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In this article, Professor A. Michael Froomkin takes a comprehensive look at federal government corporations, focusing on the legal implications arising from their character as both public and private entities. Federal government corporations often enjoy public advantages, including national establishment, tax and securities law exemptions, sovereign immunity, and privileged access to capital. As a result, they face diminished market discipline and may not be as efficient as their proponents claim unless they have similarly situated competitors. Because some federal government corporations are owned wholly or partly by private parties, yet maintain control over public funds and functions, their legal status raises important constitutional questions concerning accountability, separation of powers, and nondelegation.[*544]In his 1993 Reinventing Government program, Vice President Al Gore encouraged the proliferation of federal government corporations, obscure government devices whose legal status remains unclear even after 200 years as part of our national life. Professor Froomkin suggests that some regulatory reform is needed before this suggestion is adopted. After a critical analysis of existing proposals, he offers alternatives designed to increase accountability to both government and market discipline, thus ensuring that private parties do not profit at public expense, and limiting taxpayer liability in the event of insolvency.
[*546] American concern about inefficiency in government dates back to the First Continental Congress.{1} In the 200 years since then, reorganization plans have come and gone, but the fundamental structures of government departments have changed only infrequently, although their jurisdictions have changed constantly, and usually have grown. Vice President Al Gore's Reinventing Government program{2} is only the latest in a long series of plans to reorganize or reinvigorate the federal government.
One of the many devices proposed by the Vice President to create a "government that works better and costs less" is an often tried yet little- known type of government entity called a federal government corporation (FGC). Congress has created a new government corporation every year or so since World War II. It created the United States Enrichment Corporation in 1992,{3} and the Corporation for National and Community Service (AmeriCorps) in 1993.{4} Congress recently has considered new federal corporations for everything from aid to small businesses{5} to the regulation of boxing,{6} and is now considering proposals for a Technology Transfer and Commercialization Financing Corporation.{7} Reinventing Government would add to the list by semiprivatizing much of the Federal Aviation Administration into the U.S. Air Traffic Services Corporation, an FGC that would, the administration hopes, borrow funds (which would not be counted towards the national debt) to modernize air traffic control.{8}
[*547] Although federal corporations have been a part of the national life for 200 years,{9} they remain obscure--a status they no doubt find convenient. Today more federal corporations exist than ever before in peacetime, and the number keeps growing. While toiling in obscurity, they manage communication satellites, museums, railroads, and power generation. They provide specialized credit and insurance for housing and agriculture. They exist as accounting devices to hide the true size of the budget deficit, as nonprofit organizations, and as highly profitable and highly leveraged economic colossi. The most profitable corporations, which provided a total of about $5 trillion in credit and insurance in 1995, also have approximately $1.5 trillion in securities and other debt outstanding. These organizations are capable of squirreling away $2 billion for a rainy day, while pleading poverty to Congress.{10}
This article seeks to shed some light on these organizations and asks some hard questions about whether these bodies are properly accountable for the vast sums they borrow, lend, and spend, and for the public power and benefits they enjoy. More is at stake than just money. Left to run loose, government corporations threaten to infringe basic principles of democratic accountability.
Some federal government corporations are wholly owned by the government and are clearly state actors, resembling ordinary agencies in many ways.{11} Others, however, are owned wholly or partly by private persons.{12} These mixed-ownership and private corporations enjoy[ *548] a combination of federal and private powers and obligations, and therefore may not be state actors in a constitutional sense. Thus, they may be less accountable for their actions even though they are creatures of a national policy.
By allowing private ownership and private control of publicly funded and ostensibly publicly directed activities, the structure of some federal government corporations weakens accountability. The powers granted to privately controlled federal government corporations are usually economic, but a few federal government corporations have more public functions. The uncertain legal status of some federal government corporations also raises separation of powers and nondelegation concerns because it weakens presidential, as well as congressional, control over the federal administrative machinery and over important sectors of the national economy. Placing public funds, public monopolies, or public power, in the hands of unelected, unappointed, almost certainly unimpeachable, and largely unaccountable private parties poses a serious and largely unexplored challenge to accountable, efficient, democratic national government.
The Vice President's report suggests that a government corporation can harness the efficiency of the private sector for the service of the public. Neither a privatized existing program, nor an ordinary government department, the corporation is supposed to combine the flexibility of a business with the public purpose and public duties of government. Reality is not always that simple. Federal government corporations enjoy public advantages unavailable to state-chartered firms, including national establishment, exemption from state taxes and from portions of the securities laws, privileged access to capital, and even sovereign immunity. These advantages effectively free some federal corporations from market discipline. In addition, uncertainty as to whether to characterize federal government corporations as private bodies or coordinate departments hampers federal regulation and bureaucratic control. Similarly, otherwise simple civil cases become complicated, as courts struggle to determine whether an entity is a private party, a state actor, or part of the state itself.{13}
This article concentrates on federal government corporations in which the federal government owns shares or appoints directors.{14} It[ *549] begins with a brief description of the creation and powers of federal government corporations. The article then explains how some federal government corporations operate under a legal regime that enables them to escape accountability to Congress, the President, and the private market. As a result, their private investors, shareholders, and managers may benefit more than the public they are intended to serve. The article concludes with a critical analysis of previous regulatory reform proposals and offers alternative proposals designed to increase accountability to government discipline and market discipline, ensure that private parties do not profit at public expense, and nonetheless limit taxpayers' contingent liability if a federal corporation becomes insolvent.
Today, more than forty{15} FGCs are directly chartered by Congress,{16} [ *550] including such diverse bodies as the Federal National Mortgage Association (Fannie Mae),{17} the Legal Services Corporation (LSC),{18} the Tennessee Valley Authority (TVA),{19} the National Endowment for Democracy,{20} the Commodity Credit Corporation,{21} the Student Loan Marketing Association (Sallie Mae),{22} and the Communications Satellite Corporation (COMSAT).{23} The recently created Resolution Funding Corporation (REFCORP),{24} charged with borrowing funds for the use of the Resolution Trust Corporation (RTC) which is recapitalizing insolvent savings and loans, is only the latest in a line of FGCs created to channel funds to a specific sector of the economy. Indeed, from 1965 to 1988, the outstanding credit assistance and insurance provided by FGCs grew by over 1000%, to about $5 trillion.{25} The General Accounting Office (GAO) has warned that much of the hundreds of billions in direct loans by FGCs is at risk, although the Treasury takes a more nuanced view.{26}
[*551]The federal government's authority to charter corporations derives from the Necessary and Proper Clause of the Constitution,{27} as expounded in Chief Justice Marshall's decisions in McCulloch v. Maryland{28} and Osborn v. Bank of the United States.{29} McCulloch established that, despite the lack of an applicable enumerated federal power, the Necessary and Proper Clause of the Constitution allows the federal government to charter and use a private entity for the public purpose of banking. The Second Bank of the United States, the subject of both cases, was a federally chartered corporation with 80% of its stock owned by private persons and 20% by the United States. The Bank had twenty-five directors, five of whom were appointed by the President from among the stockholders, subject to Senate confirmation. The remaining twenty directors were elected by the other shareholders.{30} The Second Bank, like its precursor, had extensive power over the money supply and, consequently, over the monetary[ *552] policy of the United States.{31} Although the President could remove any of the five directors he appointed, he had no such power over the privately elected directors who constituted a comfortable majority. The Bank, therefore, ensured that monetary policy remained in the control of the wealthy citizens and private banks, who could afford to purchase shares.{32} Neither McCulloch nor Osborn stated that Congress has a general power to create corporations for any purpose. Instead, those cases held that Congress's power to create a Bank derives from, and exists in order to effectuate, its power to manage the fiscal affairs of the United States.{33}
Today, as in the eighteenth and nineteenth centuries, FGCs are separate legal persons chartered directly by an act of Congress or by persons acting pursuant to congressional authorization. The statute creating the corporation may provide a federal charter or may specify incorporation under the laws of the District of Columbia.{34} Every FGC, however created and governed, enjoys a separate legal personality,{35} and, unless there is legislation to the contrary, its investors, including[ *553] the United States, presumably enjoy limited liability.{36} Therefore, the United States is not legally responsible for the debts of even a wholly owned FGC unless there is a constitutional, statutory, or federal common-law rule to the contrary.
Congress ordinarily charters a federal corporation by legislation rather than delegating the power to an executive branch official. If the legislation specifies incorporators, they are usually government officials. The legislation incorporating an FGC ordinarily sets out its purposes, powers, structure, and obligations.{37}
Although the exact mix of powers granted to FGCs varies, almost every FGC has permanent succession and the following capacities: to sue and be sued{38} (and to settle cases without Justice Department authorization{39} ), to make contracts, to hold property, and to borrow.{40} Almost all FGCs are governed by a board of directors elected by the shareholders or appointed by the President, sometimes subject to Senate confirmation.{41} In keeping with the long-held theory that FGCs should be run on "business-like" principles, many FGCs are exempted from civil service rules regarding pay,{42} employee tenure,{43} [ *554] and other rules such as the Freedom of Information Act. Indeed, some FGCs are exempted from the Government Contract Control Act which is supposed to regulate how federal corporations are created and supervised.{44} From a bureaucratic point of view, most government corporations enjoy budgetary freedoms denied to ordinary federal agencies.{45} Unless limited by specific provisions in its statute, an FGC is not subject to the "use it or lose it" rule that requires most agencies to return unexpended funds to the Treasury at the end of a fiscal year.{46} Similarly, FGCs, unlike agencies, can enter into multi-year commitments, conduct long-term planning,{47} and buy or sell assets without complying with federal procurement and disposal regulations. Some FGCs may ignore government personnel ceilings, and, in general, escape federal budget restraints while retaining some of the advantages of this government link.{48}
Many, but by no means all, FGCs issue stock, some or all of which is owned by legal or natural private (nongovernmental) persons. Congress usually defines an FGC as "wholly owned," "mixed-ownership," or "private," although Congress has chartered a number of corporations without specifying their status.{49}
In wholly owned federal corporations, such as the Commodity Credit Corporation, the federal government holds 100% of the equity and exercises 100% of the votes on the board of directors or other governing body.{50} Several statutes creating wholly owned government[ *555] corporations identify the body as an "agency,"{51} and most wholly owned FGCs are subject to large portions of the Administrative Procedure Act.{52}
In mixed-ownership federal corporations,{53} such as the RTC and REFCORP,{54} the United States may own some or none of the equity. A mixed-ownership FGC's charter often guarantees that the President will appoint at least a minority of the directors even if the federal government does not own shares. The market ordinarily assumes that securities and other debt instruments issued by mixed-ownership FGCs carry an implicit guarantee from the Treasury, and prices them accordingly.
