Hard Line on Auto Aid Puts Bailed-Out Firms on Notice
Tuesday, March 31, 2009
NEW YORK, March 30 -- After ousting General Motors' chief executive, President Obama warned Monday that bankruptcy may be unavoidable for two American automotive giants.
The administration's display of authority sent U.S. stocks tumbling and raised questions about whether the government would take similar steps against top executives at U.S. banks that are also receiving government bailout funds.
The administration told GM and Chrysler they had failed to come up with restructuring plans that justify the billions of dollars in additional taxpayer funds they are requesting. GM was ordered to devise a new plan, while Chrysler was instructed to reach a deal with Fiat in which the Italian carmaker would take a stake in Chrysler.
Obama said that if they fail to achieve those goals, GM and Chrysler might need to use bankruptcy as a "mechanism to help them restructure quickly and emerge stronger." Such a move would wipe out the mountain of debt weighing down the companies.
The administration's decision to oust G. Richard Wagoner Jr. sharply ratchets up its control over companies receiving government assistance in the face of criticism about a lack of accountability over billions of taxpayer dollars. The government demanded Wagoner's departure even though it does not own a stake in the automaker. The three companies the government does control -- American International Group, Freddie Mac and Fannie Mae -- were required to replace their chief executives. The government has not, however, required any banks in which it took smaller stakes to replace its top executives. It did pressure Citigroup to replace several members of its board of directors.
Now the president's aggressive move against GM has left some banking executives wondering whether they are next in line.
"Is there a heightened risk for the Obama administration" to remove a banking executive? asked Scott Talbott, chief lobbyist for Financial Services Roundtable. "I think you'd have to conclude that the answer is yes."
Banking executives and analysts said Monday that if the administration were to replace a bank chief executive, it would likely be someone from an institution that has received large amounts of federal money.
The government is currently stress-testing the nation's 20 largest banks and "maybe three fail the test," said an executive at a large bank receiving government funds. Obama "could remove the heads of those banks," the executive said.
But the executive, who spoke on condition of anonymity because of the sensitivity of the matter, said he was not nearly as concerned about the ousting of GM's chief executive Wagoner as they were about legislation passed by the House of Representatives this month to tax Wall Street bonuses, including those of non-executives, by 90 percent.
"He had to do something dramatic; he had plenty of cause on this one," the executive said, adding that the outlook for GM was extremely grim.
Stocks plunged as investors worried that bankruptcy would undermine consumer confidence while further cutting production and raising unemployment. The Dow Jones industrial average fell 3.3 percent to 7522.02. All of its 30 blue-chip stocks declined, with General Motors shedding a quarter of its value. Chrysler, which is owned by private-equity firm Cerberus Capital Management, is not publicly traded. The Standard & Poor's 500-stock index, a broader measure, slid 3.5 percent to 787.53. The Nasdaq Stock Market declined 2.8 percent to 1501.80.