Why the Trump Administration is Now Taking Equity Stakes in American Companies

It's nothing new for the US government to use public money to support private American companies. The Biden administration, via CHIPS and the Inflation Reduction Act, was aggressive about using loans and grants to accelerate US industry. But the Trump administration has been engaged in something more novel: taking direct stakes in US companies like Intel and MP. But what is the legal basis for such action? And what are the advantages and disadvantages of direct equity stakes? On this episode, we speak with Peter Harrell, visiting scholar at the Georgetown Institute of International Economic Law. We discuss the structure of these new arrangements, and the advantages and disadvantages for the government to be a minority shareholder in publicly-traded companies. Read more:Intel Debuts New Technology in Make-or-Break Moment for CEO’s Turnaround BidUS Rare Earths Stocks Jump on Bets Government Will Keep Buying Only Bloomberg - Business News, Stock Markets, Finance, Breaking & World News subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlotsSee omnystudio.com/listener for privacy information.

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• 0:00Joe Weisenthal?

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• 1:43Joe Weisenthal?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

• 1:48Tracy Alloway?

  And I'm Tracy Alloway.

• 1:49Joe Weisenthal?

  Tracy, isn't it you who's said for a long time that whenever the government does some of these deals, like with chips, or maybe the early backing of Tesla, et cetera, aren't you always like, why didn't the government get equity stakes in these companies? Why are we just getting back sort of loans that are more or less the same amount of money we put in?

• 2:07Tracy Alloway?

  Yeah, I think I have said that.

• 2:08Joe Weisenthal?

  Yeah.

• 2:09Tracy Alloway?

  I mean, it's It seems like this weird sort of half ground where you are investing in a company without asking anything in return.

• 2:16Joe Weisenthal?

  Yeah. To be fair, they do have milestones and provisions and so forth. But yes, it does feel like some of these funding structures have been, I would say at least incomplete, to say the least. And the effectiveness has been inconsistent. All that being said, the Trump administration, apparently a big fan of yours, listening to you over the years on the podcast, with some recent deals, is sort of getting into the equity business in some way.

• 2:42Tracy Alloway?

  Yeah, so I've seen people describing this as more activist industrial policy or state interventionist industrial policy. One thing I will say, for a president who seems to like calling other people communists quite a lot, he sure does enjoy owning the means of production.

• 2:59Joe Weisenthal?

  Yeah, there's certainly some scrambling, right?

• 3:01Tracy Alloway?

  Well, this is the other thing, the ideological scrambling has been interesting to watch because you had people like Bernie Sanders who were saying, well, the intel deal is a great return for the American people. And then you had, I can't remember the name, but you had a Republican going like, oh, this is the end of capitalism. So it's kind of funny to watch.

• 3:19Joe Weisenthal?

  It's super interesting, super confusing time. I'm not personally as bothered by the lack of, quote, taxpayer return on this stuff, mostly because I view the goal or failure is, is there going to be a public benefit? Are we going to have security because we can produce chips? Are we going to have security because we finance domestically mining of rare earth minerals and so forth? But these are like the big questions. And I think we should learn more about this sort of new approach and what's a continuation of what we saw under Biden, what's different, et cetera, whether any of this will work. Of course, by the way, you know, we're talking about an intel. So intel specifically, the government has taken some sort of warrant or something. I'm not totally sure on.

• 3:58Tracy Alloway?

  They took shares, I think, almost a 10% stake.

• 4:00Joe Weisenthal?

  Yeah. And also MP, which is of course the great hope for whether the US could also mine rare earth metals such as China. So pretty big deals, and I think we should talk about them.

• 4:11Tracy Alloway?

  Can I just say, if you look at the HDS function on Bloomberg, you can see that the United States government is now listed as a top shareholder. And if you click into it, it says US Department of Commerce. I don't know why. I just find that so like.

• 4:24Joe Weisenthal?

  That's amazing. I had not looked at that.

• 4:26Tracy Alloway?

  Yeah, it's kind of funny. And I don't know, I just have this vision of like Howard Lutnick, like checking on his portfolio of Intel every morning.

• 4:32Joe Weisenthal?

  We're gonna get, well, the, you know, we're gonna get an ETF. Actually, unironically, our old friend Luke Kawa at Sherwood, he had a really good post yesterday pointing out the fact that, and it's very important, the shares of Intel and MP and one other one have done very well. So a lot of people are sort of making this trade of, why would you not be in the same trade as the US government? If the government does long Intel in some respects and MP, and given they're going to want to support their investment and see a return.

• 5:00Tracy Alloway?

  Right.

• 5:00Joe Weisenthal?

  Why would you as a shareholder not want to sort of get ahead of that train or be on the same side?

• 5:04Tracy Alloway?

  Oh, wow. I'm looking at the Intel chart right now. It's gone up a lot.

• 5:07Joe Weisenthal?

