Why the White House Went to Wall Street to Revive the U.S. Chips Industry
Talent from Goldman Sachs, KKR and Blackstone will help determine how $39 billion in semiconductor chip subsidies are allocated
By Yuka Hayashi Aug. 15, 2023
WASHINGTON—To revive the U.S. chip industry, the Biden administration has launched one of the most significant acts of government intervention since World War II—and it is relying on masters of the free market to deliver the goods.
Since the passage of the bipartisan Chips and Science Act last summer, the Commerce Department has been quietly building a small team of elite Wall Street financiers to help allocate $39 billion in taxpayer-funded manufacturing subsidies and other incentives to hundreds of companies.
The team members call it a startup within the government. The roughly three dozen professionals range in age from 23 to 64, and nearly half are women. They operate out of the cavernous Commerce Department building near the White House, in cramped rooms with steel furniture and tall partitions between cubicles.
The Biden administration has frequently tangled with American corporations over its economic policies. But when it comes to bringing advanced semiconductor manufacturing back to the U.S., administration officials say they need the skills of investment bankers, private-equity investors and management consultants.
“Markets don’t always work perfectly,” said Todd Fisher, a former executive at private-equity firm KKR who leads the investment team of the Chips Program Office.
“We are trying to correct a dislocation,” Fisher said, because “other countries put their thumb on the scale.”
Presidents have long gone to Wall Street to fill top jobs, with Federal Reserve chairman Jay Powell and former Treasury Secretary Steven Mnuchin among the recent examples. But the recruitment of an entire team of private-sector professionals is unprecedented, economists say, and reflects the central role chips play in modern economies—powering everything from household electronics to advanced weapons systems.
The intensifying technology and military rivalry with China was the crucial factor in last year’s passage of the Chips Act.
“The stakes are high and the world is watching,” says John Neuffer, head of the Semiconductor Industry Association. “It’s critical we get this big experiment in industrial policy right for America.”
The performance of Fisher’s team will be an early test of whether the government can bring back some of the most advanced manufacturing to America’s shores after decades of outsourcing. The U.S. makes only about 10% of global semiconductor supplies and none of the most advanced chips, which are mostly manufactured in Taiwan.
Some economists are skeptical of industrial policy whereby the government attempts to shape strategic industries using subsidies and tax incentives.
“Politics always takes over,” said Gary Clyde Hufbauer, a nonresident senior fellow at Peterson Institute for International Economics who has studied U.S. industrial policy.
The big challenge for the team, he said, is expected pressure from the White House and Congress to steer funds to favored constituencies. As the 2024 election season heats up, he predicts, the program will become “less on chips, and more on creating happy stories for job creation.”
Commerce Department officials say that the allocation won’t be based on politics and that one reason the government assembled the Wall Street team was to ensure careful rewarding of limited federal resources.
“We here at the Commerce Department fundamentally have to be good stewards of taxpayer dollars,” said Commerce Secretary Gina Raimondo, who described the team as “unbelievably talented and experienced.”
The team includes Sara O’Rourke, a former partner at McKinsey & Co., Farha Faisal, who previously worked at private-equity company Blackstone, and former Goldman Sachs bankers Kevin Quinn and Srujan Linga. Mary Alex Smith is an investment principal and a former JPMorgan banker.
The job is to pick winners and losers among some 460 applicants, including top semiconductor companies such as Intel, Samsung and Taiwan Semiconductor Manufacturing. Their choices will face heavy scrutiny—some of it by members of Congress.
“In an investment firm, nobody ever knows all the deals you didn’t do,” says Quinn, a senior relationship director who was co-head of global technology banking at Goldman before founding his own investment firm. “Here, you are accountable for all your no’s, and there are a lot of no’s.”
In Quinn’s cubicle—the first one he’s had since 1994—sits a copy of Chris Miller’s “Chip War.” Required reading for the team, the book examines the geopolitics surrounding semiconductors. Team members bought copies at their own expense. Accustomed to private-sector perks, Quinn shrugged his shoulders as he mentioned a requirement to fly coach for work trips to Asia.
With Raimondo—herself a former venture-capital executive—taking a hands-on role, the investment team works similarly to the way that Wall Street deal teams do.
Each Chips Act grant applicant is assigned a senior relationship director and investment officers. The team’s junior members work long hours crunching numbers to build quantitative models to see whether the projects will pencil out.
The team must ensure funded projects fulfill President Biden’s political agenda, including promoting a diverse workforce. Some in the chip industry have complained about strings attached to the program’s funding, including restrictions on expansion in China, limits on executive compensation, and mandatory daycare for workers’ children.
The investment team works closely with officials specializing in Biden strategies, including defense experts and economists. Investment team members report to Michael Schmidt, director for the Chips Program Office and a former New York state official.
Officials won’t say when Chips Act funds will be awarded, but industry executives expect it could be as soon as late this year.
“We are literally designing the strategy, designing the organization and designing the investment process as we go,” said O’Rourke, the team’s operations chief.
The initial allocation will be just a first step. Compared with the industry’s long-term investment needs, the $39 billion in manufacturing incentives is a “rounding error,” says Stacy Rasgon, a senior analyst at Bernstein Research.
TSMC plans to spend $40 billion to build new advanced plants in Arizona. The industry needs to spend $3 trillion globally in research and equipment over the next decade to meet the demand for chips, according to a Boston Consulting Group estimate.
“We will not be successful if we don’t find ways to use our money to incentivize private capital,” Fisher said.
That task falls heavily on Linga, who leads the team’s financial structuring group. As a top banker specializing in asset-backed financing at Goldman, he helped airlines borrow by using frequent-flier programs as collateral and Sprint issue debt backed by wireless spectrum licenses.
An Indian immigrant who traded a $5 million annual paycheck for a $183,500-a-year government job, Linga said he realized the national security implications at stake when he bumped into an army general at Raimondo’s office during his job interview. “When the U.S. government offers you a role like this, it’s an honor,” he said.
Linga is looking for ways semiconductor suppliers can raise money from pension funds and insurance companies. To make lending more attractive, he says, loans can be secured by the value of equipment, intellectual property and infrastructure.
Some team members, including investment director Faisal, who used to work at Blackstone, say America’s reliance on foreign-made chips has become an Achilles’ heel, justifying government intervention—for now. Longer term, they say, the aim is to build an industry that can fund its own growth.
“We are going to do this because we want to spur the private sector to come in,” Faisal said.
Write to Yuka Hayashi at Yuka.Hayashi@wsj.com