Which Came First: Government Ownership or Catastrophic Losses?

Companies like Citi and GM were failing before we took over.

By Daniel Gross
Posted Monday, Oct. 19, 2009, at 4:02 PM ET

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In the past year, taxpayers and government agencies have engineered optimal conditions for bankers to score. To use a metaphor bankers could understand (golf), by supporting markets, taking interest to zero, and providing legions of subsidies, the government has widened the fairways, enlarged the greens, and dug holes the size of bomb craters. Some bankers are playing the redesigned course like Tiger Woods. JPMorgan Chase and Goldman Sachs each earned more than $3 billion in the last quarter. But other huge banks are playing like Ted Knight's Judge Smails in Caddyshack. Citi scratched out a mere $101 million in earnings and suffered heavy credit losses, while Bank of America lost $1 billion. A similar dynamic is evident in the domestic auto industry. Cash for Clunkers and government support for auto lenders has helped prop up demand. In September, Ford saw sales rise 5 percent from September 2008, and the company gained market share. But sales at General Motors and Chrysler were off 45 percent and 42 percent, respectively, from a year before.

In both banking and autos, the companies that are partially government-owned are flailing while the independent firms are thriving. But the results raise a financial version of the age-old question: Which came first? Are these companies losing market share and facing mounting losses because they have big-government ownership and oversight? Or do they have government oversight and ownership because, for years, they lost market share and racked up losses? For folks who believe that government caused the crisis—i.e., that the Community Reinvestment Act somehow caused Bear Stearns and Lehman Bros. to destroy themselves—it's the former. For those of us who believe that the crisis was largely the making of wealthy CEOs who had every incentive to see their companies succeed but simply failed (and that their poor choices were abetted by poor regulation), it's the latter. Put more simply: Government ownership doesn't cause catastrophic losses; catastrophic losses cause government ownership.