In private federal corporations, such as COMSAT, the federal government holds no stock but may have a statutory right to select members of the board of directors.{55} A private federal corporation is, formally, little different from a corporation chartered by a state although it may have publicly appointed directors and tax advantages, and its debts may carry an implicit guarantee from the federal government.
Approximately one-fifth of the FGCs in existence{56} benefit from specialized lending powers coupled with an explicit or implicit federal guarantee which allows them to provide subsidized credit to, or for the use of, a target group. These FGCs, collectively known as Government[ *556] Sponsored Enterprises (GSEs),{57} are limited by Congress to lending to a particular constituency (farmers, students, homeowners), or for a particular purpose (such as recapitalizing insolvent savings and loans). Because some of these constituencies are very large, the GSEs designed to serve them play a dominant role in certain primary and secondary credit markets. Together, the eleven GSEs have about $1 trillion in obligations outstanding, with two-thirds of it concentrated in mortgages and mortgage-backed securities.{58} In 1989 alone, the GSEs collectively raised about $114.5 billion in the credit markets--about 12% of all funds raised in the credit markets that year.{59} In the same year, the GSEs collectively disbursed about $531 billion--about 40% of the amount disbursed by all on-budget federal agencies.{60} Five GSEs are dedicated to some aspect of home lending: the Federal Home Loan Banks (FHLBanks),{61} Fannie Mae,{62} the Federal Home Loan Mortgage Corporation (Freddie Mac),{63} the Financial Assistance Corporation (FICO),{64} and the Resolution Funding[ *557] Corporation (REFCORP).{65} Four GSEs are agricultural lenders: the Farm Credit Banks,{66} the Central and Regional Banks for Cooperatives,{67} the Farm Credit System Financial Assistance Corporation (FAC),{68} and the Federal Agricultural Mortgage Corporation (Farmer Mac).{69} Two GSEs are primarily involved in higher education lending: the Student Loan Marketing Association (Sallie Mae),{70} and the College Construction Loan Insurance Corporation (Connie Lee).{71} Congress ordinarily identifies GSEs as mixed-ownership FGCs, but the degree of private ownership varies from 0 to 100%.
Since 1945 Congress has usually created FGCs for one of four reasons: efficiency, political insulation, subsidy, and subterfuge.{72}
The classic reason given for creating an FGC instead of an agency, one echoed in the Vice President's proposals, is that an FGC will be more efficient at achieving a specific national goal, especially if the program envisioned involves market transactions. The national goal is ordinarily stated in the FGC's charter. Thus, the Farm Credit System, for example, exists to improve "the income and well-being of American farmers and ranchers by furnishing sound, adequate and constructive credit and closely related services."{73} One of Sallie Mae's[ *558] public purposes is to assure nationwide liquidity and insurance for student loans.{74} In the abstract, FGCs seem to promise an alternative that everyone, from fiscal conservatives to democratic socialists, might find attractive.{75} FGCs conjure up an image of business efficiency as opposed to the traditional bureaucratic cabinet department. Proponents of small government may welcome the introduction of an element of private control into most realms of public administration as a means of preparing for the privatization of federal functions. Democratic socialists may view wholly or even partly owned government corporations as a means of capturing the rents and profits from public activities or natural monopolies for the benefit of the public fisc.
Like independent agencies, FGCs allow Congress to insulate a program from the cabinet department that would normally have jurisdiction over it. Congress may feel that a small single-mission agency will be more zealous in furthering a given goal than a department in a multimission agency.{76} Because FGCs may have more independence from Congress, the executive, and the public than comparable public or private institutions, an FGC may be the vehicle of choice for coalitions seeking to insure a political victory against the vicissitudes of electoral politics.{77}
An FGC may be designed to create a captive agency for a constituency.{78} How better to capture an agency than to own it? The eight privately owned GSEs are a particularly effective means of delivering subsidies through the credit markets.{79} They borrow at lower[ *559] rates than private corporations, even though little GSE debt carries a formal federal guarantee.{80} GSEs that are not backed by the full faith and credit of the United States are nonetheless widely believed to have an implicit guarantee, if only because some of them are too big to be allowed to fail.
FGCs classified as either mixed-ownership or private tend to be given "off budget" status.{81} Once excluded from the national accounts, their borrowing is not counted as part of the official measure of the federal deficit. When Congress operates under spending caps or deficit reduction targets, pursuant to the Gramm-Rudman-Hollings budget reduction process for example, off-budget items are usually excluded from the official total "spent" by the government.{82} As a result, a few GSEs were created as little more than accounting devices designed to allow the federal government to borrow funds without appearing to increase the deficit.{83}
[*560]Whether an FGC is characterized public or private affects its legal relationship with the rest of the world: the President, Congress, the public, and even its own directors. Its status as a public or private body shapes the rights and remedies of any person who has a legal or commercial relationship with the corporation, whether she is employed by it, transacts with it, competes with it, makes a contract with it, is injured by it, or commits a fraud upon it. Either way, an FGC's liberty to abuse its powers faces fewer practical or even theoretical constraints than comparable institutions. Because FGCs are federal, they are not subject to regulation by the states. Because they are governmental, and often have special powers or access to cheaper capital, they are largely immune from market forces. Because they are corporations, they are exempt from most constraints ordinarily applied to federal agencies. Self- financing FGCs can even evade Congress's power of the purse. A self-funding, self- perpetuating, profit-making corporation enjoys a degree of potential, and perpetual, independence undreamed of in most agencies.{84}
Different accountability mechanisms appear appropriate depending on whether an FGC is treated as public, as private, or as a hybrid. Ordinary state-chartered corporations exist to further privately selected goals, often the quest for private profit. Their liberty to abuse their powers is curbed by market forces and by public and private laws enacted by both the state and federal governments. Ordinary federal agencies are established to further publicly selected goals, defined, in at least a general fashion, by Congress and the President. The federal agencies' liberty to abuse their powers is curbed by political forces, federal statutes, and the Constitution. In practice, neither public nor private accountability mechanisms are necessarily effective when applied to many FGCs.{85} FGCs in which the President appoints only a minority of the directors or that are financially self- sustaining are structured in a way that attenuates their accountability to elected officials.
Currently, there are few litmus tests to distinguish a public FGC from a private one in order to determine which accountability system[ *561] is appropriate. Nor are there any visible limits on the powers that may be granted to private FGCs. The courts have had few occasions to consider whether private or public FGCs undermine the separation of powers or whether the Appointments Clause of the Constitution applies to directors of an FGC. Similarly, because no laws set out the duties of FGC directors appointed by the President, whether they have the same duties as FGC directors elected by shareholders is unclear. In practice, because both market discipline and federal regulatory activity are limited, many FGCs remain free to operate as they wish, regardless of how they are classified.
McCulloch and Osborn remain the starting points for any modern inquiry into the constitutional status of FGCs, whether an FGC is viewed as public, private, or both. These two cases, together with federal government practices before World War I, establish three clear principles concerning FGCs. First, the federal government may charter private corporations.{86} Second, the presence of a minority of directors appointed by the President, or federal ownership of a minority of shares, does not necessarily make an otherwise private corporation an agency. Third, the federal government may give special advantages and powers, such as state and federal tax exemptions or control of the money supply, to a private federal corporation. No subsequent court decision has seriously questioned any of these general principles. The Supreme Court's recent decision in Lebron v. National Railroad Passenger Corp.{87} adds a fourth principle to the list: A corporation created for public purposes over which the government retains permanent control is a federal actor.{88}
Constitutional limits can apply to FGCs in either of two ways. If an FGC is considered public, then it shares a number of features with traditional agencies. A public FGC must be part of the executive branch of government. Therefore, a public FGC has to comply with rules imposed by the separation of powers that shape the executive[ *562] branch's relationship with the legislative branch. Similar rules also may affect a public FGC's relationship with private stockholders. Thus, although a public FGC presumably must observe due process,{89} it is unlikely to face a shareholder derivative suit.
On the other hand, if an FGC is considered private, then the Constitution does not apply to most of its activities, unless Congress has exceeded its powers in creating the FGC. Otherwise, the Constitution applies as it would to any other private transaction.{90} Thus, for example, although the federal government must observe procedural and substantive due process,{91} the conduct of private persons is not subject to such restraint, "no matter how unfair that conduct may be."{92}
A congressional declaration that a body is an "agency" or a "private" body may be entitled to great weight, but it cannot be the final word on the subject. Even if Congress can make a heretofore private activity public, it certainly cannot label a public agency private, thus taking it and its employees outside due process and other constitutional restraints.{93} In addition, a congressional declaration that a body is of "mixed-ownership" indicates that even Congress is uncertain as to its character and offers little guidance as to the entity's constitutional status.
