The Trump administration’s U.S. corporate stock portfolio has reached an unprecedented size outside of times of economic crisis or war.
The administration has acquired stakes in or entered into agreements with at least 10 companies, most of which are publicly traded. The government has announced its latest investments. usa rare earthsend of January.
Democrats have considered investing in U.S. industry in the past. But the Trump administration’s approach carries risks, both for the companies involved and the broader markets in which those companies operate.
“This is an invisible barrier for start-ups and new market entrants,” said Scott Linthicum, an international trade lawyer at the Cato Institute. “Why would you want to enter a market where you know your main competitor is backed by the U.S. government?”
Much of the investment is in U.S. rare earths and MP materialHowever, it also includes large industrial companies such as U.S. Steel and high-tech companies. intel.
Government officials such as Secretary of Commerce Howard Lutnick and Secretary of the Interior Doug Burgum have argued that the U.S. government is investing in strategic industries to reduce its dependence on Tawain for semiconductors and China for critical minerals.
Peter Harrell, who served as senior director for international economics under President Joe Biden, said the United States has historically acquired stakes in companies in the context of bailouts with the understanding that the investment was temporary and the government would exit the position once the company became financially viable again.
For example, President Barack Obama general motors During the 2008 financial crisis, President Franklin Roosevelt acquired stakes in the banking sector during the Great Depression.
But the Trump administration appears to have unrestricted ownership, making it unlikely the U.S. government will withdraw, Linthicum said. He said this sets a precedent that future Democratic presidents can use to invest directly in their favorite industries, such as wind and solar.
“We still don’t have a clear, consistent reason why we need stocks,” Linthicome said. He said federal assistance that doesn’t extend to ownership, such as loans, government contracts and other incentives, is widely available.
After the U.S. acquired Intel’s stake, Lutnick told CNBC that President Donald Trump wants U.S. taxpayers to benefit from the government funding companies.
But Harrell and Linthicome said the administration’s approach poses political, legal and business risks for the companies involved. It also raises concerns about potential conflicts of interest.
CNBC has reached out to the White House for comment.
political and legal risks
The Trump administration’s approach is a major ideological shift for the Republican Party, which has traditionally championed free-market capitalism and decried government intervention. The Democratic Party is typically the party of industrial policy and market intervention.
For example, Sens. Bernie Sanders and Elizabeth Warren introduced an amendment to Mr. Biden’s CHIPS Act that would allow the government to take stock in companies that accept federal funding for semiconductor manufacturing. The bill ultimately died in the Senate.
Democrats also support the idea of a national infrastructure development bank. At least one proposal for such an entity in 2021 would have allowed the government to take a stake in infrastructure projects. And Mr. Biden has considered launching a sovereign wealth fund.
These approaches would have depended on legislation passed by Congress. But Harrell said the legal basis for the Trump administration’s investment is a gray area. He said the administration appears to be relying on the rationale that stock acquisitions are possible because they are not explicitly prohibited by law and the companies have agreed to the deal.
Harrell said the lack of a clear legal basis leaves companies vulnerable to lawsuits from competitors. They also said they would likely face political scrutiny if there was a change of administration in Washington.
“If Democrats take control of one or both chambers of Congress in November, a number of the CEOs of these companies will be brought before committees to answer questions about the progress of these deals,” he said.
Companies like MP Materials acknowledge these risks in their filings with the Securities and Exchange Commission. In addition to the equity stake, the Pentagon’s contract with MP also includes price floors and offtake agreements.
The MP warned investors that they could face “government audits, investigations, parliamentary scrutiny” and “conflict of interest investigations”. It also warned that the agreement faces “risk of litigation” and is susceptible to “changes in the federal administration and related executive and legislative priorities.”
Harrell also said Congress has not set clear guardrails to minimize potential conflicts of interest or favoritism in the Trump administration’s approach. One concern, he said, is that it could give preferential treatment to companies in which the government is a shareholder in areas such as permits and contracts.
USA Rare Earths was required to raise at least $500 million in private funding as a condition of the government deal. Commerce Secretary Lutnick’s former firm Cantor Fitzgerald led the financing. When Lutnick joined the Trump administration, he resigned from Kantar and transferred his shares in the company to his children.
Capital misallocation risk
Harrell said the equity stakes also raise the question of whether the government can be trusted to make the right bets on companies and technologies that will succeed in the long term.
If done poorly, Linthicome said, money could flow to less competitive companies, and investors are already speculating which companies the government will invest in next.
“It’s just a misallocation of capital,” he said.
Business decisions can also become politicized, he said. Linthicum said large companies may decide to do business with government-backed companies to curry favor with the government.
In the case of U.S. Steel, the federal government does not have an economic interest in the company, but rather control rights known as golden shares. The White House intervened last September to prevent U.S. Steel from halting production at its Granite City, Illinois, plant.
“That’s the worst-case scenario: politicians in Washington start dictating important business decisions based on political considerations rather than what’s best for the long-term health of the company,” Linthicome said.
Barbara Hampton, CEO of U.S. Rare Earths, said in a CNBC interview in January that the government has an “economic interest” in the business “not a governance interest.” Lutnick told CNBC last August that Intel’s stock has no voting rights and does not include governance rights.
“They probably don’t have formal voting rights,” Linthicum said of government shares. “But they have phones and they can pick up the phone and make calls. They have the ability to influence decisions that don’t show up on paper or in a power of attorney.”
A Democratic president could also try to force companies with government interests to adopt progressive policies, such as caps on executive compensation and the use of labor unions, Harrell and Linthicome said.
corporate silence
Top executives have virtually never expressed public criticism of the Trump administration’s stock acquisition. Citadel CEO Ken Griffin said this week that some executives have quietly opposed the interventionist approach.
“I know that most of the CEOs that I’m friends with find it very uncomfortable when the U.S. government starts to engage with American companies in a way that favors them,” Griffin told the Wall Street Journal on Tuesday.
Government stock holdings are likely to increase. Last August, Lutnick told CNBC that the Pentagon was considering investing in major defense companies, including: lockheed martin. President Trump said in January that he would “not allow” defense companies to pay dividends or buy back stock until they ramp up military production.
Before the U.S. acquired Intel’s stake, President Trump called CEO Lip Vu Tan to resign over his ties to the Chinese company, calling him “very inconsistent.” The comment caused a temporary decline in Intel stock. Other corporate executives are also likely concerned about being punished beyond the administration, Linthicum said.
“The best outcome for shareholders here is to just sit back,” he said.
