Why the Trump Administration is Now Taking Equity Stakes in American Companies
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
This episode explores the Trump administration's groundbreaking shift toward activist industrial policy, where the US government is taking equity stakes in private companies for the first time outside of bailout scenarios. (05:06) The discussion centers on two major deals: Intel receiving a 9.9% government stake in exchange for $6 billion in CHIPS Act funding, and MP Materials giving the government a 15% stake as part of a rare earth minerals contract. (04:08) Unlike traditional government support through grants and loans, these arrangements represent a fundamental departure toward state capitalism with American characteristics, raising questions about corporate governance, international competitiveness, and the role of government in picking winners and losers.
- Main Theme: The evolution from passive government grants to active equity partnerships in strategically important industries, marking a significant shift in US industrial policy approach.
Speakers
Joe Wiesenthal
Co-host of Bloomberg's Odd Lots podcast and editor at Bloomberg. Wiesenthal brings deep financial markets expertise and has been covering economic policy and market dynamics for years, providing insightful analysis on the intersection of government policy and private markets.
Tracy Alloway
Co-host of Bloomberg's Odd Lots podcast with extensive experience covering financial markets, supply chains, and economic policy. Alloway has consistently advocated for government equity participation in industrial policy deals, making her uniquely positioned to analyze these new arrangements.
Peter Harrell
Nonresident fellow at the Carnegie Endowment for International Peace and former Biden White House official who served on both the National Security Council and National Economic Council focusing on industrial policy. (05:27) Harrell was instrumental in developing Biden's supply chain strengthening campaign pledge in 2020 and subsequently helped implement industrial policy during the administration's first two years. (05:54)
Key Takeaways
Government Equity Stakes Mark Historic Departure from Traditional Policy
The Trump administration's approach represents the first time in US history that the government has taken equity stakes in private companies outside of bailout scenarios. (07:12) Historically, government ownership occurred only during financial crises - like the 1930s bank failures, the 1979 Chrysler bailout, or the 2008 financial crisis. (07:36) This new model positions the government as a long-term investor betting on specific sectors and companies, fundamentally changing the relationship between public and private interests. The shift moves away from milestone-based grants toward direct capital injection with ownership stakes, creating unprecedented corporate governance challenges.
Strategic Support Can Overcome Engineering and Customer Acquisition Challenges
Intel's core problems aren't financial - with $10 billion in cash and access to debt markets - but rather engineering capability and customer relationships. (20:43) The company made critical strategic missteps, declining to produce iPhone chips in 2007 and missing the EUV lithography revolution that enabled TSMC's dominance. (15:18) The government's theory is that taking an equity stake sends a powerful market signal that can attract other investors like NVIDIA and encourage potential customers like Apple to work with Intel. This approach transforms government support from direct subsidies to market confidence building through aligned incentives.
Guaranteed Government Purchasing Can Create Sustainable Market Conditions
The MP Materials deal demonstrates how government can create viable markets through guaranteed offtake agreements rather than just production subsidies. The government has agreed to purchase 100% of the rare earth magnets produced and guaranteed profit margins for MP. (25:19) This approach acknowledges that China is the low-cost producer of rare earth magnets due to scale, multiple companies, advanced engineering, and lower environmental regulations. (25:45) Rather than expecting immediate cost competitiveness, the model accepts that national security benefits justify paying premium prices for domestic production.
Legal Authority Exists in Flexibility Rather Than Explicit Authorization
The Trump administration's legal justification for taking equity stakes rests on the principle that existing grant authorities don't explicitly forbid equity participation. (23:00) Their two-part legal theory argues that the CHIPS Act doesn't say they can't take equity stakes, and practically, who would have standing to sue since Intel agreed to the deal. (23:22) This represents a novel interpretive approach to existing laws, converting intended grant authorities into equity investment mechanisms. The precedent could enable similar conversions across various government funding programs without requiring new legislation.
Corporate Governance Arrangements Reveal Inconsistent Government Investment Strategy
Each government equity deal contains unique corporate governance provisions, revealing the lack of standardized federal regulations for managing government investments. (27:31) In Intel's case, the government agreed to vote shares according to board recommendations except for major transactions like changes in control. (28:04) This gives Intel's board effective control over 9.9% of voting shares while potentially exposing the company to political pressure on strategic decisions. The ad hoc nature of these arrangements creates uncertainty about future government involvement in corporate management and strategic direction.
Statistics & Facts
- The US government took a 9.9% equity stake in Intel in exchange for transferring just under $6 billion in unspent CHIPS Act funding, with Intel's stock rising approximately 60% since the deal was announced. (11:09)
- The Department of Defense became the largest shareholder in MP Materials with a 15% stake as part of a contract to scale up rare earth mining and processing operations in California and Texas. (11:48)
- The CHIPS Act includes a 25% investment tax credit that allows any company building semiconductor fabrication facilities in the US to claim 25% of construction costs as a fully refundable tax credit. (36:51)
