View Full Version : U.S. becomes airline broker

10th Oct 2001, 19:51
from http://www.dailynewslosangeles.com/business/articles/1001/10/biz06.asp

By Brad Foss
Associated Press

NEW YORK -- Government officials have a fairly simple response to taxpayers who are skeptical about the federal bailout of the airline industry and wonder what's in it for them: the potential for stock options.
A provision in the airline bailout bill says the federal government will give preference in awarding up to $10 billion in loan guarantees to airlines that offer "warrants or other equity instruments that will allow the federal government to participate in the gains of the company."

The government has a history of accepting equity in a publicly traded company in exchange for loan guarantees. The 1979 bailout of Chrysler, for example, had a similar arrangement that resulted in a profit of more than $300 million for the government.

But critics expressed concern about the potential for conflicts of interest and questioned whether the government is capable of making astute investment decisions for taxpayers.

Austan Goolsbee, an economist at the University of Chicago, called the provision troubling, likening it to the controversy surrounding privatization of Social Security accounts.

"Would they have an incentive to make certain rules and regulations more lax on companies whose stock they own?" Goolsbee said. "Will they want to bail out certain companies or approve mergers" that might otherwise be rejected?

Since the terrorist attacks on the World Trade Center and the Pentagon, airlines have cut capacity by 20 percent, laid off more than 90,000 employees and affirmed the likelihood of multibillion-dollar losses well into 2002. Without the loans, industry officials say, some major carriers would likely go out of business by summer.

The authors of the bailout provision, which gives the government more power to negotiate the terms of loan guarantees, say the benefits to the American public are straightforward.

"Hard-working U.S. taxpayers should not be asked to bail out the airline industry with absolutely no strings attached," said Sen. Peter G. Fitzgerald, R-Ill., who co-wrote the provision with Sen. Jon S. Corzine, D-N.J. "If the federal government is going to guarantee $10 billion in loans to the industry, the taxpayers deserve something in return."

Under the new rules issued by the Office of Management and Budget, all airlines will be eligible to seek federal loan guarantees, part of the $15 billion airline relief package signed into law last month.

The loan guarantees are to be awarded by a four-member Air Transportation Stabilization Board, consisting of Transportation Secretary Norman Y. Mineta, Federal Reserve Chairman Alan Greenspan, Treasury Secretary Paul O'Neill and Comptroller General David Walker or representatives designated by them.

The guarantees effectively make the federal government a co-signer on a loan, agreeing to pay it off if the airline fails.

Besides the loan guarantees, the assistance included $5 billion in direct payments to airlines still hurting from the recent terrorist attacks. The payments were allocated according to the airlines' market share.

Amy Call, a spokeswoman for the Office of Management and Budget, said any stock options negotiated by the government would be nonvoting shares and would be viewed as a short-term investment.

"It's a way to compensate the taxpayers for taking a large risk if the airlines do make a profit eventually," she said.

John Heimlich, an economist for the Air Transport Association, a Washington-based industry trade group, said the airlines could try to use stock options to persuade the government to offer longer-term loans or better interest rates.

But he admitted taxpayers might be uncomfortable with the government as their stockbroker.

"Why would I want the government to decide how I invest my money? Historically, airline equities have not exactly been high-quality investments," Heimlich said. The government is "saying we could share in the gains, like what happened with Chrysler. But we ain't Chrysler."

In the case of Chrysler, the government guaranteed $1.2 billion in loans in 1979 in exchange for warrants to buy stock. When the company rebounded four years later, the government reaped more than $300 million in profits.

Helane Becker, an airline analyst with Buckingham Research Group in New York, said by attaching such strings to loan guarantees would give airlines more incentive to pursue every possible resource in private markets before going to the government.

Goolsbee disagreed.

"The government is precisely the kind of shareholder you want," he said. "What are they going to do -- come down to a board meeting and demand management changes?"