Commentary by Kevin Hassett
Nov. 24 (Bloomberg) -- A politician is a person who says one thing, does the opposite, and fails to acknowledge the contradiction. A leader is a person who does the right thing, no matter the consequences.
Every president must decide, on balance, which he will be.
When you look back at past presidents, the most successful ones, like Franklin Roosevelt and Ronald Reagan, often led regardless of the political risks.
The less successful ones, like Richard Nixon and George W. Bush, operated without any clear compass and sailed with the political winds. Bush, for example, flip-flopped from tax-cutting conservative to prescription-drug peddler, all with an eye toward building a permanent majority. (He was right about the majority part, but he got the party wrong.)
Let's assume that most politicians want history to view them as leaders. As Barack Obama is already finding out, it isn't easy. We are already learning a good deal about his leadership style, and for those hungering for a post-partisan direction, his performance has been disappointing.
Take the proposed bailout of the U.S. auto manufacturers, a policy that has been tirelessly advocated by the president-elect and sadly seems to be gaining support from enough members of both parties to have a chance of passage.
Economics 101 suggests that the government shouldn't bail out the automakers. They are saddled with enormously high costs relative to the competition and have been unable to deliver a product that is attractive enough to earn big markups and make up the difference.
Creative Destruction
When the manufacturer of a product has trouble in the marketplace, it needs to change its product or its cost structure, and government intervention can only slow the adjustment process. The fastest and most efficient path to economic growth is through the reorganization that generally occurs in bankruptcy.
So what arguments might cause one to reject the Economics 101 answer? The first is that there will be a contagion if the U.S. automakers enter bankruptcy. They are too big to fail.
This analysis is indefensible. Firms operate in bankruptcy all the time. The airlines seem to do it as a matter of habit. Forcing the unions and automakers to make tough choices in bankruptcy court isn't the same as shutting down the factories. Factories usually continue to operate in such circumstances. And if a few plants are shut, it will allocate workers and resources toward more efficient uses. That is a plus, not a minus.
The Little Guy
The second argument in favor of the bailout is that it serves social justice. In this view, Washington politicians are here to fight for the little guy, and now is their chance. Those poor blue-collar workers in Detroit didn't have a voice in Washington, and now they do.
This argument is worse than the first. The U.S. automakers are hemorrhaging money, it's true, and a big reason they are doing so is they are shoveling it out the door to the workers.
Times are tough, and people all over the country have been losing their jobs. When an auto worker at one of the U.S. automakers who has worked at least 10 years loses his job, he gets a severance payment of $140,000. Most everybody else in the U.S. gets a minimal severance or nothing.
And those who don't lose their jobs are compensated richly. The average cost of an hour of United Auto Worker member work is about $73. The average cost for an hour of work for a Honda Motor Co. worker in the U.S. is about $43.
Higher Pay
Some of those higher costs are attributable to the great retirement benefits that are provided to UAW members, who on average have a retirement that is about twice as comfy as the typical senior relying upon Social Security.
Even excluding the rich benefits, a typical Chrysler assembly worker had an annual salary of $64,100 in 2006, compared with $49,568 for the average American household. Including benefits, the UAW worker is solidly encamped in the upper third of the income distribution.
Bailout proposals all have the effect of fueling this gravy train for the auto workers. It is difficult to see how anyone could claim that this serves social justice. If you take general revenue, which is collected from everyone in the U.S., and transfer it to high-salaried auto workers, then you aren't serving social justice; you are subverting it.
Why would anyone propose such a thing? It might be that the proponents of the bailout are just mistaken about the first point and believe that bankruptcy is death, that a systemic economic calamity will follow if the automakers enter Chapter 11. Or they might not have understood the distributional consequences of their actions.
Simple Explanation
But it seems unlikely that President-elect Obama, surrounded as he is with brilliant economists, could have missed this point. The auto bailout is political payback, pure and simple.
After all, the Center for Responsive Politics reports that organized labor contributed a sum of $58 million during the 2008 election cycle to both parties. Republicans picked up $4.85 million; Democrats got $53 million.
It is clear that unions provide an important political advantage, and rewarding them is good for the Democratic Party even if it isn't good for the whole.
It is great politics to bail out the automakers. Just don't mistake it for leadership.
(Kevin Hassett, director of economic-policy studies at the American Enterprise Institute, is a Bloomberg News columnist. He was an adviser to Republican Senator John McCain of Arizona in the 2008 presidential election. The opinions expressed are his own.)
Nov. 24 (Bloomberg) -- Barack Obama will today unveil an economic team steeped in fighting crises and likely to push for an unprecedented government role in reviving growth and stabilizing the financial system.