  It's gone up a lot. So this is a meaty subject that we have to talk about further. So I'm very excited to say we have the perfect guest, someone who's been talking about this, someone who even recently contributed something to the Odd Lots newsletter, specifically about the MP deal. We are going to be speaking with Peter Harrell. He's a non-resident fellow at the Carnegie Endowment for International Peace. He was also serving in the Biden White House, National Security Council, Economic Council. And he's going to talk us through these deals. So Peter, thank you so much for coming on Odd Lots.

• 5:37Speaker 05

  It's great to be on. Thanks for having me.

• 5:39Joe Weisenthal?

  Why don't you just sort of give us a very brief background, or your background or your work and why you're particularly interested in these deals arrangement?

• 5:48Speaker 05

  So I served at the Biden White House for the first two years or so of the administration, doing industrial policy. And, you know, it's interesting, I'd actually gotten into the industrial policy file for the White House because back during the campaign in 2020, I was advising the Biden campaign. And Brian Deese, who was with the campaign then, later became the National Economic Council Director, came to me and was like, you know, it's COVID times, we have all these supply chain issues. You know, their podcasts talk about the supply chain issues. Maybe we should do something about this. And so I actually, on the campaign, had put together what was a campaign pledge that then candidate.

• 6:30Speaker 05

  Biden rolled out in mid 2020 on how you could strengthen American supply chains. And the downside of doing that is then you get to you win the election, president wins the election. And Brian Deese calls you back up and says, hey, you remember that thing you did last summer? How would you like to come in and start getting industrial policy along with a whole huge team of other people going in this country again?

• 6:50Tracy Alloway?

  So just to sort of set the scene before we talk about why these deals are unusual in some respects, can you talk about how government support of industry has happened in the past? Because I'm thinking about something like the CHIPS Act. I don't remember equity stakes ever being mentioned in that. What was the quid pro quo in these sorts of previous government deals?

• 7:12Speaker 05

  Yeah, Tracy, I appreciated the comment you made in your opening about how you've talked previous about maybe there should be some government upside in when the government is investing money in some technology or some development of some industrial capacity. That is very, very unusual in American history. If you look at the history in the United States of government ownership of private sector companies, it has almost always only been in the context of bailouts. So in the 1930s, a bunch of banks are failing. Some of the New Deal programs, in particular, something called the Reconstruction Finance Corporation, take stakes in at least 40% or so of America's banks again in the 1930s.

• 7:56Speaker 05

  But that's really fundamentally a bailout program for the banks because the banks are going under. Similarly, famous examples in more recent history, 1979, 1980, Chrysler's going bankrupt. It's part of a bailout of Chrysler. The government takes warrants in Chrysler. Then during 2008, the financial crisis is part of the bailouts of AIG and some of the other financial companies, as well as some of the bailouts of automakers back then. Government takes equity. But historically, we've only done it during kind of bailouts. And the government, when it has taken these equity stakes as part of bailouts, has always made clear our goal was to own this for as short a time as possible.

• 8:35Tracy Alloway?

  Yeah, because I think I remember from the 2008 auto bailouts, those were warrants, right? The goal was always to eventually get out of that position.

• 8:45Speaker 05

  Exactly. It was very clear. You know, you go back, you read both the Treasury Department guidance at the time, you read the press at the time, you read the statute, and it was kind of, we're going to take this as a security interest for the bailout, you know, for as short a time as possible. And the Treasury Department exited most of those positions within a couple of years, certainly as soon as commercially feasible. And I think what the Trump administration is doing now is really quite different, where they seem to be seeing themselves, seeing the US government as a long-term investor in a set of sectors, in a set of companies, where they think having that government capital as a long-term investor will help, A, strengthen the company and the sector, and B, potentially give some upside

• 9:30Speaker 05

  to the US government.

• 9:31Joe Weisenthal?

  So what do you, with Intel and MP, what do you give the sort of broad, as you understand them, the broad stroke structure of these arrangements? What is the nature of these investments? What are the obligations of the companies and so forth? Give us the sort of outline of them.

• 9:46Speaker 05

  Yeah, and Joe, to pick up on a point you had made during your introduction, it's not that the idea of government support for chip manufacturing in the US or for rare earths in the US is new. I mean, there was a GIPS program under the Biden administration. There have, going back for more than a decade now, been programs to try to get US rare earths processing. Historically, those things have been done through grants and loans, not equity, you know. So there was a grant to Intel to pay basically 15%. This is prior to the Trump administration. There's a grant to Intel to pay basically 15%, 1.5% of the cost that Intel was going to incur to build four sets of fabs here in the United States.

