Why the Trump Administration is Now Taking Equity Stakes in American Companies

25:15And on top of being the guaranteed purchaser of the magnets, it has also guaranteed profit margin for MP. So I actually kind of get why private investors are crowding into MP, because it's sort of a no-lose business proposition at this point. But I do think the reality, your point, Joe, is that China is the low-cost producer of rare earth magnets. It just is. It has the scale. And the best. It has multiple companies that do it. And the best. It has the engineering. It has no low environmental regulation. It is the low-cost producer. If we as the United States do not want to be dependent on China for rare earth magnets, we are going to have, at least in the near and midterm, to pay more for those magnets.

25:58And so that subsidy is either going to have to be a direct subsidy from the U.S. government, like the MP materials deal, or it's going to have to be an indirect subsidy like tariffs or something else that forces U.S. manufacturers to pay U.S. producers because they're protected from foreign competition. And that's just the reality of this market. And then you get this whole debate of, are the national security needs, are the economic security needs so great that it is worth paying what will be a subsidy to have that production here in the U.S. Well, talk to us about the corporate governance angle in all of this.

26:33So with Intel, the U.S. government is getting a 9.9 percent stake. They also, I think, have a golden share like they do in the Nippon deal. Again, that's something that we tend to associate with China's state interventionist style. And we should talk about that a little bit later. But is Howard Lutnick going to be showing up to Intel AGMs and participating in the votes? This is another thing that worries me, Tracy, about the government taking equity in companies without kind of a clear statutory basis for it, because there isn't really any federal set of regulations or laws about how the government should manage its investments and what its role in corporate governance should be.

27:19So we're sort of seeing ad hoc approaches as the government does these deals. So in the Intel case, if you read the SEC filings, the government has basically agreed to vote the shares the way the board recommends the shares be voted, except in a couple of major types of transactions, like an overall change of control, you know, change in ownership of control transaction. So that's a great deal for the board, because actually now the board of Intel knows it has 10 % or 9.9 % of the shares to do whatever it wants. Great deal for the board. But that's unique to the Intel deal. And it will be interesting to see as these play out, do we see more and more kind of direct government involvement in the management of the companies?

28:05It's interesting. One of the things that I think about sometimes, so the corporate income tax rate in the United States is 21%. Now, if I own 21 % of a private company, right, I'm in theory entitled to 21 % of their income. It's kind of one way to think about it. In a sense, the US government already owns about a fifth of every private company in America, right? Because you have your profits and then 79 % goes to the normal shareholders, then 21 % goes to the government. There is a sense in which the government already owns a fifth of every company through taxation. The difference is, however, exactly what you just identified, which is this is a very passive equity stake that the government sort of has in every company.

28:48So what's really changing is this potential, not that the government is going to collect income from the profits, but this potential for new ways for sort of activist involvement in the private sector beyond the sort of traditional regulatory or legal environment that exists. Yeah. And it is both that this is going to give potentially the government a way of meddling much more specifically and with much more detail in individual companies. And it also is much more of the government potentially picking winners within an industry. I mean, let's take MP. You know, MP is one of it's not the only company in the U.S.

29:27that is trying to get rare mining and manufacturing going again. There are a number of other companies that are doing this with mining operations elsewhere in the U.S. And there are also some companies that are in the technology space that are saying, you know what, we might be able to create magnets that do what rare earth magnets do, but without using any rare earths. We have, you know, we're developing new materials. And the government here, rather than sort of saying, you know what, we have a program, we're giving a tax incentive to anybody who qualifies to kind of let all of these ideas flourish.

30:00The government is saying, you know what, we're guaranteeing that MP is going to make the money here without actually knowing, is MP like the most cost efficient, the best technological bet? It is very much a picking winners and losers rather than seeing what flourishes in the market approach. Do we have any sense of how foreign governments and foreign businesses are reacting to this? So I'm aware that Intel put out a statement that basically warned that having the U.S. government as a major shareholder could be problematic for the company. It could lead to maybe additional regulations or obligations or restrictions abroad.

30:36Have you picked up any, I guess, scuttlebutt on how... Is scuttlebutt too weird a word? No, it's great. It's a great word. All right. That's a classic. All right. Any scuttlebutt on how foreign entities are reacting? So I do think foreign governments are worried about what it means that the U.S. government is investing in specific companies. And they're worried about it in two ways, one of which is just like the classic government's worry about what other government subsidies are going to do. You know, if there's more subsidies for Intel, how is that going to affect European manufacturing? Also, Intel in particular had been planning to build fabs in Europe, actually prior to the U.S.