New York Federal Reserve Bank President Timothy Geithner is set to be nominated as Treasury secretary, former Treasury chief Lawrence Summers will be White House economic director and Peter Orszag, head of the Congressional Budget Office, will be in charge of assembling President-elect Obama’s budget, aides said. Christina Romer, a University of California, Berkeley, professor, will head the Council of Economic Advisers, according to a person familiar with the matter.
“Obama has picked a very strong troika to pull the sled,” said Peter Wallison, a Treasury general counsel in the 1980s and now a fellow at the American Enterprise Institute in Washington.
They’re going to need all their skills, and coordination, to get ahead of a financial market meltdown that has confounded outgoing President George W. Bush’s policy makers. First up: putting together and passing a stimulus package that may run to $700 billion or more, in an attempt to head off millions of job losses as the credit crunch freezes the economy.
Focus on Jobs
“It will be a two-year, nationwide effort to jump-start job creation,” Obama said two days ago. The president-elect is due to hold a press conference in Chicago at noon New York time.
Obama’s program will be far larger than the $175 billion package of tax cuts and stepped-up government spending he proposed just a month ago. Some of his advisers, and Democratic Senator Charles Schumer of New York, have suggested a figure of $700 billion. Bush’s February stimulus was just $168 billion.
The incoming administration may also enlarge the $700 billion financial-rescue fund enacted last month. It may surge to perhaps $1.2 trillion, said Martin Baily, who served as White House chief economist under Clinton and is now at the Brookings Institution in Washington.
Outgoing Treasury Secretary Henry Paulson already plans a new program to aid consumer-finance companies, signaling he may request from Congress the remaining half of the funds.
Summers, in a Bloomberg Television interview last month, urged “extraordinary steps” to ensure the flow of credit and address the cycle of mortgage foreclosures. He will take on a wide-ranging portfolio at the White House, coordinating economic policy across the administration.
Summers, 53, will also be positioned to take the helm of the Federal Reserve in 2010 when Chairman Ben S. Bernanke’s term ends. Geithner may stay on at the New York Fed until Obama takes office Jan. 20.
Shift at Fed
For Bernanke, today’s designations mean a shift in his ties with Geithner, who until now has been his top lieutenant on Wall Street. Any perception that Obama wants him replaced could also undermine his authority.
Still, any decision on the Fed chairman post is likely a year away, leaving time for Bernanke to build on his increasing outreach to Democratic positions -- and for any opposition to Summers to emerge. Summers, now a Harvard University professor, has repeatedly stirred controversy that has affected his career; he was forced out as Harvard president in 2006 after clashes with the faculty.
Obama has shifted gears as the economic crisis mushroomed. Initially inclined to steer clear of influencing policy while Bush was president, Obama indicated Nov. 22 that his team might start working with Congress on a stimulus program now. That would make it more likely it could be signed soon after he takes office Jan. 20.
Down Payment
The stimulus package will act as a down payment on Obama’s longer-term proposals to cut taxes for the middle class, improve the country’s infrastructure and lessen U.S. dependence on foreign oil, according to his radio address Nov. 22.
“We’ll put people back to work rebuilding our crumbling roads and bridges, modernizing schools that are failing our children and building wind farms and solar panels,” Obama said.
Investors gave the Geithner pick a vote of confidence, driving the Standard & Poor’s 500 Stock Index up 6.3 percent from its lowest level in 11 years.
Obama’s team will need to avoid the type of internal squabbling that characterized the early years of the Bush administration and which could delay speedy action to counter the economic travails facing the country. Both Geithner, 47, and Summers had been in the running for Treasury secretary, people close to the Obama camp said earlier this month.
No Nirvana
“It’s certainly not going to be Nirvana, but policy making never is,” said Michael Barr, who worked with Geithner and Summers at the Treasury in the 1990s and is now at the University of Michigan Law School in Ann Arbor. At the same time, “a strong president is best served by a strong series of team members and that’s what Obama is getting.”
Bush’s team began the crisis seeking to avoid government intervention, then oversaw an intrusion into the financial system unprecedented since the Great Depression. Yet even after seizing mortgage financers Fannie Mae and Freddie Mac, taking over insurer American International Group Inc. and creating the $700 billion financial-rescue fund, the financial turbulence has morphed into a global recession.
Since the Nov. 4 election, reports have shown the jobless rate climbed to 6.5 percent in October, the highest level since 1994, with retail sales and consumer prices plunging the most on record. Fed policy makers now anticipate the economy will contract through the middle of 2009, with private analysts forecasting the worst recession in at least a quarter century.