• 10:30Speaker 05

  There were grants, again, prior to the Trump administration, to MP Materials, to help subsidize MP Materials building a rare earths mine and processing facility. So we've historically done this through grants and loans. And as you say, the idea was the, the public return was, well, we have chip manufacturing in the US, or we have rare earths processing in the US. What the Trump administration has done is converted what were grant and loan programs into programs

• 11:02Speaker 05

  Whereas part of the grant or loan, the government is taking an equity stake. In the Intel case, it is taking a 9.9% equity stake in exchange for transferring the unallocated, the unspent part of that previous Intel grant to Intel. So they, instead of doling it out over years as Intel built the fab, they have now transferred just under $6 billion in cash to Intel and gotten equity in return. And they've also actually relieved Intel of some of its legal obligations to build the fab. So they're sort of converting this grant into an equity purchase. Similar with MP. The MP deal is extremely complicated. You know, I wrote a 4,000-word piece for you,

• 11:46Speaker 05

  along with my colleague Arne Duda on this. But basically, DOD has contracted with MP Materials, the Department of Defense, or maybe we call it the Department of War now, has contracted with MP Materials to scale up a mine in California to mine for rare earths and then to scale up in both California and Texas, a processing facility to turn those rare earths into magnets, which are used in all kinds of industrial applications. And as part of this very large contract to pay MP Materials to scale up the mining and processing operations, the government, MP has given the government a 15% stake in MP. Defense Department's now the largest shareholder there.

• 12:30Tracy Alloway?

  Just on the Intel deal, you mentioned that the grants and loans that were previously given under the CHIPS Act, those came with milestones that Intel had to meet, right? In terms of building fabs and actually expanding manufacturing of semiconductors in the U.S. But under this new deal, those are now delinked from the equity stake, I guess. Do we have any sense of what the Trump administration's actual goals are in this deal? Because I could understand, you know, if they give a company money and they say you have to do the following things to expand production, that would make sense. But if they say... Have some money and make sure you give us a shareholder return. That seems a little bit different.

• 13:11Speaker 05

  It is a different deal. As you say, Tracy, the the original deal between the Commerce Department and Intel was planning to dole out about $8 billion over a number of years with the payments to Intel. At that time, grant payments made to Intel as Intel met certain agreed milestones for how they were building out four sets of fabs, Ohio, Arizona, New Mexico, and Oregon. According to the SEC filings that Intel has made, Intel is now, as we discussed, relieved of those milestone obligations. Now, I think the Trump administration's view is that, well, by injecting capital into Intel,

• 13:56Speaker 05

  by taking an equity stake in Intel, we, the US government, are sending a very strong signal of support to Intel, both gives them some capital upfront, but it also gives them this very strong signal of support that will help Intel go around and, you know, get customers, get other investors to come in. They are now, they also now have Nvidia coming in as an investor, so there's a little bit of a record already to suggest that might be happening. But it's kind of rather than here are things we want you to do, we will pay you for milestones. It is more of an approach of we're going to bet on you as a company and hope that our bet on you helps you succeed over time. As you said, they're actually up, the government's stake is up, I think, 60%.

• 14:40Speaker 05

  So it's, you know, cash-wise, turned out OK for them so far.

• 14:42Joe Weisenthal?

  Yeah, I was gonna say, it's been a good trade. And maybe some of the reason that the stock has rallied, maybe it's just the sort of pure logic, as you expressed, or it could just be sort of like, it could be sort of meme stock traders, people are excited about, here is a thing that's going on, we just want to be in on the trade. From your perspective, though, do you see something about the structure of this deal such that, frankly, that there's reason to be more hopeful about Intel's future in this arrangement, just on a fundamentals basis?

• 15:16Speaker 05

  So I think of this as a very high risk bet in the following ways. If you go and talk to pretty much anyone in the semiconductor industry, and if you've talked to them, and you guys have talked to them over the last couple of years, you hear a lot of concern about Intel's health. You know, Intel made a couple of huge strategic missteps. They decided in 2007 that they did not want to produce chips for the iPhone. You know, huge strategic misstep. They decided in the mid 2010s that they were not going to bet on something called EUV lithography, which is advanced lithography that TSMC uses to make what are today,

• 15:59Speaker 05

  hands down, the world's most advanced chips. And over the last couple of years, Intel has been playing a huge catch-up game. And there have been very deep doubts across the industry about whether Intel can actually do this catch-up game. I think the government's theory here is, well, if we show support for Intel, we can encourage, you know, other investors to come in. We can encourage the potential customers of Intel chips to come in. You know, Apple and Nvidia, we can encourage customers to come in, and we can really bet on this company and help get them, not just the capital, but also the customers and other things they need to turn it around. That's the bet.

• 16:58Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief podcast. Every week, experts from Barclays Markets and Research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee. So search Barclays Brief wherever you get your podcasts.

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• 17:52Joe Weisenthal?

  Something you pointed out in your piece for us on MP and other people have talked about this as well, but that deal provides like an order book. The government is going to buy more and we've talked about this with other guests that it's not just enough in some of these cases to subsidize supply or make it easier to build, but it also helps to have that guaranteed buyer for several years out, et cetera. And so that when something is produced, there is knowledge of an end customer. Is there any such provision or relation in the Intel deal in terms of if they build X, that there will be a buyer for X?

• 18:26Speaker 05

  No, so in the Intel deal, there's no kind of guaranteed end customer government support for the end customer. With one exception, I mean, going back to the Biden administration days, there's, there's been a little piece of this deal that is actually not with the commerce departments, with the defense department to build highly secure chips for the Pentagon. Like there, there is obviously a guaranteed customer, but that's a small piece of this deal.