The Supreme Court has addressed the specific legal status of government corporations several times, starting with McCulloch and Osborn. Five years after Osborn, the Supreme Court confronted the following argument: A suit against a bank owned solely by a state government was, in fact, a suit against the state government itself and, therefore, forbidden by the Eleventh Amendment. Holding that the Eleventh Amendment did not apply, the Court ruled that the president and directors of the corporation "alone constitute[d] the body[ *563] corporate, the metaphysical person liable to suit."{94} The presence of a (state) government among the incorporators or shareholders of a bank did not give the bank corporation immunity from suit and did not pierce the veil and transform the suit into one against the government.{95}
Some guidance as to when an FGC is public can be gained from the state/federal action doctrine.{96} Under the state action doctrine, the actions of a putatively private party can be ascribed to the state when there is "a sufficiently close nexus between the [government] and the challenged action of the regulated entity so that the action of the latter may be fairly treated as that of the [government] itself."{97} The current test focuses on three factors: the extent to which the actor[ *564] relies on government assistance and benefits; whether the actor is performing a traditional government function; and, whether the injury caused is aggravated in a unique way by the incidents of governmental authority.{98}
FGCs present a threshold problem that is usually absent from state action cases. The issue is not simply whether the FGC's conduct can be traced to the government, but more fundamentally whether the FGC is part of the government.{99} An FGC owes its existence to an act of Congress. In some cases it owes its funding to Congress as well. In other cases, some or all of its directors are appointed by the President. An FGC thus may fit the profile of "state"--not just "state actor"--much better than, say, a private parking lot operated on municipal property.{100} Federal incorporation alone, however, does not make an FGC a state actor.{101}
Although the recent Lebron decision has clarified some questions, the Supreme Court's decisions relating to FGCs do not follow a consistent pattern except that most of the decisions have been brief and, when taken as a group, contradictory. As a result, although the federal government's power to create private corporations and to own shares or bonds in such corporations remains unquestioned,{102} the legal status of many FGCs remains unclear. For example, the Court held that the Fleet Corporation, a wholly owned FGC,{103} was legally[ *565] independent from the United States in United States v. Strang,{104} Sloan Shipyards,{105} and in United States ex rel. Skinner & Eddy Corp. v. McCarl.{106} Yet the Court held that, despite the technicality of incorporation, the Fleet Corporation and other wholly owned FGCs were functionally identical to the United States in United States Grain Corp. v. Phillips,{107} United States v. Walter,{108} Emergency[ *566] Fleet Corp. v. Western Union Telegraph Co.,{109} Inland Waterways Corp. v. Young,{110} Cherry Cotton Mills v. United States,{111} and now again in Lebron v. National Railroad Passenger Corp.{112} Moreover, all the parties to Ashwander v. TVA apparently assumed the identity of interest between the United States and the wholly owned nonstock TVA.{113}
Most recently, in Lebron, the Supreme Court relied on the confluence of a number of factors to conclude that Amtrak, a federally chartered for-profit corporation, is "part of the government"{114} for "the purpose of individual rights guaranteed against the Government by the Constitution."{115} Amtrak is wholly owned by the United States, and the government controls its board of directors.{116} In incorporating[ *567] Amtrak, Congress declared that it "will not be an agency or establishment of the United States Government,"{117} although it subjected Amtrak to the Government Corporation Control Act, and classified it as a mixed-ownership government corporation.{118}
Justice Scalia, writing for eight members of the Court,{119} began his analysis of Amtrak's legal status by rejecting the contention that Congress's designation of Amtrak as a private body controls.{120} After canvassing the Court's own precedents, Justice Scalia found that the test for determining an FGC's status remained open.{121} Finding no controlling statute or precedent, Justice Scalia turned to what he termed the "public and judicial understanding of the nature of Government-created and -controlled corporations over the years."{122} The opinion characterized the prevailing view among post- Depression political scientists as one in which wholly owned government corporations such as Amtrak were ordinarily part of the government;{123} a view that, according to Justice Scalia, also accorded with congressional[ *568] practice until recently.{124} Given the Court's previous decision that Congress's declaration that Amtrak was private did not resolve the issue, Justice Scalia did not explain why it mattered that Congress and the public understood Amtrak to be public.
Once the Court disposed of the congressional declaration that Amtrak was private, Amtrak's strongest remaining argument for claiming that it was not a public body rested on one paragraph of the Regional Rail Reorganization Act Cases.{125} In that paragraph, which forms part of a much longer discussion of other matters, the Supreme Court held that the Consolidated Rail Corporation (Conrail),{126} a Pennsylvania for-profit corporation, was not a federal instrumentality despite the federal government's power to appoint a majority of its directors.{127} Writing for seven members of the Court, Justice Brennan explained that
Conrail is not a federal instrumentality by reason of the federal representation on its board of directors. That representation was provided to protect the United States' important interest in assuring payment of the obligations guaranteed by the United States. Full voting control of Conrail will shift to the shareholders if federal obligations fall below 50% of Conrail's indebtedness. The responsibilities of the federal directors are not different from those of the other directors--to operate Conrail at a profit for the benefit of its shareholders. Thus, Conrail will be basically a private, not a governmental, enterprise.{128}
Justice Brennan's distinction between a corporation that the government controls "as a creditor," as in the case of Conrail, and one that it controls "as a policymaker," as in the case of Amtrak, permitted Justice Scalia to distinguish the Regional Rail Reorganization Act Cases. Justice Scalia noted that Amtrak's charter, unlike Conrail's,[ *569] establishes public-interest goals for the railroad,{129} and concluded that "Amtrak is worlds apart from Conrail: the Government exerts its control not as a creditor but as a policymaker, and no provision exists that will automatically terminate control upon termination of a temporary financial interest."{130}
Although Justice Scalia reached the correct result--Amtrak is clearly part of the government under the tests advocated in this article--his reliance on Justice Brennan's distinction in the Regional Rail Reorganization Act Cases is unfortunate because Justice Brennan misapplied his own test.{131} A valid distinction exists between a corporation in which the federal government has taken an active role in management or control, and a corporation in which the government finds itself temporarily holding the debt or equity of a going concern as the result of a civil forfeiture{132} or the government's action as a creditor or trustee.{133} If the previous management remains in control for a short time while the government seeks to dispose of the asset, it is reasonable to conclude that the corporation does not automatically become a federal actor for the period that the government owns the company. In the Regional Rail Reorganization Act Cases, however, the government did far more than passively hold Conrail stock. The federal government created Conrail.{134} The incorporators were led by a government official.{135} The government named a majority of Conrail's[ *570] directors, who in turn selected the corporation's management.{136} In the case of Conrail, the government really ran the railroad from its inception until it was privatized in 1987.{137}
The only potentially significant difference between Conrail while under federal control and Amtrak today is that the government's control of Conrail was destined to end if and when Conrail's federal indebtedness fell to less than 50% of its total debt;{138} in fact, the government still controlled Conrail when it sold the corporation.{139} This, however, did not mean that the federal government's loss of control was inevitable; it certainly had no obvious or fixed date. Indeed, Justice Douglas's dissent in the Regional Rail Reorganization Act Cases noted that "all the parties concede, that Conrail, though dubbed 'a for-profit corporation' shows no prospect of being an enterprise operating on a profitable basis."{140}
As Justice Scalia noted in Lebron:
It surely cannot be that government, state or federal, is able to evade the most solemn obligations imposed in the Constitution by simply resorting to the corporate form. On that thesis, Plessy v. Ferguson can be resurrected by the simple device of having the State of Louisiana operate segregated trains through a state-owned Amtrak.{141}
Had Conrail run segregated trains while a majority of federal appointees sat on its board, the offense to the Constitution would have been no less.
Lebron was actually an easier case than the Court made it seem.{142} The Court previously held, in what is now known as the federal action doctrine,{143} that entities that display "a sufficiently close nexus" to the government to "be fairly treated as [the actions] of the government itself" must be considered part of the government. Under this holding, a wholly owned FGC such as Amtrak (and probably Conrail despite the contrary holding in the Regional Rail Reorganization[ *571] Act Cases) is a federal actor because the government owns and controls it. Indeed, Justice Scalia stated that "reason itself" compelled the conclusion that the federal government cannot hide behind a corporate form "to evade the most solemn obligations imposed in the Constitution"{144} for the same reasons the Court previously held that a state cannot evade constitutional strictures by acting through a private trust operated and controlled by state officials.{145}
The Brennan-Scalia distinction will be difficult to extend to future cases. Other than the rule that permanent control for the foreseeable future amounts to ownership in the nature of a "policymaker,"{146} it provides no guidance for determining whether the government's ownership interest is just that of "a creditor," or whether it rises to the level of "policymaker" as in Amtrak. Lebron thus represents a missed opportunity to link FGC case law to the federal actor test. Relying on the federal actor test would not necessarily solve every problem,{147} but it would provide a principled distinction between, on the one hand, cases such as Conrail and Amtrak, and on the other hand, the RTC's management of an insolvent savings and loan which is soon to be sold off.