Tax Cuts
David Axelrod, who will be a senior adviser to the president, left open the possibility that Obama will refrain from repealing tax cuts for the wealthy right away -- as he suggested he would do during the campaign. Instead, he may allow them to lapse at the end of 2010 when they are scheduled to expire under current law.
“The main thing right now is to get this economic recovery package on the road, to get money in the pockets of the middle class, to get these projects going, to get America working again,” Axelrod, Obama’s chief strategist during the campaign, said in an interview with “Fox News Sunday” yesterday. “That’s where we’re going to be focused in January.”
Champion of Stimulus
Summers has already advocated a massive stimulus package, saying it needs to be “speedy, substantial and sustained” to counter the forces buffeting the economy. He’s also played down concerns about what’s shaping up to be a record federal budget deficit, arguing that demand for Treasury securities currently far outstrips supply.
The stimulus program won’t be the only thing swelling the deficit. Obama has said he wants to do more to help homeowners who are facing foreclosure and the loss of their houses. The big three automakers -- General Motors Corp., Ford Motor Co. and Chrysler LLC -- are seeking assistance from the government.
Geithner and his onetime mentor Summers were top advisers to former Treasury Secretary Robert Rubin when the Clinton administration tapped a government fund to rescue Mexico from default in 1993-94. Later, they corralled banks into extending financing to South Korea, and worked with the International Monetary Fund to prop up emerging markets during the 1997-98 Asian financial crisis.
“There were two people who could make fun of Larry: Bob Rubin and Tim -- one from above, the other from below,” said Jeffrey Shafer, who served with Geithner and Summers at the Treasury from 1993 to 1997 and who is now vice chairman of global banking for Citigroup Inc. in New York.
Bear, Lehman, AIG
Geithner has, along with Paulson and Bernanke, been one of the top decision-makers in handling the current crisis. He helped lead the rescue of Bear Stearns Cos. in March, the ultimately unsuccessful attempts to prevent a Lehman Brothers Holdings Inc. collapse in September, and the subsequent takeover of AIG.
A collapse in Citigroup shares this month may leave what was once the nation’s biggest bank next on the list of casualties.
It will be up to Geithner in his role as Treasury secretary to try to make sure that the flood of securities coming from the U.S. government doesn’t spook America’s foreign creditors, including those in China and the Middle East, who may be already worried about what they see as an unprecedented borrowing binge.
That’s a part for which the former Treasury undersecretary for international affairs is well suited. Geithner has studied Japanese and Chinese and has lived in East Africa, India, Thailand, China and Japan.
‘Savvy Negotiator’
“He is a substantive and savvy negotiator on the international scene, understands the substance and nuances well, and knows the key players,” said Mohamed El-Erian, co-chief executive officer of Newport Beach, California-based Pacific Investment Management Co, which runs the world’s biggest bond fund.
At the New York Fed, Geithner’s departure will leave a gap at the central bank’s main link with Wall Street. Among potential leading candidates to succeed him is Kevin Warsh, a Fed governor who previously worked at the White House and as an investment banker with Morgan Stanley.
Nov. 24 (Bloomberg) -- Citigroup Inc. received a U.S. government rescue package that shields the bank from losses on toxic assets and injects $20 billion of capital, bolstering the stock after its 60 percent plunge last week.
The second-biggest U.S. bank by assets surged as much as 72.4 percent in New York trading after the Treasury, Federal Reserve and Federal Deposit Insurance Corp. announced the aid plan in a joint statement. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend.
The regulators stepped in to protect Citigroup from losses on a $306 billion pile of troubled U.S. home loans, commercial mortgages, subprime bonds and corporate loans when the firm’s tumbling share price sparked concern that depositors might pull their money and destabilize the company, which has $2 trillion of assets and operations in more than 100 countries. The $20 billion of new cash comes on top of a $25 billion infusion the bank received last month under the Troubled Asset Relief Program, passed by Congress to shore up the financial industry.
“It really was a must-do thing,” said Nader Naeimi, a Sydney-based strategist at AMP Capital Investors, which manages about $85 billion. “If they’d let Citigroup go, that would’ve been disastrous.”
Citigroup’s stock sank about 80 percent this year and dropped below $5 last week for the first time since 1994. The shares closed last week at $3.77 on the New York Stock Exchange. They gained 65 percent to $6.22 at 11:00 a.m. in NYSE composite trading today, after rising as high as $6.50.