• 18:51Tracy Alloway?

  Could you argue that Intel's main problem isn't necessarily cash in the first place? I think it has something like 10 billion in cash on its balance sheet, which is probably a drop in the ocean if you're building fabs. But on the other hand, you know, there is a lot of capital crowding into the semiconductor space. And it seems, given some of the missteps that the company has made previously, maybe the issue is more management than actual balance sheet health.

• 19:18Speaker 05

  Yeah, so when I look at Intel, I think its biggest problems aren't really access to capital, as you said, I mean, even prior to the government investment, it was a $100 billion market cap company. It could raise money in the debt markets. The biggest problems were can it do the engineering to build advanced chips? Like, that's problem number one.

• 19:38Tracy Alloway?

  Can it actually do the thing it says it's going to do?

• 19:41Speaker 05

  Exactly. And related to that, are there going to be customers to buy Intel's chips? And those two things are obviously totally linked because if it can't do the engineering, there won't be customers. And if it can't do the engineering, there probably will be customers. I mean, I think the big risk with the Intel deal is that we definitely have an instance here of the government picking a winner, right? They are placing a huge bet on Intel and not on TSMC and not on, you know, startup semiconductor companies that might actually be more innovative in this space. And that is something, you know, the government has not historically done, you know? Historically, we've kind of said we want to let companies

• 20:24Speaker 05

  go out and compete in the marketplace, and we're not going to put a very heavy thumb on the scale in favor of one particular kind of champion company here. And we are very much seeing the government, even though it's not a formal contract here, clearly the impetus now is for the government to be putting a thumb on the scale here for Intel and hope that helps them get customers and engineers and the like.

• 20:45Tracy Alloway?

  What legal authority does the Trump administration actually have to do this? So we spoke about the CHIPS Act. Pretty sure the CHIPS Act doesn't say anything about taking equity stakes in return for grants and loans. Could it be something like the Defense Production Act or some other act that I am unaware of that might be in the making?

• 21:05Speaker 05

  Well, you know, we talked about how there isn't a lot of history for the US government taking equity stakes. And there's not really any law out there that authorizes the government to take equity stakes in private companies with a handful of exceptions, and the CHIPS Act is not one of them. I think the Trump administration's legal theory here basically boils down to two things. You know, first is, well, the CHIPS Act may not say we can take an equity stake, but it doesn't forbid us from taking an equity stake, so why not? And then thing two on their legal theory is who's going to sue us anyway? I mean, Intel's not going to sue us, right? They just agreed to this deal. And it's, it's not clear that anyone else really has legal standing to go into court to sue over this.

• 21:51Speaker 05

  So, you know, like much of the Trump administration, I think we are, we are seeing a lot of novel interpretive approaches to the law. But it really does boil down to, I think, at its core, there's no, they have a very flexible authority, legally speaking, they have a very flexible grant authority. It was clearly intended as a grant authority, not an equity authority. But if you read the, the details of the grant authority, it doesn't say you cannot take equity as a part of this. It just says you can give grants and they've interpreted that as allowing them to take equity as part of the grant.

• 22:22Joe Weisenthal?

  I want to go back to the question about whether the engineering capacity actually exists for Intel to become a top flight producer of semiconductors. Again, you know, you mentioned the quote strategic missteps, whether it was choosing not to build the chips for the iPhone or to get into advanced UV lithography. But again, they could have chosen to do those things and not execute on them. Like they could have made different strategic choices and just not done them as well as TSMC. And this also gets back to the MP deal because, okay, like there is this big mine out in California that's very rich in rare earths and so forth.

• 23:03Joe Weisenthal?

  But a lot of the question is not whether you could dig it out of the ground, but whether you can refine these metals at a cost competitive price, especially compared to the Chinese who have invested a ton of this and are clearly far and away the leader in the most advanced infrastructure, et cetera. They're like, I'm curious with that deal, like with MP, do you perceive them as having the same questions hanging over them about whether, okay, they get this money and they have this mine, can they create these magnets at a market competitive price?

• 23:33Speaker 05

  Well, I think that the MP materials deal sort of ensures that they are not going to create these magnets at a market competitive price. But at some level, that doesn't matter because the government has agreed both to purchase all of the offtake of the magnets. So part of this deal, the government is buying 100% of the magnets. Now, it could resell some of these magnets to private parties, but it's a guaranteed purchaser of all of them. And on top of being the guaranteed purchaser of the magnets, it has also guaranteed profit margin for MP. So I actually kind of get why private investors are crowding into MP because it's sort of a no lose business proposition at this point. But I do think the reality, your point, Joe, is that China is the low-cost producer of rare earths magnets.

• 24:18Speaker 05

  It just is. It has the scale. And the best. It has multiple companies that do it. And the best, it has the engineering. It has no, you know, low environmental regulations. It is the low-cost producer. If we, as the United States, do not want to be dependent on China for rare earth magnets, we are going to have, at least in the, you know, near and midterm, to pay more for those magnets. And so that subsidy is either going to have to be a direct subsidy from the US government, like the MP Materials deal, or it's going to have to be an indirect subsidy, like tariffs or something else that forces US manufacturers to, you know, pay US producers because the foreign, they're protected from foreign competition. And that's just the reality of this, this market. And then you get into this whole debate of, you know, are the national security needs,

• 25:02Speaker 05

  are the economic security needs so great that it is worth paying what will be a subsidy to have that production here in the US?

