Can the Government Nationalize a Business?

Thomas J. Donohue
Advisor and Former Chief Executive Officer, U.S. Chamber of Commerce

Published

February 26, 2018

Is the federal government allowed to take over and run a private business in an emergency? That is the fundamental question at the heart of a case brought by Starr International Company against the federal government.

Starr is a major shareholder of insurer American International Group (AIG), which received emergency loans from the federal government during the financial crisis of 2008. However, as a condition of these loans, the government demanded that it receive an almost 80% ownership interest in AIG. The government took control of the company and eventually pocketed nearly $23 billion in profits when it sold its 80% stake. Starr argues that federal law never allowed the government to take an ownership stake in return for its loans and is seeking to recover the illegal gain made by the government’s unlawful takeover.

In June 2015, the U.S. Court of Federal Claims agreed with Starr that the government overstepped its authority by taking 80% of the company. But a federal appeals court overturned the ruling on the theory that AIG shareholders did not have “standing” to seek a remedy for that violation in court. Starr has now petitioned the Supreme Court to take up the case, and the Court is scheduled to consider that request this week.

The U.S. Chamber of Commerce supported the federal government in extending emergency credit in 2008 because, without swift government intervention, the global financial markets were in danger of shutting down. But this particular case raises separate and deeply important questions about how far the government can go when issuing emergency loans, including whether it can nationalize a business receiving such loans. These questions should be dealt with now, once and for all.

In a free enterprise system such as ours, it is troubling when the government makes billions in profits by running a previously private business. And this is not the first time this issue has arisen. Fannie Mae and Freddie Mac were similarly taken over, and the government has continued to claim their profits ever since. That may come to an end soon, and the Chamber stands ready to work with the administration and Congress to resolve the issue.

The question remains: How do we reconcile the rights of businesses in our free enterprise economy with the interests of taxpayers in stabilizing businesses in a financial crisis? As Fannie and Freddie prove, this is not a one-time dilemma unique to AIG. Indeed, these critical questions may come before the Supreme Court if it chooses to review the Starr International case.