is one of a number of pundits who think that if the US is going to own a big chunk of bank common stock — and in the case of Citigroup (C) they certainly will, perhaps not Bank of America (BAC) though — then it should act like any other big fund. Yglesias wants the US to be active, with board representation and a say in how the company is run.
There’s certainly something to be said for this idea from a fairness point of view. At least it seems fair. And he thinks that if the government were to remain a passive shareholder, it would be a strange institution where the largest shareholder remained passive.
For one thing, he’s wrong in that this wouldn’t be so unusual. Lots of publicly traded firms have one or two exceptionally large shareholders that don’t exert much influence. Does Warren Bufett exercise much of a say in how Coke (KO) operates? No. Big passive investments are common.
Beyond that, there’s something off about the idea of advocating an active stake just for the stake of being active. The real question should be: Does the US having an active stake in Citigroup make it more likely that the bank will be run better for shareholders? If it does then OK, we can debate. But this seems highly unlikely, given how politicized lending can become. This is the same problem as having labour union representation on a board. The board’s duty is not too look out for their sponsoring shareholders, their duty is to look out for all shareholders. But any government rep — armed with mandates, such as “green” lending, lending to labour union-dominated companies and providing more affordable housing loans — would have a totally separate agenda.
This isn’t to defend the current management or the board. Certainly, in the case of Citigroup (C), beggars can’t be choosers. They had no choice but to get in bed with Uncle Sam. But that doesn’t stop us from debating whether excessive influence will produce a positive result or not.
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