Dividend Cut
Citigroup shareholders will be diluted in the “near term by the cost of the incremental preferred stock,” Morgan Stanley analysts Betsy Graseck and Cheryl Pate wrote in a report today. Over the longer term, Citigroup will appreciate because of “the reduction in tail risk” from the troubled assets, they said.
“There will surely be ongoing chatter about a breakup of Citi once the dust settles,” analysts at Royal Bank of Scotland Group Plc, led by Tom Jenkins, said. “For now though, and indeed for the foreseeable future, Citi has oxygen.”
Former Chairman Sanford “Sandy” Weill, 75, built Citigroup through more than 100 acquisitions during his 17 years at the helm. The company, which two years ago was the biggest by market value, has slipped to No. 6 after racking up four straight quarterly losses totaling $20 billion amid the worst financial crisis since the Great Depression.
Through last week, Citigroup shares had declined 67 percent since Weill formed the company in 1998 through the merger of Citicorp and Travelers Group Inc.
Protect Taxpayers
The government’s preferred shares come with warrants to buy 254 million Citigroup shares at $10.61 each, allowing taxpayers to profit if the stock rallies following the government’s investment, according to a term sheet that accompanied the agencies’ statement. Citigroup is required to pay a quarterly dividend of no more than 1 cent a share for the next three years, down from 16 cents in the most recent quarter.
“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers,” the agencies said.
Citigroup Chief Executive Officer Vikram S. Pandit said the agreement addresses “market confidence and the recent decline in Citi’s stock,” and also strengthens the bank’s “capital ratios.” The company said its so-called Tier 1 capital ratio exceeds 14 percent with the support from the government.
Pandit’s Job
Terms of the asset guarantees mean Citigroup will cover the first $29 billion of pretax losses from the $306 billion pool, in addition to any reserves it already has set aside. After that, the government covers 90 percent of the losses, with Citigroup covering the rest from assets that include leveraged loans and so-called structured investment vehicles.
Unlike the bailouts of insurer American International Group Inc. and mortgage companies Fannie Mae and Freddie Mac, no management changes were required and Pandit gets to keep his job, government officials said. The government will have a say over executive compensation at Citigroup.
“This is a partial government takeover,” Christopher Whalen of Institutional Risk Analytics, a Torrance, California- based research firm, said in a Bloomberg Radio interview. “We have been telling people for a while that some of the top banks were going to end up controlled by the government next year. It looks like that’s happening sooner than even we expected.”
Gary Crittenden, Citigroup’s finance chief, said on CNBC that the government aid is “not a nationalization in any sense.”
Prince, Alwaleed
Pandit, 51, a former Morgan Stanley banker, joined Citigroup last year as head of hedge funds and private equity, and he was picked in December to succeed Charles O. “Chuck” Prince after the bank’s expansion in subprime mortgages and asset-backed lending backfired.
Pandit announced a plan last week to eliminate 52,000 jobs and cut costs by about $2 billion per quarter. He and three top deputies bought 1.3 million shares in a show of confidence, and Prince Alwaleed bin Talal, one of the bank’s biggest investors, said he would boost his stake to about 5 percent from 4 percent.
Citigroup also issued a statement last week saying the company had “a very strong capital and liquidity position and a unique global franchise,” and Pandit held two conference calls with employees to reassure them.
The stock kept plunging, forcing the bank’s board to hold an emergency meeting on Nov. 21 and thrusting executives into a weekend of discussions with the Fed and Treasury. The slump was reminiscent of what happened to Bear Stearns Cos. in March before it was sold to JPMorgan Chase & Co. and to Lehman Brothers Holdings Inc. before it went bankrupt in September.
Loan Losses
“Pretending that Citi is going to be a going concern I think is silly,” said Whalen, of Institutional Risk Analytics. “We should be thinking about breaking this company up and redistributing the assets into stronger hands.”
The added capital and the asset guarantees are intended to provide confidence to investors that Citigroup has a big enough loss cushion to absorb bad loans as unemployment climbs and the economy sours.
The rescue was “structured in a way that existing debt holders are not impaired and equity investors are not overly diluted,” CreditSights Inc. analysts led by David Hendler wrote in a report today. “All in all, these actions should settle market jitters surrounding the company for now and provide a boost for bondholders.”
Citigroup remains vulnerable to losses on loans and securities outside the U.S., said Peter Kovalski, a portfolio manager at Alpine Woods Capital Investors LLC in Purchase, New York, which oversees $8 billion and holds Citigroup shares.
The government plan “gives them a little bit of breathing room, but longer term, things may deteriorate and losses increase,” said Kovalski. “The Achilles heel with Citi is their exposure to emerging markets and what’s going to happen when emerging markets turn down, as they’re doing now.”
