- The Washington Times - Wednesday, October 10, 2001

The government has a simple response to taxpayers who are skeptical about the federal bailout of the airline industry and wonder what's in it for them: 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 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 are expressing concern about the potential for conflicts of interest and questioning 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?" Mr. Goolsbee asked. "Will they want to bail out certain companies or approve mergers" that might otherwise be rejected?
The authors of the provision, which gives the government more power to negotiate the terms of loan guarantees, say the benefits to the public are straightforward.
"Hard-working U.S. taxpayers should not be asked to bail out the airline industry with absolutely no strings attached," Sen. Peter G. Fitzgerald, Illinois Republican, who co-wrote the provision with Sen. Jon S. Corzine, New Jersey Democrat, said in a statement. "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 after the Sept. 11 terrorist attacks.
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 H. O'Neill and Comptroller General David Walker, or their designees.
The guarantees make the federal government a co-signer on a loan, agreeing to pay it off if the airline fails.
Besides the loan guarantees, the airline assistance bill included $5 billion in direct payments to airlines still reeling from the recent terrorist attacks. The payments were allocated according to the airlines' market share.
Amy Call, a spokeswoman for the OMB, said any stock options negotiated by the government would be nonvoting shares and would be viewed as short-term investments.
"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 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 conceded that taxpayers might be uncomfortable with the government behaving like a stockbroker.
"Why would I want the government to decide how I invest my money? Historically, airline equities have not exactly been high-quality investments," he 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 1979 in exchange for warrants to buy stock. When the company rebounded four years later, the government reaped more than $300 million in profit.
Helane Becker, an airline analyst with Buckingham Research Group in New York, said by attaching such strings to loan guarantees, airlines will have more incentive to pursue every resource in private markets before going to the government.
Mr. 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?"

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