Unfortunately, not every case involving an FGC is likely to be as simple as Lebron. Neither the state action doctrine nor whatever principles that can be extracted from precedent provides a sufficiently clear standard for determining whether an FGC that is not wholly owned by the government is public or private.{148}
In mixed-ownership FGCs and privately owned FGCs the government appoints only a minority of the directors, causing two valid public policies to conflict. On one hand, Congress chooses the instruments that are necessary and proper to achieve valid ends. Because private enterprise is a valid means to valid ends, the fact that the government facilitates the creation of private enterprise does not render that enterprise either public or invalid. If an FGC most closely resembles a private contractor that provides a government service, it[ *572] should not be treated as part of the government.{149} The analogy to private contractors is convincing if one looks only at the primarily commercial tasks that are most often entrusted to FGCs. Indeed, any rule requiring FGCs to comply with the constitutional mandates applicable to federal agencies could easily extend to all other private corporations.{150}
On the other hand, FGCs at least partly controlled by the government are arguably the government's agents. The federal government's agents should comply with the Constitution.{151} If FGCs that are partly owned or controlled by the government are private, they may provide a vehicle for the federal government to hide behind the corporate veil and escape responsibility for its actions. If the state action doctrine means anything, it is surely that the government cannot contract out of the Constitution.{152}
For the same reasons that a wholly owned corporation should be treated as a federal actor, both Lebron and the state action doctrine suggest that any mixed-ownership FGC in which the federal government owns more than half the shares should be treated as a federal actor for constitutional purposes. In addition, because the number of shares required to control a corporation varies with the circumstances, whether the United States has effective control over a particular[ *573] mixed-ownership FGC in which it owns less than 50% of the shares is a factual question, one that should be decided on the same principles that apply when the existence of control is disputed in the private law context. If shareholding is very dispersed, no group may have complete control of a mixed-ownership FGC. In such cases, coalitions may form and shift from issue to issue or year to year. It is anybody's guess whether a policy that an FGC pursues with the support of the United States, or with the support of directors appointed by the United States, has a sufficient nexus to the government that can be fairly ascribed to it.
These esoteric contingencies illustrate the difficulties that can result from the unclear status of mixed-ownership FGCs, but they are largely theoretical at present. Although the government initially took an equity stake in a large number of mixed-ownership corporations, the modern trend has been toward requiring the corporations to repurchase the government's (often nonvoting) stock. As a result, although the government retains its statutory directors, it no longer has any shares in the large majority of "mixed-ownership" government corporations. Conversely, sometimes Congress designates a corporation as "mixed-ownership" even when there is no plan to sell any stock to private investors.{153}
The federal charters of several private FGCs in which the United States holds no stock provide for the presidential appointment of a minority of directors. These "public" directors sit alongside the private directors elected by the shareholders.{154} For example, the President appoints five of Fannie Mae's eighteen directors, with the majority elected annually by the common stockholders.{155}
The appointment of a minority of directors gives the appointing authority no more formal control over a corporation than would the ownership of a minority of the stock. Indeed, the power to appoint a minority of directors may carry less influence over the corporation's affairs than the ownership of an equivalent block of stock; although minority blocks sometimes suffice to control a corporation whose other shares are widely distributed, the same is rarely true of voting in a small group like the board of a corporation. In addition, the presence[ *574] of a minority of presidentially appointed directors on the board of an otherwise private corporation does not make it a state actor and, thus, does not necessarily undermine the corporation's fundamentally private legal character.{156}
If an FGC is a private body, its establishment can be viewed as a delegation of public power to a private group, much as authorizing an administrative agency to regulate is a delegation of legislative power. Viewed this way, it seems natural to ask whether there is a nondelegation doctrine for private groups akin to the nondelegation doctrine that prevents Congress from delegating standardless rule-making power to the executive branch.{157}
A delegation of federal power to a private corporation differs from delegations to an agency in two important respects: what is being delegated and the natural competence of the delegate. The agency version of the nondelegation doctrine limits delegations of legislative power; but the power of the agency to execute the laws is unquestioned. When a private body is the delegate, whether it has any right to exercise government power--legislative or executive-- is an issue.{158} When the federal government delegates power to a small group of[ *575] individuals, it transfers power to a private group that is presumptively less accountable to the public than are legislators, who must face reelection, or administrators, who must report to the President.{159}
This judicial concern over the delegation of legislative power to private persons reached its high-water mark in Carter v. Carter Coal Co. In Carter Coal, the Supreme Court struck down a statute authorizing coal producers and mine workers to vote on a regional basis to set hours and wages that would bind dissenters. Justice Sutherland described the statute as "legislative delegation in its most obnoxious form; for it is not even delegation to an official or an official body, presumptively disinterested, but to private persons whose interests may be and often are adverse to the interests of others in the same business."{160} The Carter Coal rationale has not, however, been used to invalidate any subsequent federal delegation to a private group.{161} In a world in which private police forces and private prisons are imaginable, if not yet commonplace, if a nondelegation rule applies at all, it probably applies only to legislative powers.
The Carter Coal doctrine is known as a nondelegation doctrine, but this name is misleading. Unlike the real nondelegation doctrine, which relies on the separation of powers to prevent Congress from making standardless delegations to administrative agencies, the Carter Coal doctrine is in fact a prohibition against self-interested regulation. The Carter Coal doctrine seeks to prevent private individuals from judging or regulating their own causes.{162} Thus, it is not surprising that the Supreme Court unanimously found it "beyond dispute" that Congress may give a private corporation the power of eminent domain,{163} because a government-sponsored taking entitles the owner to just compensation--secured in court if necessary.
If the President neither appoints nor removes private FGC directors, there is a strong argument, deriving from separation of powers cases, that FGCs cannot be given public powers. Settled constitutional principles prescribe that the only government agencies that may exercise executive powers are those in the executive branch.{164} An agency that is responsible to Congress or the courts may not execute the laws.[ *576] The Carter Coal doctrine can be seen as the private analog of this limit on congressional delegation.
In Morrison v. Olson,{165} the Supreme Court distinguished the independent special prosecutor, who could be removed by the Attorney General for "good cause," from "a case in which the power to remove an executive official has been completely stripped from the President, thus providing no means for the President to ensure the 'faithful execution' of the laws."{166} Unlike the Carter Coal doctrine, which focused on excessive delegation of legislative power to private groups,{167} the modern separation of powers cases often examine the extent to which the President's powers have been impermissibly diminished by congressional action. One way to read these cases, perhaps the most persuasive way, is to view them as concerned with the balance of power among the branches. Under this interpretation, the Supreme Court is primarily concerned with congressional actions that aggrandize its own power at the President's expense. Actions that weaken the President without transferring authority directly to Congress are less likely to be held unconstitutional. This view provides a simple way of reconciling Commodity Futures Trading Commission v. Schor,{168} Mistretta v. United States,{169} and Morrison,{170} with the harsh language in other separation of powers cases.{171}
On the other hand, if one takes the strong language in cases such as Morrison at face value, then clearly an FGC headed by private directors may not exercise any public power. Although Morrison did not concern a delegation of power to a private group, Morrison asserts that there are core presidential powers with which Congress may not "interfere impermissibly," including the power to ensure the "faithful execution" of the laws.{172} Today, this restriction seems almost insubstantial for two reasons. First, the set of core presidential powers remains indeterminate--Morrison itself found that the President's powers were permissibly undermined by the independence of the special prosecutor. Second, the distinction between public and private functions is very vague. If either doctrine were made clearer, one side effect might be to reduce the sphere of action for FGCs.
Assuming that the Carter Coal doctrine is still valid, nonetheless, it seems very unlikely that any existing FGC would be declared unconstitutional under it. Although a government corporation competes[ *577] with private firms, it cannot regulate its competitors; thus, the central evil identified in Carter Coal is lacking. Competition alone, even competition by an FGC powerful enough to set the market price, is not a constitutional violation.{173} Nor do the exclusive lending powers enjoyed by certain GSEs rise to the level of control over others struck down in Carter Coal, for it is the legislature that decides who may, and who may not, have those powers, not the delegates themselves. Modern FGCs do not legislate and do not ordinarily issue regulations binding anyone but themselves and their employees. Nor do most modern FGCs exercise powers traditionally reserved to the state.
FGCs are most commonly created to operate a self-sustaining bank, insurance, or other commercial activity.{174} Ordinarily, the federal government is involved in the activity either because the goods or services are deemed of national importance but are not adequately provided by the private sector or because the commercial opportunity is a by-product of some other federal activity. In either case, an FGC is usually created with the hope that it will be more efficient than a traditional government department.
Although efficiency is a core justification for the existence of FGCs, in practice, FGCs are subject to a very limited degree of market discipline from bondholders, competitors, and shareholders. The absence of market discipline suggests that FGCs have little incentive to be efficient. As a result, FGCs are probably not as efficient as proponents hoped. Of course, this does not mean that FGCs are inevitably inefficient or that they could not become efficient if confronted with competitors.
The efficiency claims that have been asserted to justify FGCs are sufficiently broad to cover almost any contingency. At one time or another proponents have claimed FGCs are appropriate for both commercial and noncommercial purposes, as the most efficient form of nationalization, and as preparation for eventual privatization.
