Mark Calabria at the Cato Institute takes a hard look at what happens when government gets into the banking business.

Despite the substantial and continuing repayment of TARP bank assistance, the U.S. government maintains an equity interest in 371 banks.  A small number of those banks actually have the government as a majority owner.  For instance the former GM financing arm, now known as Ally Bank, has a government interest of 74 percent.  Sadly the United States is not alone in this regard.  The Royal Bank of Scotland (RBS) is still majority owned by the UK government.  And of course the U.S. government owns Fannie Mae and Freddie Mac, even if the Office of Management and Budget denies that reality.

Should we be concerned about all this government ownership of financial institutions?  The small body of empirical literature on the topic suggests a strong “yes.”  Probably the most comprehensive research was published in the Journal of Finance by La Porta, Lopez-de-Silanes, and Shleifer.  The authors find “that higher government ownership...

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