• 25:11Tracy Alloway?

  Well, talk to us about the corporate governance angle in all of this. So with Intel, the US government is getting a 9.9% stake. They also, I think, have a golden share, like they do in the Nippon deal. Again, that's something that we tend to associate with China's state interventionist style, and we should talk about that a little bit later. But is Howard Lutnick going to be showing up to Intel AGMs and participating in, in the votes?

• 25:38Speaker 05

  This is another thing that worries me, Tracy, about the government taking equity in companies without kind of a clear statutory basis for it, because there isn't really any federal set of regulations or laws about how the government should manage its investments and what its role in corporate governance should be. So we're, we're sort of seeing ad hoc approaches as the government does these deals. So in the Intel case, if you read the SEC filings, the government has basically agreed to vote the shares the way the board recommends the shares be voted, except in a couple of major types of transactions, like an overall change of control, you know, change in ownership and control transaction.

• 26:23Speaker 05

  So that's a great deal for the board. Because actually now the board of Intel knows it has 10% or 9.9% of the shares to do whatever it wants. All right, great deal for the board, but that's unique to the Intel deal. And it will be interesting to see as these play out, do we see more and more kind of direct government, you know, involvement in the management of the of the companies?

• 26:47Joe Weisenthal?

  It's interesting. One of the things that I think about sometimes, so the corporate income tax rate in the United States is 21%. Now, if I own 21% of a private company, right, I'm in theory entitled to 21% of their income. It's kind of one way to think about it. In a sense, the US government already owns about a fifth of every private company in America, right? Because you have your profits and then 79% goes to the normal shareholders, then 21% goes to the government. There is a sense in which the government already owns a fifth of every company through taxation. The difference is, however, exactly what you just identified, which is this is a very passive equity stake that the government sort of has in every company.

• 27:29Joe Weisenthal?

  So what's really changing is this potential, not that the government is going to collect income from the profits, but this potential for new ways for sort of activist involvement in the private sector beyond the sort of traditional regulatory or legal environment that exists.

• 27:48Speaker 05

  Yeah, and it is both that this is going to give potentially the government a way of meddling much more specifically and with much more detail in individual companies. And it also is much more of the government potentially picking winners within an industry. I mean, let's take MP, you know, MP is one of, it's not the only company in the US that is trying to get rare earths mining and manufacturing going again. There are a number of other companies that are doing this with mining operations elsewhere in the US. And there are also some companies that are in the technology space that are saying, you know what? We might be able to create magnets that do what rare earth magnets do, but without using any rare earths. We have, you know, we're developing new materials.

• 28:31Speaker 05

  And the government here, rather than sort of saying, You know what, we have a program where we're giving a tax incentive to anybody who qualifies to kind of let all of these ideas flourish. The government is saying, you know what, we're guaranteeing that MP is going to make the money here.

• 28:46Joe Weisenthal?

  Yeah.

• 28:46Speaker 05

  Without actually knowing, is MP like the, the most cost efficient, the best technological bet? It is very much a picking winners and losers rather than seeing what flourishes in the market approach.

• 28:58Tracy Alloway?

  Do we have any sense of how foreign governments and foreign businesses are reacting to this? So I'm aware that Intel put out a statement that basically warned that having the US government as a major shareholder could be problematic for the company. It could lead to maybe additional regulations or obligations or restrictions abroad. Have you picked up any, I guess, scuttlebutt on how, is scuttlebutt too weird a word?

• 29:24Joe Weisenthal?

  No, it's great. It's a great word.

• 29:25Tracy Alloway?

  All right.

• 29:26Joe Weisenthal?

  It's a classic.

• 29:26Tracy Alloway?

  All right. Any scuttlebutt on how foreign entities are reacting?

• 29:31Speaker 05

  So I do think foreign governments are worried about what it means that the US government is investing in specific companies. And they're worried about it in two ways, one of which is just like the classic governments worry about what other government subsidies are going to do. You know, if there's more subsidies for Intel, how is that going to affect European manufacturing? Also, Intel in particular had been planning to build fabs in Europe, actually prior to the US government buy-in, had canceled those fabs in Europe. But there's worry like, would Intel still be a reliable partner if it is investing overseas? Or is it just going to invest in the US now that it's US government owed? And then the other one is, I do think that for companies, particularly technology companies, you know,

• 30:16Speaker 05

  we are in this era of geopolitics where we worry a lot about Chinese companies, where Chinese companies worry about the security issues around American companies. I think European companies are increasingly getting worried about, you know, is American tech safe to be used? And the closer the US government gets to a company, I think the more you're going to see foreign governments wonder about those security risks. I mean, I just look at what Microsoft had to do a couple of months ago where they actually said in response to European privacy concerns about Microsoft products in Europe that Microsoft would be prepared to sue the US government if the US government started putting unfair privacy requests on Microsoft

• 31:00Speaker 05

  about European customers. I don't think anyone would believe that Intel is going to sue the US government at this point to protect the privacy rights of its customers.