31:18government buy-in and canceled those fabs in Europe. But there's worry like would Intel still be a reliable partner if it is investing overseas or is it just going to invest in the U.S. now that it's U.S. government owned? And then the other one is I do think that for companies, particularly technology companies, you know, we are in this era of geopolitics where we worry a lot about Chinese companies or Chinese companies worry about the security issues around American companies. I think European companies are increasingly getting worried about, you know, is American tech safe to be used. And the closer the U.S.

31:51government gets to a company, I think the more you're going to see foreign governments wonder about those security risks. I mean, I just look at what Microsoft had to do a couple of months ago, where they actually said in response to European privacy concerns about Microsoft products in Europe, that Microsoft would be prepared to sue the U.S. government if the U.S. government started putting unfair privacy requests on Microsoft about European customers. I don't think anyone would believe that Intel is going to sue the U.S. government at this point to protect the privacy rights of its customers.

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34:42Do that with the all new Adobe Acrobat Studio. Learn more at adobe.com slash do that with Acrobat. So you mentioned the issue of picking winners, which of course is an issue that precedes any equity stake. Every industrial policy in the world always has to think about this risk or possibility. And traditionally, the way it sometimes, quote, works in the context of sort of developing economies is they might have that sort of export test. And we've talked about that a bunch on the show. Are customers in foreign markets buying your thing? And if so, that's a sign that you're building something competitive and we're going to keep backing you.

35:21And if not, This is a sign that you're not working out. And so there's this mechanism. If we're concerned about the idea that the government is picking winners with MP or picking winners with Intel, let's say again with MP, should the direction be that not that we get rid of the equity component, but that we just sort of build out the program so that any entity at any stage could theoretically make the US government a partner and that partnership is contingent on its success in some market measure. Well, I guess I look at that as, Joe, you know, you talked about taxes earlier. Isn't that what a tax credit's for?

35:58I mean, if you look at the CHIPS Act, the original CHIPS Act, we all focused on the grant part of the CHIPS Act. And this is the grant part of the CHIPS Act that we're talking about now. But actually, I think the more important part of the CHIPS Act is there was a 25 percent investment tax credit that lets anybody building a fab in the U.S. take 25 percent of the cost of that fab as a fully refundable tax credit. So, I mean, it's just a very great deal. I guess I actually, as a general bias, would prefer relatively more neutral approaches that let companies thrive and succeed in the marketplace.

36:33And where you do have grant programs, there will always be a place for grant programs. I think you want to do it in a fairly broad based way and seed multiple different ideas. I mean, I've been talking just recently with Jigar Shaw, previous guest on your podcast about his time at LPO. And he, you know, he had this approach. He's like, I wanted to say yes to everybody, you know, anybody who could fit the criteria of getting a loan. I wanted to say yes to because we want to place a bunch of different bets on a bunch of different technologies on a bunch of different investments. And, you know, I think there's a lot to be said for that, which is also historically how we have come.

37:13Now, maybe there are rare cases if there's a market failure, there's some sort of market where there's going to be a natural monopoly. Maybe in those cases, it does make sense, you know, there's a natural monopoly or some kind of market failure. Then you're only going to have one or two potentially successful companies. Maybe you do want the government to take a stake there because if it's kind of guaranteeing the market, some upside for the taxpayer makes sense. But I generally think that should be a pretty rare instance in our in our capitalist system. So there is an irony here that an administration which has been very critical of China and, you know, criticized them for manipulating their market or cheating on global trade rules or doing illegal subsidies and all of that kind of stuff is now pursuing a more interventionist approach that does seem very reminiscent of what happens in China.

38:06Can you compare and contrast those two systems and maybe talk about how U.S. policymakers are thinking about Chinese industrial policy at the moment? I mean, there is kind of an element here, right? We're looking a little bit like state capitalism with American characteristics. I think we should be, you know, open and direct about that. There are actually some differences. I mean, if you look at the Chinese industrial policy kind of approach, there are both similarities and differences. I think one big difference is actually when it comes to equity stakes in China, a lot of the equity is actually done at the provincial government level.

38:42You know, it's sort of an SOE that's owned by a particular province, relatively less at the central government level in China. The central government does tend to do a bunch of, you know, grants and R &D programs and that kind of thing. But they have a very heavy provincial level element to these. The other thing that I think China does, frankly, pretty well, kind of where we just were talking, Tracy and Joe, is China does tend to bet on multiple companies. And if you look at why they have a very successful EV sector right now, it is in part because you had lots of provinces investing in lots of companies, plus a tremendous amount of central government support on the demand side, as well as on the supply side of the equation.

