Assets Not Taxes: Flexible Financing Lessons from the New Deal to CARES

Executive Summary

Introduction

A Case Study: The Tennessee Valley Authority

“TVA has been able to carry out its broader mission with respect to energy, environment and economic development under the public power model, including as measured by TVA’s performance vs. its forecast set forth in the FY14 Plan. TVA’s rate-setting authority and statutory protections that balance service area restrictions are key features of the model. TVA’s structural advantages (e.g., tax-advantaged debt, lack of a required equity return, etc.) allow TVA to charge lower rates than it would as an investor-owned utility. Additionally, TVA is positioned to serve and protect the communities and natural resources of the Tennessee Valley in ways that private enterprises may not be equipped or incentivized to do (e.g., TVA’s expansive economic stewardship activities, flood protection programs and recreational initiatives). TVA’s performance in recent years and current positioning suggest that the public power model is a reasonable approach to support TVA’s mission. Lazard believes that its previous conclusions in the 2014 Strategic Assessment with respect to the benefits and considerations of alternative business models vs. the public power model are still valid today.”

The Government Can Finance These Assets Creatively and Profitably — with Equity and Debt Investments

“…with Jones at the helm, overall, it made money. The RFC developed different projects that turned cutting-edge technology into self-sustaining commercial enterprises. Nervous businessmen said it couldn’t be done. Jones — and the rest of the RFC agencies — did it anyway. These financial lessons… [are] worth dredging up. They provide many examples of how to harness private capital for public good, and help promote free enterprise, entrepreneurship, and technological innovation.”

“In several situations, the RFC used this control to replace officers and significantly alter the business practices of the institution. The earliest and most prominent intervention involved Continental Illinois National Bank of Chicago. Agreement on selecting a new chair was a pre-condition of the investment in Continental Illinois. However, the current directors did not approve of the RFC’s choice and visited Washington to voice their objections. They finally acquiesced after eight other directors were replaced with RFC appointees.

A similar situation played out with the Union Trust Company of Cleveland. The RFC agreed to finance the reorganization of Union Trust by providing a loan of $35,000,000 to liquefy and write off the poor assets of the old bank and a purchase of $10,000,000 of preferred stock to guarantee the new bank’s capital structure. But these were contingent upon “… the right of the RFC to select the new bank’s officers and the ability of those officers to raise $10,000,000 more in common stock,” from the private market (Olson 1972, 233). Other prominent banks were assured that the situations at Continental Illinois and Union Trust were due to a combination of unusual circumstances, and would not be repeated without due cause, but the threat of such control kept many banks from availing themselves of the resources offered by the RFC for at least the first nine months of the program’s existence.”

Creative Financing Minimizes CBO Scores

“Although the act provides financial assistance totaling more than $2 trillion, the projected cost is less than that because some of that assistance is in the form of loan guarantees, which are not estimated to have a net effect on the budget. In particular, the act authorizes the Secretary of the Treasury to provide up to $454 billion to fund emergency lending facilities established by the Board of Governors of the Federal Reserve System. Because the income and costs stemming from that lending are expected to roughly offset each other, CBO estimates no deficit effect from that provision,” [emphasis added].

The Reconciliation Bill

Manufacturing, Climate Change & Industrial Policy

“He also will call for the creation of a new financing program to support debt and equity investments for manufacturing to strengthen the resilience of America’s supply chains.”

Strengthen manufacturing supply chains for critical goods. President Biden believes we must produce, here at home, the technologies and goods that meet today’s challenges and seize tomorrow’s opportunities. President Biden is calling on Congress to invest $50 billion to create a new office at the Department of Commerce dedicated to monitoring domestic industrial capacity and funding investments to support production of critical goods. The President also is calling on Congress to invest $50 billion in semiconductor manufacturing and research, as called for in the bipartisan CHIPS Act.”

The Industrial Finance Corporation

Conclusion

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