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• 32:25Joe Weisenthal?

  So you mentioned the issue of picking winners, which of course is an issue that precedes any equity stake. Every industrial policy in the world always has to think about this risk or possibility. And traditionally, the way it sometimes quote works in the context of sort of developing economies is they might have that sort of export test. And we've talked about that a bunch on the show. Are customers in foreign markets buying your thing? And if so, that's a sign that you're building something competitive. And we're going to keep backing you. And if not, this is a sign that you're not working out. And so there's this mechanism. If we're concerned about the idea that the government is picking winners with MP or picking winners with Intel, let's say again with MP, should

• 33:09Joe Weisenthal?

  the direction be that not that we get rid of the equity component, but that we just sort of build out the program so that any entity at any stage could theoretically make the US government a partner and that partnership is contingent on its success in some market measure?

• 33:26Speaker 05

  Well, I guess I look at that as, Joe, you know, you talked about taxes earlier. Isn't that what a tax credit's for? I mean, if you look at the CHIPS Act, the original CHIPS Act, we all focused on the grant part of the CHIPS Act. And this is the grant part of the CHIPS Act that we're talking about now. But, but actually, I think the more important part of the CHIPS Act is there was a 25% investment tax credit that lets anybody building a fab in the US take 25% of the cost of that fab as a fully refundable tax credit. So I mean, it's just a very great deal. I guess I actually, as a general bias, would prefer relatively more neutral approaches that let companies thrive and succeed in the marketplace. And where you do have grant programs, and there will always be a place

• 34:11Speaker 05

  for grant programs, I think you want to do it in a fairly broad-based way and seed multiple different ideas. I mean, I've been talking just recently with Jigger Shaw, previous guest on your podcast, about his time at LPO. And he, you know, he had this approach. He's like, I wanted to say yes to everybody, you know, anybody who could fit the criteria of getting a loan, I wanted to say yes to, because we want to place a bunch of different bets on a bunch of different technologies, on a bunch of different investments. And, you know, I think there's a lot to be said for that, which is also historically how we have come. Maybe there are rare cases, if there's a market failure, there's some sort of market where there's going to be a natural monopoly.

• 34:55Speaker 05

  Maybe in those cases, it does make sense. You know, there's a natural monopoly or some kind of market failure, then you're only going to have one or two potentially successful companies. Maybe you do want the government to take a stake there because if it's kind of guaranteeing the market, some upside for the taxpayer makes sense. But I generally think that should be a pretty rare instance in our capitalist system.

• 35:18Tracy Alloway?

  So there is an irony here that an administration which has been very critical of China and, you know, criticized them for manipulating their market or cheating on global trade rules or doing illegal subsidies and all of that kind of stuff, is now pursuing a more interventionist approach that does seem very reminiscent of what happens in China. Can you compare and contrast those two systems and maybe talk about how US policymakers are thinking about Chinese industrial policy at the moment?

• 35:49Speaker 05

  I mean, there is kind of an element here, right? We're looking a little bit like state capitalism with American characteristics. I think we should be, you know, open and direct about that. There are actually some differences. I mean, if you look at the Chinese industrial policy kind of approach, there are both similarities and differences. I think one big difference is actually when it comes to equity stakes in China, a lot of the equity is actually done at the provincial government level. You know, it's sort of an SOE that's owned by a particular province, relatively less at the central government level in China. The central government does tend to do a bunch of, you know, grants and R and D programs and that kind of thing, but they have a very heavy provincial level element to these.

• 36:32Speaker 05

  The other thing that I think China does frankly pretty well, kind of where we just were talking, Tracy and Joe, is China does tend to bet on multiple companies. And if you look at why they have a very successful EV sector right now, it is in part because you had lots of provinces investing in lots of companies, plus a tremendous amount of central government support on the demand side as well as on the supply side of the equation. So you have dozens of EV companies there out in the marketplace battling every week to build better technology and to sell it to customers. So they've kind of created this state capitalism, but state capitalism that is actually in some of these sectors quite Competitive in a way that spurs innovation.

• 37:15Speaker 05

  And I think if we're going to do more of that, we need to make sure we are also focusing on how do we keep this competitive to spur innovation and don't just kind of, you know, back a bunch of flabby 1970s European style national champions, which, you know, didn't turn out too well in the past.

• 37:31Tracy Alloway?

  Now's the time to start a lean and mean fab, Joe.

• 37:34Joe Weisenthal?

  We've, oh, have I ever told you my, um?

• 37:37Tracy Alloway?

  You have, but remind me.

• 37:38Joe Weisenthal?

  Fable semiconductor fab apostrophe. Although that wouldn't be with a fab, but I do think that'd be a good name for a chips company.

• 37:44Tracy Alloway?

  That'd be great.

• 37:44Joe Weisenthal?