Congress often turns to an FGC when the mission, often viewed as necessary to fill a gap in the private sector, is basically commercial.[ *578] The theory is that a corporation is more efficient than a traditional federal bureaucracy.{175} President Harry S. Truman summed up the received wisdom-- still current today--when he stated, "Experience indicates that the corporate form of organization is peculiarly adapted to the administration of governmental programs which are (1) predominantly of a commercial character; (2) are at least potentially self-sustaining; and (3) involve a large number of business- type transactions with the public."{176}
The market failure justification was particularly applicable to the FGCs designed to create secondary financial markets during a period in which intermediation in particular consumer credit markets remained highly regional. When Fannie Mae was established in 1938 it was the only truly national purchaser of home mortgages.{177} Its national status not only protected it from regional fluctuations in the housing market, but over time it has also generated economies of scale.{178} More recently, the General Accounting Office has suggested that the secondary capital market for multifamily housing loans has failed to mature due to potential lenders' difficulties in obtaining information about loan performance and other costs associated with these complex loans.{179}
In general, the private sector produces goods and services more efficiently than a traditional government department,{180} although[ *579] there are exceptions to the rule.{181} Unfortunately, whether a publicly owned corporation is more or less efficient at adding value than a private firm is difficult to measure. Return on equity is perhaps the simplest crude measure, but its value is limited. Just because an FGC produces a high return does not mean that it is efficient. A fair comparison with the private sector must account for whether the FGC operates in a competitive market and whether it has comparable access to capital.{182}
On the other hand, even if FGCs have a lower return on equity than comparable private firms, they should not necessarily be written off as failures. The FGC may have been created to provide other social outputs, which are external to the FGC, or inherently hard to measure.{183} In some cases, federal ownership may be a more efficient means than regulation to achieve a social goal that interferes with profit maximization.{184} If, however, the social outputs are internal to the FGC, e.g., higher wages or better working conditions than in comparable private firms, then an ordinary private corporation might be preferable.{185}
The existing empirical evidence provides weak support, at most, for the hypothesis that government corporations are less efficient than private corporations.{186} Strong evidence suggests, however, that at least some profit-oriented FGCs, such as Fannie Mae, have a far higher return on equity than do most large private firms.{187} The increasing[ *580] number of FGCs with an implicit federal guarantee, and the growth in the size of their liabilities, raise micro- and macroeconomic concerns. The greatest microeconomic concerns are self-dealing,{188} and management or shareholder enjoyment of a publicly created rent, free of charge.{189} The greatest macroeconomic concern is that the FGCs may fail, leaving the government with no real alternative but to deliver on the implicit guarantee. Delivering is likely to be expensive; refusing to do so is likely to cause severe credit shortages in the relevant markets and to cause a great decline in confidence in the other FGCs in the credit markets.{190}
Today, most FGCs are involved in commercial, if not necessarily competitive, activities. Even if the entity's task is not commercial, structuring it as a corporation arguably allows it to avoid the inefficiencies believed characteristic of the federal bureaucracy. Thus, for example, President Franklin Delano Roosevelt, proposing the creation of the TVA, spoke of "a corporation clothed with the power of government but possessed of the flexibility and initiative of a private enterprise."{191} Nonprofit FGCs include the Smithsonian,{192} the U.S. Institute for Peace,{193} and the National Park Foundation.{194}
Retaining the corporate form simplifies the nationalization of a private corporation because only the ownership is changed. Moreover, when assets (such as a railroad) formerly operated by a private corporation pass into the hands or the effective control of the United States, they are often managed by a new or existing corporation, whether or not the transaction is labeled nationalization. The takeover of "essential"[ *581] assets from corporations threatening to cease providing an uneconomical service prompted the creation of FGCs, including Conrail{195} and Amtrak{196} --perhaps the best-known example.
The federal government currently is not reaping significant profits from its relationship with the FGCs as a group, although it does collect federal taxes from most of those in which it owns no equity. Nonetheless, federal ownership of valuable assets, managed for profit, could be used either to lower taxes or to produce other benefits for the citizenry. Arguably, some degree of public ownership, particularly if combined with private management with suitable incentives, might be a more efficient means of funding some government activities than taxation.
The federal government has never started or taken over a commercial venture solely or primarily to produce revenue.{197} The profit motive alone is probably an insufficient constitutional justification for a government-owned and government-run commercial enterprise{198} because the applicable federal powers are only incidental to other Article I powers.{199} The Commerce Clause, however, might justify the creation of a corporation to provide additional competition in a market that Congress reasonably found and declared to be insufficiently competitive. Or, a profit-making high-technology corporation might be justified on national security grounds, on the theory that a domestic corporation must retain control over the development and exploitation of a sensitive technology.
In modern practice, however, the federal government has tended only to take over unprofitable activities, particularly railroads, from owners who, for bankruptcy or other reasons, did not intend to maintain them and who could not find another buyer. If the activities become profitable, they are usually sold off.{200} Because the government ends up owning only unprofitable activities that it cannot sell, this policy has been dubbed "lemon socialism."{201}
[*582]The corporate form is a natural method of organizing enterprises that are considered candidates for eventual privatization. An enterprise that has corporate status can more easily become profit oriented, if only because employee pay can be linked to performance. In addition, it is easier to keep business-style accounts which reflect costs such as office rent, capital depreciation, pensions, and even goodwill, that would be difficult to assess in a single agency. Such accounts give potential buyers a clearer idea of the value of the enterprise than is available to assess an agency. The transfer of a traditional agency would have to be organized as a sale of physical assets and certain contracts. But a going concern consists of more than its physical assets and its rights and obligations. For example, because the government does not have mechanisms for transferring employees who have civil service status, i.e., who work for an agency, employees may seek transfers if their departments are sold. Excluding an FGC's employees from the civil service system allows transfer of the corporation's assetspecific human capital as well.{202}
In theory, "virtually any [government] function is, at least potentially, amenable to 'privatization."'{203} Indeed, during the Reagan administration, the Office of Personnel Management proposed spinning off a large number of government entities as independent, for- profit companies with the current government employees as shareholders.{204} Congress and the agencies currently are considering several privatization proposals.{205}
The bond market is a potential source of discipline for FGCs that are regular borrowers because these FGCs have a long-term interest in keeping the cost of credit as low as possible. However, because[ *583] bond holders have little incentive to carefully monitor GSEs whose debt benefits from a federal guarantee, the bond market poorly constrains FGC activities. There is no doubt that the market's perception that GSE debt is implicitly guaranteed by the United States government, despite disclaimers to the contrary, means that GSE debt trades at low rates of interest regardless of the actual soundness of their balance sheets. FICO, for example, continued to sell its obligations at near-Treasury rates despite a negative net worth.{206}
Indeed, proponents of increased safety and soundness regulation for GSEs have argued that the existence of the implicit guarantee may have a perverse effect: as a GSE approaches insolvency, management's access to credit will remain unimpaired; in turn, this access to relatively cheap credit, arguably, provides an incentive for management to engage in excessive risk taking in increasingly desperate attempts to recoup their losses. In addition, whether an FGC is eligible to become a debtor under the Bankruptcy Code is unclear.{207}
Few FGCs operate in competitive markets; indeed, many were created because the market was not able or willing to take on the task entrusted to them. The Federal Prison Industries{208} literally has a captive source of labor{209} and sells primarily to the government. The Tennessee Valley Authority sells power on a competitive market but enjoys at least the same anticompetitive advantages as any utility with a monopoly access to a source of hydropower.
A few FGCs do operate in competitive markets. Amtrak competes with other forms of transport. Connie Lee competes directly with private insurers.{210} Several of the GSEs have private competitors or sell financial products that are close substitutes for securities sold by the Treasury, other GSEs, or private institutions. In addition, the public purposes and financial strategies of Fannie Mae and Freddie Mac have converged, effectively making them competitors,{211} or duopolists.
[*584] Private competitors of the few FGCs that operate in competitive markets sometimes accuse the FGCs of having unfair advantages.{212} FGCs are ordinarily immune from state tax;{213} and sometimes they have unique abilities to operate on national scale. And, of course, the large financial GSEs are able to borrow at lower rates than available to competing private financial institutions. It even has been suggested that Fannie Mae's entry into the mortgage-backed security market contributed to the savings and loans crisis because investors preferred its mortgage-backed securities to certificates of deposit (CD) issued by S&Ls. An S&L's CD is ultimately backed by its assets, primarily its portfolio of mortgages, making the certificate of deposit, arguably, a close substitute for a Fannie Mae mortgage-backed security. In addition, the mortgage-backed security enjoyed an implicit government guarantee at no charge, while an S&L was required to purchase its guarantee, further lowering the rate of return it was able to offer. Finally, S&Ls had much stiffer capital requirements than Fannie Mae, increasing their relative costs.{214} In defense of the GSEs, however, it should be noted that their charters usually restrict them to a narrow line of business, depriving them of the ability to diversify.
The aftermath of the recent scandal concerning price fixing in the government bond market provides a striking example of a GSE's market power.{215} Freddie Mac's contracts with its original dealers are terminable at will. When it learned that more than a third of its original dealers had provided misleading information designed to secure excessive allocations of Freddie Mac securities, Freddie Mac informed the responsible dealers that it believed their activities constituted breach of contract. Subsequently, the dealers had a choice between paying a fine equal to twenty percent of their commissions earned in 1990 and 1991, or having their contracts terminated. Many dealers chose to pay fines totalling over $1 million.{216}
[*585]The generally unsettled nature of the law relating to FGCs is reflected in the remarkably small number of clear rules regulating their internal governance and their relations with their shareholders.
Any privately owned or mixed-ownership for-profit FGC that issues shares faces two theoretical types of discipline from shareholders. First, shareholders, including the government if it owns shares, may vote their shares to replace the management, or they may sell their shares to a predator seeking to take over the company. Second, if the FGC contemplates returning to the market for additional capital it will want to act in a manner that tends to increase its share price.
How much control shareholders actually have over the ordinary corporations in which they hold shares has been the subject of a great deal of legal and economic analysis, particularly in the literature deriving from the property rights theory of the firm.{217} Corporate managements are greatly concerned with corporate control, or at least with the acquisition and retention of it. A normative desire that managers remain accountable to owners, i.e. shareholders, often combines with the positive assertions that this is what shareholders desire and that this is in their interest. Shareholders are presumed to be most interested in the maximization of the value of their investment, albeit with varying time-preferences for money. Protecting one's corporate control, it is argued, supplies salutary market discipline to owners and managers alike by forcing directors to maximize value of shares or face hostile takeover (and loss of employment for managers) by predators better able to put assets to remunerative use.{218}
[*586] The federal government is not an ordinary shareholder.{219} Its interests are more likely to be political than profit maximizing. Majority control by the federal government provides takeover insurance that can only be dented by privatization. Any federal corporation in which the federal government has a majority stake thus gains unusual insulation from the chief source of discipline on which the property rights theory of the firm relies.