39:21So you have dozens of EV companies there out in the marketplace battling every week to build better technology and to sell it to customers. So they've kind of created this state capitalism, but state capitalism that is actually in some of these sectors quite competitive in a way that spurs innovation. And I think if we're going to do more of that, we need to make sure we are also focusing on how do we keep this competitive to spur innovation and don't just kind of, you know, back a bunch of flabby 1970s European style national champions, which, you know, didn't turn out too well in the past. Now's the time to start a lean and mean fab, Joe.

39:59We've, oh, have I ever told you my fabless semiconductor fab apostrophe? Although that wouldn't be with a fab. But I do think that'd be a good name for a chips company. Fabulous Semi. Fabulous. Anyway, actually, we've never talked about those 1970s European champions too much on this show. What's the story there? I don't know anything about them. Well, I'm being a little bit blase, but you did see in Europe in the 1970s, you saw state ownership in a number of industrial firms. You saw fairly heavily state management in a way that I think a lot of economists looking at that thought did not make for economic, you know, sort of the most dynamic over time innovative industrial programs in Europe.

40:39Two quick questions. So, so far, these deals seem to be sort of ad hoc, individualized one offs. Right. And I'm curious if you have a sense that we're building towards something that's much more broad, a much more sustained model of, I guess, U.S. interventionist involvement in the sphere of strategically important companies. And then secondly, what happens to these stakes if we get a new administration and the Democrats come in or something like that? Yeah. So I think when this administration came into when the Trump administration came into office, I think they actually fairly early had identified a handful of areas where they thought equity was appropriate.

41:21I think critical minerals is one of those. And I think that that is guided in part by a view that we aren't going to have a domestic competitive market in critical minerals without either subsidies or without a tariff wall because China just is the low cost producer. So I think there was kind of a strategic view of we're going to do a lot of investing in critical minerals. We're going to do a lot of protectionism or other kinds of subsidies for these guys. But because we as the government are creating this market and it's not really a free market, we as the government should also take some equity and have some upside.

41:57So I think there was a strategic view in that sector. I think what we are seeing now is the Trump administration is drastically broadening out its views of what sectors the government should get involved in. You know, we see that with the Intel deal. I'd also note just last week, the CHIP's office, CHIP's office at the Commerce Department, put out a notice of a new grant program for semiconductor R &D. So not to build fabs, but to do R &D program for semiconductors. And that notice says right in it that bidders for these grants may be expected to offer the government warrants or equity as a piece of it.

42:36So they are clearly looking to build this out. We obviously also earlier this year when Nippon Steel bought into U.S. Steel saw the non-economic golden share that Nippon Steel got. I think we're going to see more of that in the CFIUS context. So I think they had a vision early on of a couple of discrete areas. I take it that the president and Secretary Lutnik and others just really like this concept, and they are now in the process of broadening it out quite a bit across a number of other sectors. And they are probably broadening it out ahead of any strategic vision. So I'm a little worried that we're going to see more of this.

43:11And then they'll have to try to back end some strategic vision after they have a number of these deals in the latter. Well, let's say they expanded, Or let's say, OK, maybe we want to have multiple stakes in the same industry such that there is some competition, et cetera. How much firepower does the government have? How much capacity via the CHIPS Act does it have to make deals like this? What would it would it at some point need to get a fresh allocation from Congress to spend more on this? How much can it do? Yeah, well, because their legal theory is kind of no one says we can't do this when we spend money, we're going to do it.

43:50I think there are ways in which they could argue, well, we could we could try to demand equity alongside lots of government spending and grants programs. And we've even seen Secretary Lutnik talk about, well, maybe the defense contractors should give us equity. The problem they're going to run into is at some point, you know, the amount of cash they're putting on the table for a particular deal, a company is going to decide, you know what, that's not worth it to me. Right. If you're offering some company 50 million, you know, a major multinational 50 million dollars to grant money to do something you want them to do.

44:25But you also want three percent. They're just going to say no. But like when we, you know, when we talked about the LPO back in the day, you know, there was a fixed amount of money that had been allocated to these various programs and same with chips, et cetera. Like how deep is that? Well, if the government wants to do a lot more chips deals, I don't even know if it does. Maybe it just wants to pick a winner. Does it have the sort of I guess they would say in the private sector context, dry powder to do more of these deals? So you'd have to I'd actually have to ladder that up and think about what are the different pots of money they could potentially use here.

45:00They clearly have another probably on the order of 10 billion dollars of unallocated chips money. LPO, mostly a lending facility, but they still have lots of unallocated lending power out of LPO. Now, because that's a lending facility, not a grant facility, kind of whether a company wants to give equity as part of a loan, that's a complicated commercial view. They could say it's a convert, right? They could say it's a convert and this counts as lending. Because again, under the theory, you know who's going to stop them, right? I mean, that is their theory. Yeah. Does Intel have basically a shadow mandate now?