  Fable semi. Fabulous. Anyway, actually, we've never talked about those 1970s European champions too much on this show. What's the story there? I don't know anything about them.

• 37:53Speaker 05

  Well, I'm being a little bit blase, but you did see in that you're, you know, in Europe in 1970s, you saw state ownership in a number of industrial firms. You saw fairly heavily state management in a way that I think a lot of economists looking at that thought did not make for economic, you know, sort of the most dynamic over time innovative industrial programs in Europe.

• 38:14Tracy Alloway?

  Two quick questions. So, so far, these deals seem to be sort of ad hoc, individualized one offs, right? And I'm curious if you have a sense that we're building towards something that's much more broad, a much more sustained model of, I guess, US interventionist involvement in the sphere of strategically important companies. And then secondly, what happens to these stakes if we get a new administration and the Democrats come in or something like that?

• 38:44Speaker 05

  Yeah, so I think when this administration came into, when the Trump administration came into office, I think they actually fairly early had identified a handful of areas where they thought equity was appropriate. And I think critical minerals is one of those. And I think that that is guided in part by a view that we aren't going to have a domestic competitive market in critical minerals without either subsidies or without a tariff wall because China just is a low cost producer. So I think there was kind of a strategic view of we're going to do a lot of investing in critical minerals. We're going to do a lot of protectionism or other kinds of subsidies for these guys. But because we as the government are creating this market and it's not really a free market,

• 39:28Speaker 05

  we as the government should also take some equity and have some upside. So I think there was a strategic view in that sector. I think what we are seeing now is the Trump administration is drastically broadening out its views of what sectors the government should get involved in. You know, we see that with the Intel deal. I'd also note just last week, the CHIPS office, CHIPS office at the Commerce Department, put out a notice of a new grant program for semiconductor R and D. So not to build fabs, but to do R and D program for semiconductors. And that notice says right in it that bidders for these grants may be expected to offer the government warrants or equity as a piece of it. So they are clearly looking to build this out.

• 40:14Speaker 05

  We obviously also earlier this year, when Nippon Steel bought into US Steel, saw the non-economic golden share that Nippon Steel got. I think we're going to see more of that in the CFIUS context. So I think they had a vision early on of a couple of discrete areas. I take it that the president and Secretary Lutnick and others just really like this concept and they are now in the process of broadening it out quite a bit across a number of other sectors. And they are probably broadening it out ahead of any strategic vision. So I'm a little worried that we're going to see more of this. And then they'll have to try to back end some strategic vision after they have a number of these deals in the ladder.

• 40:53Joe Weisenthal?

  Well, let's say they expand it or let's say, okay, maybe we want to have multiple stakes in the same industry such that there is some competition, et cetera. How much firepower does the government have? How much capacity via the CHIPS Act does it have to make deals like this? What would it, would it at some point need to get a fresh allocation from Congress to spend more on this? How much can it do?

• 41:17Speaker 05

  Yeah, well, because their legal theory is kind of, no one says we can't do this when we spend money, we're going to do it. I think there are ways in which they could argue, well, we could, we could try to demand equity alongside lots of government spending and grants programs. And we've even seen Secretary Lutnick talk about, well, maybe the defense contractors should give us equity. The problem they're going to run into is at some point, you know, the amount of cash they're putting on the table for a particular deal, a company is going to decide, you know what, that's not worth it to me, right? If you're offering some company 50 million, you know, a major multinational $50 million to, and grant money to, you know, do something you want them to do, but you also want 3%, they're just going to say no.

• 42:02Joe Weisenthal?

  But like when we, you know, when we talked about the LPO back in the day, you know, there was a fixed amount of money that had been allocated to these various programs. And same with CHIPS, et cetera. Like, how deep is that well if the government wants to do a lot more CHIPS deals? And I don't even know if it does. Maybe it just wants to pick a winner. Does it have the sort of, I guess they would say in the private sector context, dry powder to do more of these deals?

• 42:27Speaker 05

  So you'd have to, I'd actually have to ladder that up and think about what are the different pots of money they could potentially use here. They clearly have another, probably on the order of $10 billion of unallocated CHIPS money. LPO, mostly a lending facility, but they still have lots of unallocated lending power out of LPO. Now, because that's a lending facility, not a grant facility, kind of whether a company wants to give equity as part of a loan, that's a complicated commercial view, but there is some money there.

• 42:58Joe Weisenthal?

  They could say it's a convert, right? They could say, they could say it's a convert, and this counts as lending, but, right? They, because again, under the theory, no, who's going to stop them, right?

• 43:06Speaker 05

  I mean, that is their theory.

• 43:07Joe Weisenthal?

  Yeah.

• 43:09Tracy Alloway?

  Does Intel have basically a shadow mandate now? Because if I think about companies in the US, the goal is to maximize shareholder value, and that's been pretty explicit over time. But now you're adding in, you know, strategic ambitions and the public good aspect to Joe's point. Is there a potential tension there?

