax on Bonuses after Bailouts, N.Y. Times, Mar. 19, 2009,

[23] AIG Chief Worried About Safety after Death Threats, Mar. 18, 2009,

[24] Jeff Capellini, 15 of Top 20 AIG Execs to Give Back Bonuses,, Mar. 24, 2009,