45:38Because if I think about companies in the US, the goal is to maximize shareholder value. And that's been pretty explicit over time. But now you're adding in, you know, strategic ambitions and the public good aspect to Joe's point. Is there a potential tension there? I, you know, I think Intel has obviously tried to protect itself from that tension by negotiating this provision where by and large, the government has agreed to vote its shares at the board's direction. I think you can see they were trying to minimize political influence. There is another part of the Intel deal where actually there's kind of a poison pill if against Intel splitting apart its fab manufacturing part and its chip design part.

46:25There's been a long debate around Intel about whether it should split itself up or not. And the government did negotiate kind of a poison pill against a split. So that is incorporated fully in the documents. But beyond that, Intel, I think, has tried to minimize government influence in its day-to-day operations. This is a government that wants to get involved in day-to-day corporate operations, right? We see the president talking about individual executives at individual companies and a commerce secretary is very clear. He thinks companies should be doing things in the public interest. And I think the board is clearly probably going to feel some pressure that not just the government, but also the government and its largest shareholder or one of its largest shareholders are going to be prodding it to do things that might be in what they see as the commerce department or the country's interest, even if those aren't in shareholder interest.

47:15So I think we are going to see that tension over the next couple of years, even if Intel has tried to insulate itself from that. All right. Peter Harrell, this was a fantastic overview. I definitely have a much I feel like I understand these deals much better than before. Really appreciate you coming on Apple. It was great to be on. Thanks so much for having me.

47:45You know, Tracy, I think the point that you asked about how might this change under, say, a Democratic administration is, to my mind, one of the most interesting questions. Because, like I said, the government already gets a fifth of corporate profits. The government already can establish rules and regulations via the regulatory process or the legislative process about how companies work. What's new really to me is the specificity. This is about one company in particular and the ability to sort of circumvent Congress in the management of individual companies and that it's not easy to change regulation or law with each administration.

48:22But if equity stakes allow you to change how you interact with a specific company, then you could really have very fast shifts from one presidency to another. Yeah. I mean, I think there's also an optics element in here where if the administration said we're going to raise the corporate tax rate, that would be unpopular. But if they say we're going to create shareholder value for the U.S. citizens. Yeah, exactly. It plays a little bit differently. I do think, you know, my last question about the tension between being a strategic asset for the U.S. government and the wider U.S. population versus being a company that's all about profits and maximizing shareholder value.

49:03I think that's a really interesting one because, again, I think back to China. Yeah. And China, the compromise there seems to be that you have a very state interventionist system. But on the other hand, no one seems to expect companies to be massively profitable, right? We spoke with Dan Wong about this. Like maybe the Chinese system is, you know, we build lots of stuff, we innovate and don't make that much money. And I just don't know like how that works in the U.S. No, it's a great question. I mean, think about it, you know, from Intel's perspective, had it not been for the CHIPS Act or had it not been for all of the concern about national security and U.S.

49:48production, at some point the company might have decided, you know what, we're going to be fabulous too, like NVIDIA is, whose market cap is, you know, whatever, 40 times as much. And it could have been very much the case that Intel today would be worth more as a company, speaking of strategic missteps, could be worth more as a company if it had never got into the fab game at all. That if they just decided, you know, we're going to have all of our chips be made overseas by TSMC and others. So there is this thing that maybe the company is worth less today because they've had this concern. They've had this national security obligation that they've played along with.

50:21We should leave it there. I'm starting to get PTSD flashbacks to my dad complaining about paying his taxes in order to bail out his competitor airlines. Oh, that's funny. He always used to complain about that. He worked at Southwest, which was one of the few airlines that never actually went bankrupt. Oh, right. I do wonder, like, when Peter talked about standing to sue competitors, plausibly, right? Couldn't like a Samsung U.S. or an AMD or whatever? I don't know. I think an ambitious lawyer would probably be interested in that case. But I think probably an ambitious CEO does not want to get on the bad side.

50:59Clashing ambitions. They might want to take a feed of the trough, too, one day. And so maybe they'd let this one slide. All right. Shall we leave it there? Let's leave it there. This has been another episode of the Odd Lots podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway. And I'm Joe Weisenthal. You can follow me at The Stalwart. Follow our guest, Peter Harrell. He's at Peter Harrell. Follow our producers, Carmen Rodriguez at Carmen Armand, Dashiell Bennett at Dashbot, and Kale Brooks at Kale Brooks. For more OddLots content, go to Bloomberg.com slash OddLots. We have a daily newsletter and all of our episodes.

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