Some FGCs are wholly or partly owned by persons whom the FGCs were designed to benefit. Vesting ownership in the targeted beneficiaries has the advantage of greatly increasing the chances that any profits generated by the FGCs' activities will go to those groups. Unfortunately, vesting ownership in the target group also can create significant conflicts of interest and moral hazard, and certainly gives the owners a special interest in retaining control. The insolvency of the Farm Credit System, the only FGC to become insolvent since World War II, has been attributed to lax loan standards due to cooperative ownership by its borrowers.{220}
The peculiar structure of the boards of privately owned FGCs also may serve to insulate them from shareholder discipline. For example, for many years Sallie Mae's twenty- one-member board of directors was divided into three groups, with seven directors appointed by the President, seven elected by educational institutions holding voting stock, and seven by financial institutions holding voting stock.{221} In this scheme, no private individual or individual institution could[ *587] control Sallie Mae; a takeover would have required coordinated action among, say, seven financial institutions and four universities. Sallie Mae's longstanding (but now greatly lessened) insulation from market discipline may explain why, until recently, Sallie Mae's management pursued surprisingly risk-averse policies.{222} The need to take risks in order to increase earnings is greatly reduced if a firm faces no danger of a hostile takeover.
The privately elected directors of a private or mixed-ownership FGC are presumably subject to the same duties as the directors of an ordinary corporation. Precisely what law governs these duties is, however, unclear. There is no federal corporate code, essentially no relevant federal common law outside the context of the Securities Acts, and most FGCs are exempt from registration requirements.{223} If a court were asked to find an applicable law, presumably it would have to fashion federal common law.{224}
Very little law governs the duties of presidentially appointed directors in a mixed- ownership or private federal corporation. At the turn of the century, the Supreme Court considered the status of Union Pacific, a private railroad which had a minority of directors appointed by the President. The Court held that, although the directors appointed by the President were required to make reports to the Secretary of the Interior in addition to their ordinary duties, "[t]hey had the same powers as the other directors and no more" because "Congress did not vest in the government directors any peculiar powers."{225} The Court emphasized that the presence of the directors appointed by the President did not alter either the internal governance of the corporation or its relations with others.{226}
[*588] The Union Pacific case could be read to suggest that so-called public directors do not have special duties to the public at large. This simply cannot be right. Requiring presidentially appointed directors would be pointless, especially in FGCs in which the government owns no shares, unless the government's directors represented the national interest in some way. What remains unclear is to what extent these public directors have special responsibilities and to what extent their duties are the same as ordinary directors whose fiduciary duties include the traditional duties of diligence and loyalty to the corporation and its shareholders. More troubling, no body of law exists to guide the directors themselves in reconciling the two sets of duties should they conflict.
The issue has been further confused by Justice Scalia's recent opinion in Lebron. He distinguishes between so- called nongovernmental, albeit government- controlled, corporations such as Conrail, in which the "responsibilities of the federal directors are not different from those of the other directors-- to operate [the corporation] at a profit for the benefit of its shareholders,"{227} from governmental, government-controlled, corporations such as Amtrak, in which the public directors have other duties besides profit, as set forth in the corporation's charter.{228} Justice Scalia's distinction is unfortunate not only because it relies on a case that wrongly determined whether Conrail was part of the government,{229} but also because it mistakenly implies that private directors might not share in the duty to give effect to the public purpose specified in an FGC's charter.
Although the duties owed by executive and nonexecutive directors sometimes differ, the fiduciary duties to which they are subject are basically the same. A government director, whose role resembles that of a nonexecutive director in an ordinary corporation, may feel--and should feel--a duty to represent the public interest.{230} It is not obvious, however, how government directors are supposed to act on this feeling. Further, even if government directors are expected to use their votes and influence to promote the public interest, their influence may not be equal to the task when they are in the minority.{231} [ *589] (Suppose, for example, that the corporation is considering trade-offs between profit maximization and nonpecuniary social interests such as environmental quality or compliance with current government policy.) On the other hand, if the presidentially appointed directors primarily function as the eyes, ears, and mouthpieces of the President and the federal bureaucracy, then numbers are less important, although there may be a conflict with duties of confidentiality owed to the corporation. The conflicts are likely to be particularly acute if the director is privy to corporate secrets concerning litigious or contractual relationships with the government. Some evidence suggests that the private directors of more than one FGC, not blind to the potentially dual loyalties of the directors appointed by the President, have cut them out of key decisions.{232}
In addition to the duties resulting from their public status, the government directors of a corporation may share the personal liability that emanates from acceptance of an ordinary directorship. Directors are often insured against their personal liability for negligence. Government officials do not always enjoy similar protection; some types of liability for official wrongs may be uninsurable as against public policy.{233}
Directors appointed by the President may sometimes find themselves in anomalous positions. For example, the Secretary of Housing and Urban Development (HUD) served for about a year as an ex officio member of Freddie Mac's board of directors. HUD was also Freddie Mac's regulator. As a result, HUD issued no regulations affecting Freddie Mac, fearing that regulations would be inappropriate while the Secretary served in this dual capacity.{234}
[*590]Voting the government's shares in a corporation is either an act of appointment (when electing directors), or an act that can affect the rights, duties, and responsibilities of a person outside the legislative branch (when voting on any other type of shareholder's resolution). In the case of the latter, it is either an executive act or one that Congress can only exercise in conformity with the bicameralism and presentment requirement of the Constitution.{235}
No statute or case determines how the government's shares should be voted on shareholder's resolutions.{236} Immigration & Naturalization Services v. Chadha suggests that Congress could pass legislation, duly presented to the President, that would mandate that the directors appointed by the President submit a particular resolution or that the nation's shares be voted for or against a particular shareholder initiative.{237} In the absence of legislation, the President, or his delegate, is presumably the nation's proxy- holder. The alternative is to share the nation's proxies among the publicly appointed directors.
Shareholders in an FGC have few obvious rights.{238} If a corporation is private enough to avoid being subjected to constitutional prohibitions,{239} but still a creature of federal law, then the only apparent source for shareholders rights, beyond the few provisions contained in the corporation's charter, is federal common law. Federal charters ordinarily set out the voting rights that attach to a share of stock. Such provisions probably suffice to create a private right of action if the right to vote such a share is somehow impaired. Other traditional corporate claims, such as waste and acting ultra vires, either do not exist or, if they do exist, must arise from the federal common law of corporations or from federal common law regulating the[ *591] (implicit) contract formed when an investor purchases a share. If the courts have the authority to make such federal common law, they have yet to do so. Thus, any discussion of shareholders' rights in FGCs is fundamentally speculative. Apparently, no shareholder action, derivative or otherwise, has succeeded against any federally chartered corporation in this century.{240} Until this year, no federal corporation has been the subject of a takeover or even a proxy fight. One reason for the lack of reported cases may be that private shareholders in a private or mixed- ownership corporation chartered by Congress face a daunting task in making a claim against the corporation or its directors unless Congress has subjected the corporation to the laws of the District of Columbia. Or, it may be that shareholders in the for-profit FGCs that issue stock lack the motive to bring a claim because they make sufficiently high returns on their investment.
The greater an FGC's entitlement to sovereign immunity, the more it enjoys an advantage over private competitors. If an FGC is private, then it has no right to sovereign immunity unless Congress, by statute, chooses to grant that immunity. If an FGC is public, whether it has sovereign immunity is a question of statutory construction involving both the FGC's charter and the various limited statutory waivers of the United States's immunity. Courts have found two types of immunity that apply to FGCs: sovereign immunity from tort claims and protection from estoppel claims based on employee conduct. The interplay between these two areas has not only given many FGCs an advantage over private competitors, but it has given some FGCs greater immunity from suit than is available to ordinary federal agencies.
As a general rule, when a federal incorporated (or even unincorporated) entity is "launched into the commercial world"{241} the government is assumed to have "accepted the ordinary incidents of suits in such business,"{242} unless there are statutory grounds for a different[ *592] conclusion. Torts are one area where courts have found grounds for an exception.
The Federal Tort Claims Act (FTCA){243} provides a limited waiver of the sovereign immunity of the United States for certain torts of federal agency employees. The FTCA defines federal agencies as including "the executive departments, independent establishments of the United States, and corporations [other than contractors] primarily acting as instrumentalities or agencies of the United States."{244} If the FTCA applies, it ordinarily provides the exclusive monetary remedy for the tort--even if the federal agency employing the tortfeasor has a sue-and-be-sued clause in its charter.{245}
Courts seeking to determine whether the FTCA applies usually examine five factors: (1) the federal government's ownership interest in the entity; (2) the federal government's control over the entity's activities; (3) the entity's structure; (4) government involvement in the entity's finances; and (5) the entity's function or mission.{246} Thus, the Seventh Circuit recently held that the FTCA did not apply to Freddie Mac because it was not one of the "corporations primarily acting as instrumentalities or agencies of the United States"{247} contemplated by that act.{248} The Seventh Circuit did not explain why Freddie Mac, which is a mixed-ownership GSE in which the government[ *593] holds no stock, was entitled to sovereign immunity at all,{249} and this seems to be the minority rule.{250}
The Merrill doctrine holds that estoppel generally cannot be applied, at least offensively, against the government.{251} Although originally based on principles of sovereign immunity, the doctrine also has been justified as deriving from separation of powers and public policy.{252}
The Merrill case concerned the Crop Insurance Corporation, a wholly owned FGC that the Supreme Court equated with "the Government."{253} The doctrine is routinely applied to actions against federal agencies.{254} The Seventh and D.C. Circuits have held that, because Freddie Mac has a public mission, it too should be entitled to Merrill doctrine protection.{255} Because of this protection, in the Seventh Circuit and D.C. Circuit at least, FGCs like Freddie Mac enjoy the best of both worlds. Like federal agencies, they have sovereign immunity and Merrill doctrine protection. Yet, unlike federal agencies[ *594] they are not subject to the waiver of sovereign immunity in the FTCA.