• 43:31Speaker 05

  I, you know, I think Intel has obviously tried to protect itself from that tension by negotiating this provision where by and large, the government has agreed to vote it shares at the board's direction. I think you can see they were trying to minimize political influence. There is another part of the, the Intel deal where, where actually there's kind of a poison pill if against Intel splitting apart its fab manufacturing part and its chip design part. There's been a long debate around Intel about whether it should split itself up or not. And the government did negotiate kind of a poison pill against a split. So that, that is incorporated fully in the, the documents. But beyond that, Intel, I think has tried to, you know, minimize government influence in its day-to-day operations.

• 44:16Speaker 05

  That's a, this is a government that wants to get involved in day-to-day corporate operations, right? We see the president talking about individual executives at individual companies. And a commerce secretary is very clear. He thinks companies should be doing things in the public interest. And I think the board is clearly probably going to feel some pressure that not just the government, but also the government and its largest shareholder, one of its largest shareholders are going to be prodding it to do things that might be in what they see as the Commerce Department or the country's interest, even if those aren't in shareholder interest. I think we are going to see that tension over the next couple of years, even if Intel has tried to insulate itself from that.

• 44:56Joe Weisenthal?

  All right. Oh, Peter Harold, this was a fantastic overview. I definitely have a much, I feel like I understand these deals much better than before. Really appreciate you coming on Alpha.

• 45:06Speaker 05

  It was great to be on. Thanks so much for having me.

• 45:20Joe Weisenthal?

  You know, Tracy, I think the point that you asked about how might this change under, say, a democratic administration is, to my mind, one of the most interesting questions. Because, like I said, the government already gets a fifth of corporate profits. The government already can establish rules and regulations via the regulatory process or the legislative process about how companies Work. What's new really to me is the specificity. This is about one company in particular and the ability to sort of circumvent Congress in the management of individual companies and that it's not easy to change regulation or law with each administration. But if equity stakes allow you to change how you interact with a specific company,

• 46:02Joe Weisenthal?

  then you could really have very fast shifts from one presidency to another.

• 46:06Tracy Alloway?

  Yeah, I mean, I think there's also an optics element in here where if the administration said, we're going to raise the corporate tax rate, that would be unpopular. But if they say, we're going to create shareholder value for the US citizens. Yeah, exactly. It plays a little bit differently. I do think, you know, my last question about the tension between being a strategic asset for the US government and the wider US population versus being a company that's all about profits and maximizing shareholder value. I think that's a really interesting one because again, I think back to China.

• 46:41Joe Weisenthal?

  Yeah.

• 46:42Tracy Alloway?

  And China, the compromise there seems to be that you have a very state interventionist system.

• 46:48Joe Weisenthal?

  Yeah.

• 46:49Tracy Alloway?

  But on the other hand, no one seems to expect companies to be massively profitable. Right? We spoke with Dan Wong about this, like, maybe the Chinese system is, you know, we build lots of stuff, we innovate and don't make that much money. And I just don't know like how that works in the US.

• 47:08Joe Weisenthal?

  No, it's a great question. I mean, think about it, you know, from Intel's perspective, had it not been for the CHIPS Act or had it not been for all of the concern about national security and US production, at some point, the company might have decided, you know what, we're going to be fabulous too, like Nvidia is, whose market cap is, you know, whatever, 40 times as much. And it could have been very much the case that Intel today would be worth more as a company, speaking of strategic missteps, could be worth more as a company if it had never got into the fab game at all, that if they just decided, you know what, we're going to have all of our chips be made overseen by TSMC and others. So there is this thing that maybe the company is worth less today because they've had this

• 47:52Joe Weisenthal?

  concern, they've had this national security obligation that they've played along with.

• 47:56Tracy Alloway?

  We should, we should leave it there. I'm starting to get PTSD flashbacks to my dad complaining about paying his taxes in order to bail out his competitor airlines.

• 48:05Joe Weisenthal?

  Oh, that's funny.

• 48:06Tracy Alloway?

  He always used to complain about that. He worked at Southwest, which was one of the few airlines that never actually went bankrupt.

• 48:12Joe Weisenthal?

  Oh, right. I do wonder, like, when Peter talked about standing to sue competitors, plausibly, right? Couldn't like a Samsung US or some, or an AMD or whatever? I don't know.

• 48:23Tracy Alloway?

  I think an ambitious lawyer would probably be interested in that case.

• 48:28Joe Weisenthal?

  But I think probably an ambitious CEO does not want to get on the, get on the bad, you know, they might, they might want to take a feed at the trough too, one day. And so maybe they'd let this one slide.

• 48:40Tracy Alloway?

  All right. Shall we leave it there?

• 48:41Joe Weisenthal?

  Let's leave it there.

• 48:42Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alockway. You can follow me at Tracy Alockway.

• 48:47Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at the Stalwart. Follow our guest, Peter Harrell. He's at Peter Harrell. Follow our producers, Carmen Rodriguez at Carmen Armadas, Shoban at Dashbot, and Kale Brooks at Kale Brooks. For more Odd Lots content, go to Bloomberg.com/oddlots, where we have a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 49:11Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we dig into deals made by the US government, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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