FedSoc Hosts Panel on Govt Ownership of Companies in the Bailout
by Justin Shubow
Posted January 05, 2012, 7:14 PM
Today at the Federalist Society's 14th Annual Faculty Conference, Professors David Zaring, Lynn Stout, and J. W. Verret discussed the federal government's taking an ownership stake in private companies as part of the financial bailout. Zaring said he was "more sanguine" than many regarding the sovereign as shareholder. As for the government's managing the compensation of executives of companies it came to control, Zaring argued that it makes sense that executives should pay a price for putting their company in such a poor position. He asked: Is the government's behavior in this regard really so different from what a private equity firm would do after it took over a company?
Stout claimed that derivatives are nothing but bets in the strict sense of the term: mutual promises made regarding a future prediction. She argued that such gambling is at best a zero-sum game, and "adds risk by definition." She said that in the 1800s, the government would not enforce the derivative contracts of the day (called "difference contracts"). These were matters of state, not federal, law and the common law did not enforce gambling contracts. Instead, private institutions such as commodity exchanges would enforce the agreements among their members, in the same way that gambling clubs in ancient Rome would enforce bets among their members. Such institutions, like casinos of today, made sure their members could not place bets they could not pay. Stout concluded that better than the Dodd Frank legislation would be returning to the prior system: let state courts and the common law handle the enforcement (or lack thereof) of derivatives contracts.
Verret said in response to Stout, "I have trouble distinguishing between derivatives and everyday stocks and bonds," explaining that he viewed them all as bets of a kind. He argued that derivatives do have an economically useful function by allowing parties to take advantage of their comparative advantage in handling different kinds of risk. He was skeptical that the government would be able to accurately identify the difference between investment and mere speculation.