All FGCs that enjoy sovereign immunity receive greater protection from suit than is available to a private competitor. This advantage persists when the FTCA applies because the government waives less than the full extent of private liability. As a counterweight, however, those same FGCs may be subject to constitutional restrictions as federal actors. FGCs that enjoy sovereign immunity, Merrill protection, and are not subject to the FTCA, have greater immunity from suit than is available to either private competitors or agencies--and may not be federal actors subject to the Constitution.
Logically, sovereign immunity should go hand in hand with status as a state or federal actor. The same policies that determine whether constitutional restrictions apply to an entity should be used to determine whether an entity is entitled to the special protections reserved for the nation's agents. Although Congress could, by legislation, confer sovereign immunity on a private body, it makes as little sense for courts to create a class of entities that have sovereign immunity but are not federal actors as it would to create a class of agencies that are federal actors but are ineligible for any immunity. The anomalous position of FGCs like Freddie Mac, combined with the wording of the FTCA, has produced, in a minority of circuits, a peculiar result which does not deserve wider acceptance and may, in fact, warrant reversal. Unfortunately, this minority includes the D.C. Circuit, which is where the majority of such cases are likely to be heard.{256}
The Constitution provides that ordinary agencies are formally accountable to Congress in at least three ways. First, what Congress creates, Congress can destroy; that is, Congress can simply abolish an agency.{257} Similarly, Congress can restructure an agency or require it to act in some manner. Second, Congress has the power of the purse.{258} Third, all civil officers of the federal government are impeachable,{259} [ *595] which presumably includes the publicly appointed directors of an FGC. Congress's continuing oversight of agency behavior is a fourth, informal and erratic, source of accountability. If FGCs are public bodies, then they are subject to all of these congressional powers, although the power of the purse may have less influence over an FGC with an independent source of income.{260}
Perhaps by design, private and mixed-ownership FGCs are significantly less accountable to Congress than agencies. Because they have alternate sources of funding--debt, equity, or revenue from transactions--Congress's power of the purse is lessened.{261} In addition, because private directors of an FGC do not hold civil office under the Constitution, they are not impeachable. Nevertheless, Congress's leverage over FGCs contains both carrots--removing restrictions on an FGC's activities and providing direct funding--and sticks-- adding new restrictions, subjecting the FGC to regulation, and abolishing the FGC entirely.
Sometimes FGCs are created in an attempt to insulate an activity from the political process. Entrusting federal responsibilities, or even just federal money, to corporations subject to varying degrees of presidential and congressional control raises difficult questions of constitutional and administrative law, such as when the corporation's action should be characterized as federal action, and whether the corporation must observe First Amendment, due process, and other restrictions in its dealings with the public.{262}
Another fundamental question is whether any justification ever exists for keeping an activity that owes its inspiration and at least part of its funding to the government "out of politics." For many years there has been a consensus that certain areas of public life, notably the money supply, should be insulated from direct political control and entrusted to autonomous bodies such as the Federal Reserve Board. Privately owned FGCs are far more independent than the Federal Reserve Board. The attempt to keep an FGC "out of politics"[ *596] does not always succeed,{263} which is perhaps fortunate as "out of politics" also means beyond the reach of democratic accountability.
FGCs are used to subsidize certain sectors of the economy. Once the political decision has been made to give a particular group or activity a federal subsidy, an FGC has political advantages as the vehicle for delivery of the benefits. Because some FGC accounts are usually not included in the main part of the federal budget, the subsidy may not be as visible, tending to reduce the opposition from competing interest groups. Because an FGC can operate outside the ordinary bureaucracy, and often enjoys more freedom from congressional and executive control than an agency, Congress also insulates the subsidy program from future Presidents and, to a great degree, future Congresses as well.
A federal charter that creates a self-sustaining corporation provides the enacting Congress with an almost unique means of insulating a program that benefits a favored group from future Congresses.{264} Using an FGC to deliver a subsidy has the additional advantage of not requiring a direct federal expenditure, although it almost inevitably involves indirect costs to the Treasury and competing private interests.
Ordinarily a statute establishing a new program can, at most, set up an institution that will administer it and authorize funding for it. A separate funding bill is then required to appropriate the money. Funding bills typically appropriate money only for the coming year. Thus, the agency remains on a short leash, and the program's beneficiaries are dependent on future Congresses to approve the annual appropriations. By contrast, a self-sustaining program has two advantages.[ *597] First, its appropriations do not have to compete with other programs for funds. Second, Congress can entrench a program so that future Congresses must take strong affirmative action to kill it. Because the legislative process makes it far easier to block legislation than to secure its passage, an entrenched program requires only a blocking minority in one House rather than enacting majorities and presidential assent. The result is the rent-seeker's paradise: a one-time victory is locked in virtually forever. Subsidy programs may benefit from an additional degree of political camouflage if the general public comes to perceive the FGC as a private body. A suitably camouflaged, privately owned FGC has an enhanced capacity to capture rents without attracting political opposition because the public is not as aware that the rents are going to the private shareholders.{265}
The ultimate entrenchment device creates a property right that the government must buy back in order to cancel the program. Dartmouth College v. Woodward established that a state's grant of a corporate charter can be a contract vesting rights in the corporation.{266} The effects of a federal charter are not any different except that, unlike the State of New Hampshire in the Dartmouth College case, the federal government may impair the obligation of contracts,{267} including corporate charters. In theory then, congressional amendments to a private or mixed-ownership FGC's charter that lessen the value of a charter could be characterized as a taking of private shareholders' property compensable under the Fifth Amendment. That is, if a vested right is diminished, shareholders may have a right to claim compensation.{268} To avoid such claims, Congress has reserved the power to amend or repeal at will in many federal corporate charters.{269}
[*598] An FGC in which the government owns no stock also has a potential source of leverage over Congress that agencies lack. Agencies, and corporations in which the federal government owns stock, are not allowed to expend their funds to lobby Congress or make campaign contributions. Private FGCs, even those in which the federal government appoints directors, are not so constrained.{270} Thus, creating a private corporation with a source of funding not only creates a program that can be protected from future Congresses, it also creates one with special means of advancing its own interests. For example, when the Reagan administration indicated that it was considering making Fannie Mae fully independent,{271} Fannie Mae established a political action committee to oppose the Reagan administration initiatives.{272} It also took out more than $100,000 worth of newspaper advertisements to "raise housing as an issue in this election year." Fannie Mae's chairman reportedly told congressmen that if they severed Fannie Mae's links to the government, he would make sure that they had to "run for reelection on a platform that you just made it more expensive to buy a home."{273} Contributions to federal candidates must be disclosed and are relatively easy to monitor. A more insidious problem is the ability of some FGCs to make contributions to private advocacy groups which then lobby Congress on the FGCs' behalf.{274}
Fannie Mae, the oldest GSE, is a privately owned FGC that concentrates on the secondary mortgage market. The President appoints just over a quarter of its directors.{275} Fannie Mae earned about $1.6 billion in 1994, giving it an after-tax return on equity of 24%, which[ *599] compares well to the average return on equity of 14.9% for all FDIC-insured commercial banks and 16.4% for the Standard & Poor's (S&P) 500 companies.{276} Fannie Mae's profitability rests heavily on its ability to borrow more cheaply than any private competitor.{277} Estimates vary, but the consensus is that Fannie Mae saves somewhere between 30-75 basis points in borrowing costs compared to an AA-rated private borrower.{278} About half of this pricing advantage is thought to come from the implicit federal guarantee.{279} Fannie Mae's sheer size is a factor as well: Size creates economies of scale. Moreover, size, when coupled with an ever-increasing number of mortgage-backed securities (MBSs) and other outstanding obligations, enhances the secondary market for those obligations. In turn, a strong secondary market provides an incentive for acquiring more obligations.{280}
The implicit government guarantee can be viewed as a subsidy to Fannie Mae. The only direct costs to the Treasury, however, are the contingent liability if Fannie Mae defaults and the government decides to fulfill the market's expectation of an implicit guarantee. In addition, Treasury borrowing costs may increase due to the perception[ *600] that GSE debt is a relatively good substitute (substitution cost).{281} No study has measured the effect of GSE debt on the market for Treasury bonds, but estimates based on more general empirical work suggest an increase of no more than 2.5 basis points in the Treasury's short-term cost of borrowing for every $100 billion of GSE debt issued, and negligible long-term effects.{282}
Measuring how much of the federal "subsidy" to Fannie Mae is passed on to mortgage borrowers, who are presumably the intended beneficiaries of the subsidy, is a difficult exercise, but studies suggest that the existence of Fannie Mae and Freddie Mac in the secondary market ultimately lowers mortgage rates by up to 50 basis points.{283} Further evidence that Fannie Mae passes on at least a significant fraction of its lower costs to primary lenders comes from studies demonstrating that Fannie Mae's entry into new product markets in the securities field has lowered interest rates in those markets.{284}
The difference between the estimate of Fannie Mae's borrowing advantage (30- 75 basis points) and the estimate of the benefit to consumers (25-50 basis points) suggests that while borrowers are getting the lion's share of the savings, either Fannie Mae and/or primary mortgage lenders are benefiting from a rent of up to 50 basis points (one-half percent) on mortgage loans. This rent originates, at least in part, from the investment community's perception that Fannie Mae debt has an implicit federal guarantee. Given that Fannie Mae is expected to issue more than $121 billion in mortgage backed securities in 1996,{285} even a quarter of a percent spread adds up to $300 million. In fact, the Treasury has estimated that the various federal advantages granted to Fannie Mae and Freddie Mac together are worth some $2 to $4 billion per year.{286}
Borrowing at near-Treasury rates, and in some cases enjoying important efficiencies of scale made possible by their monopoly or near-monopoly position in particular credit markets, GSEs can, if they choose, pass on their savings to the groups to which they lend. Privately controlled GSEs, however, have no obligation to do so. A privately[ *601] owned GSE can keep much of the profit from its intermediation for its shareholders and investors.