Nov. 24 (Bloomberg) -- U.S. stocks climbed for a second day after the government said it will guarantee $306 billion of troubled Citigroup Inc. assets and Democratic lawmakers pledged to pass an economic stimulus package by January.
Citigroup, which lost more than 60 percent of its market value last week, rebounded 52 percent after the Treasury Department also agreed to inject $20 billion into the bank. JPMorgan Chase & Co. added 5.2 percent and Bank of America Corp. rose 11 percent as the guarantee eased concern that a flight of depositors might destabilize Citigroup, which has $2 trillion of assets. Alcoa Inc. and Microsoft Corp. climbed more than 4.5 percent on speculation a new stimulus will spur economic growth.
The Standard & Poor’s 500 Index added 2.9 percent to 823.54 at 10:11 a.m. in New York, its first back-to-back gains this month. The Dow Jones Industrial Average climbed 204.3 points, or 2.5 percent, to 8,250.72. The Nasdaq Composite Index rose 2.6 percent to 1,420.78. Europe’s Dow Jones Stoxx 600 Index increased 4.9 percent, while the MSCI Asia Pacific Index slipped 0.5 percent.
“Job one is to continue to repair the psychology of this market, and the bailout or the help for Citigroup is an important part of that puzzle,” James Dunigan, managing executive for investments at PNC Wealth Management in Philadelphia, said on Bloomberg Television. PNC Wealth Management oversees $63 billion.
Citigroup Rallies
The S&P 500 rallied 6.3 percent on Nov. 21, paring a third straight weekly decline, after President-elect Barack Obama picked New York Federal Reserve Bank chief Timothy Geithner as Treasury secretary. The index has tumbled 44 percent this year and closed at an 11-year low on Nov. 20 after almost $1 trillion of financial-company losses caused corporate profits to decrease for five straight quarters.
Citigroup climbed $1.97 to $5.74 today. The cash injection from the Treasury adds to the $25 billion the company received last month under the Troubled Asset Relief Program. In return for the cash and guarantees, the government will get $27 billion of preferred shares paying an 8 percent dividend.
The Treasury, Fed and Federal Deposit Insurance Corp. said in a joint statement that the move aims to bolster financial- market stability and help restore economic growth.
‘Main Focus’
“With Citigroup hanging in the low single digits, the market was calling for either a breakup or some kind of resolution,” said Jack Ablin, who helps manage about $60 billion as chief investment officer of Harris Private Bank in Chicago. “This is going to be the main focus of market activity. It should be good news.”
Concern Citigroup may need a government rescue sent bank stocks down 24 percent last week, the steepest slide in at least 19 years.
The Financial Select Sector SPDR Fund, an exchange-traded fund of financial stocks known by its XLF ticker symbol, advanced 4.4 percent to $10.11. JPMorgan added $1.18 to $23.90 and Bank of America increased $1.28 to $12.75.
Congress will send President-elect Barack Obama an economic stimulus package the day he takes office Jan. 20, Democratic lawmakers said. Senator Charles Schumer of New York said on ABC’s “This Week” program that the package will be between $500 billion and $700 billion. House Majority Leader Steny Hoyer of Maryland said on “Fox News Sunday” that he believed the Inauguration Day goal would be met. He declined to put a price tag on the bill.
Microsoft, the world’s software maker, gained 4.5 percent to $20.61. Alcoa, the biggest U.S. aluminum producer, increased 5.8 percent to $8.93.
Energy Shares Rise
Some energy companies climbed as oil rallied above $51 a barrel in New York on a retreat in the U.S. currency.
National-Oilwell Varco Inc., the largest U.S. maker of oilfield equipment, advanced 9.6 percent to $23.59. EOG Resources Inc., the former oil and gas unit of Enron Corp., rose 5.2 percent to $78.57.
General Motors Corp., the automaker in danger of running out of cash this year, will seek to negotiate a cut in debt levels and new union work rules to help boost its chances of winning federal loans, people familiar with the plan said. Directors are scheduled to meet by phone today, Nov. 26 and Nov. 28, and then gather Nov. 30 and Dec. 1 to review the plan, the people said. The shares slipped 1.6 percent to $3.01.
Investors are paying $9.24 per dollar of operating profit forecast in 2009 for S&P 500 companies, half the two-decade median of $18.10, data compiled by Bloomberg show. Stock valuations suggest S&P 500 profits may decrease as much as 42 percent next year amid forecasts for the worst recession in more than two decades.
Posts
No comments:
Post a Comment