The evidence that one GSE, Sallie Mae, did not pass on any of its gains to its ostensible clients--student borrowers{287} --was so damning that the Clinton administration decided to cut out the middleman and have the government begin to make student loans directly.{288} In the case of Fannie Mae, which is the largest GSE, a significant fraction of the interest rate differential goes to its private shareholders, who receive annual dividends and who benefit from retained earnings as their stock appreciates. These gains are an amalgam of a rent and a return on the shareholders' investment, but it is difficult to say which element predominates. The efficient markets hypothesis suggests that shareholders should bid up the price of Fannie Mae stock to a level at which it provides no better risk/return combination than other shares.{289} Similarly, although bond holders receive a higher return than Treasury bill holders, they bear the risk, however minimal, that the GSE will fold and the government will not mount a rescue. The small premium over T-Bills presumably reflects the market's estimate of the value of this risk. Thus, although Fannie Mae benefits from a rent, if the financial markets are efficient then neither current lenders nor investors in Fannie Mae's equity in the secondary market necessarily benefit from it.
Whether purchasers of the original issue of a GSE's equity secure a rent by purchasing shares may depend on the conditions under which the equity is issued and, in some cases, whether investors have the foresight or good fortune to hold their shares long enough. If the shares are issued on the open market, investors should bid up the shares to a point at which there is no rent to be had. If shares are issued to a limited class of persons, however, the reduced market may create a potential rent.{290}
[*602] Several public choice theorists have suggested that rents derived from government benefits will be dissipated totally by socially wasteful expenditures to capture them.{291} Once a GSE has secured the right to a rent it does not need to go back to Congress; its relative insulation from congressional control and its lack of effective competitors render it relatively immune from the competition that could dissipate its rent.{292} Investors, however, face the misfortune of having to compete with each other and, at least in the secondary market, may well be unable to enjoy any of the rent.
Some of the rent may go to the GSE's employees, although this fact alone may not differentiate it from an ordinary managerial firm.{293} Fannie Mae recently paid its retiring chairman a $20 million lump-sum pension payment, in addition to his $7 million annual salary--a payment it justified by saying that he had turned the company around from losing $1 million per day to earning $1 billion a year.{294} Fannie Mae's special stock plan for presidentially appointed directors, designed to "reinforce the mutuality of interest between such directors and the company's stockholders," may give those directors an incentive to prefer the stockholders' interests over the public's.{295}
In the case of Sallie Mae, which Congress established to make a secondary market for student loans at a time when private lenders did not want to invest in them,{296} few of the benefits of the government[ *603] guarantee reached the students who were the purported beneficiaries.{297} In addition to benefiting from an implicit federal guarantee, Sallie Mae deals primarily in loans that are insured by the government, which means it faces little if any credit risk. Indeed, the government pays a substantial, explicit subsidy to the lenders from which Sallie Mae purchases loans.{298}
FGCs make a politically attractive vehicle for delivering subsidies because the absence of an actual appropriation makes them appear costless. If the long- term substitution cost to the Treasury is indeed negligible as some studies suggest,{299} and the subsidies do indeed reach their intended beneficiaries, FGCs impose no direct costs on the public.
Regardless of the extent of their direct costs, however, FGCs clearly create two types of opportunity cost and a contingent risk for Congress and the taxpayer. First, because an FGC must ordinarily borrow at a rate slightly higher than the Treasury, the public that the FGC is designed to serve pays a premium for funds compared to what it would pay if the debt were guaranteed by the full faith and credit of the United States. Second, to the extent that private investors provide the equity for a GSE and receive dividends as a return, the taxpayer (or the would-be beneficiary of the program) loses sums that might have been available had the government provided the equity capital.{300} The contingent risk arises from the fact that the government might rescue a GSE that fails.
The separate personality of an FGC not owned and controlled by the federal government almost certainly means that the federal government has no formal, legal obligation to make good the debts of an[ *604] insolvent FGC. Nevertheless one GSE has encountered difficulties since World War II, and the government has responded by authorizing up to $4 billion to rescue it.{301} Given the size of most GSEs, the political pressure to rescue a failed GSE again almost certainly would be overwhelming. The practical consequence of this political reality is to weaken Congress's power of the purse by holding the nation potentially liable for unauthorized debts--debts that may have been incurred to increase private profits rather than to further a public purpose set by Congress.
GSEs carry less capital than comparable private financial institutions.{302} Either GSEs are not subject to capital requirements,{303} or the current rules are antiquated; they fail to provide for GSE expansion into new types of business, such as guarantees. As a result, GSEs tend to hold lower capital levels than do regulated financial entities. The lower capital ratios allow the GSEs to benefit from increased leverage on the funds they control, which may either increase their ability to fulfill their public purposes, contribute to the GSEs' profits, or both.{304}
The financial risk from all but a few GSEs appears, however, to be negligible, and even the GSEs most at risk are not in great danger.{305} The S&L crisis was caused in large part by the perverse incentives produced by federal deposit insurance. The managements of troubled S&Ls knew that the government insured a large majority of their depositors' money at a cost that did not account for the riskiness of an individual S&L's behavior. A failing S&L thus had an incentive to take desperate, risky measures, and its depositors did not have an incentive to prevent it. When property prices fell and took the S&L's assets with them, these S&Ls, given their incentives, reacted rationally, plunging deeper into debt and ultimately incurring losses that exceeded the sums available to the FSLIC.
In theory, the essentially limitless access to cheap borrowing could create an incentive for a GSE's management to borrow recklessly[ *605] once it reaches a point where it has little or no capital left to lose.{306} Currently, however, only one of the GSEs is arguably low on capital, and this moral hazard seems a remote specter.{307} Unlike the S&Ls, which were numerous and dispersed, and therefore difficult to monitor, only a handful of GSEs exist, making them relatively easy to monitor. Indeed, the Treasury argues that GSEs pose a greater threat than did S&Ls precisely because there are so few of them--the five largest GSEs alone have obligations that exceed the total deposits of the more than 2000 insured S&Ls. Mismanagement by a small group of private persons could, the Treasury argues, expose the government to (moral) obligations as large as the S&L bailout.{308} Implicit in the Treasury concern is a legitimate fear that because there is no supervisory power over most GSEs' safety and soundness, under the current regime a GSE could become insolvent, or at least sufficiently capital-poor to be subject to moral hazards, long before Congress could organize a response.
Congress's previous attempt to control FGCs was, at most, a limited success. At the end of World War II, the United States had sixty-three wholly owned and thirty-eight partly owned FGCs as well as nineteen noncorporate credit agencies and hundreds of military-run enterprises.{309} In response to this proliferation of FGCs, inconsistent accounting standards, and a general lack of federal control and accountability,{310} Congress enacted the Government Corporation Control Act (GCCA).{311} The GCCA required the liquidation of FGCs chartered in the District of Columbia and not reincorporated by, or pursuant to, an act of Congress within the next two and a half years.{312} It subjected all existing FGCs to a new regime of audit and budgetary control.
From its inception, the GCCA distinguished between wholly owned government corporations and mixed-ownership corporations. Wholly owned corporations were subject to much tighter control. They submitted an annual "business-type budget" to the President to[ *606] modify as he saw fit and then transfer to Congress,{313} and were subject to periodic audits.{314} The GCCA gave the Treasury the power to set the terms and price of any debt issued by most FGCs.{315} (In practice, however, the Treasury does not exercise this power except to insure that GSE debt is not issued on dates that would conflict with Treasury issues.) Mixed-ownership government corporations were free to make their own budgets, although the GCCA contemplated presidential recommendations that mixed- ownership corporations return government capital to the Treasury.{316}
The orderly approach of the GCCA reflected the administrative theory of the day, which held that the corporate form should be restricted to predominantly commercial government programs.{317} Chaos quickly returned, however, as Congress exempted the majority of FGCs created after 1945 from all or part of the GCCA.{318} And although the GCCA also prohibits the creation or acquisition of new FGCs by the executive branch without specific legal authorization,{319} at times this rule has been ignored.{320}
Although the GCCA brought temporary order to the oversight of the FGCs within its purview, it did little to resolve the basic issue of where FGCs fit into the legal order. Labelling some FGCs as "private"[ *607] and others as "mixed- ownership" may provide a congressional finding of fact or declaration of policy as to how certain FGCs are to be treated in the courts, but the categories themselves bear little relation to the FGC's relations with the government. There is no reason why, for example, a "mixed-ownership" FGC in which the government owns no shares should be treated differently than a private FGC with some directors appointed by the President.
The result has been confusion: sometimes FGCs are held to be public,{321} and sometimes they are held to be private or partially private.{322} Indicia of publicness include whether the FGC's staff is in the civil service, a