By Tomoeh Murakami Tse
Washington Post Staff Writer
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.
Bert Ely, a banking industry analyst in Alexandria, said the administration will likely exercise its powers in only a limited number of a cases, if at all. Even banks that have received repeated injections of government funds, analysts said, appear to be making some progress, and more importantly, are showing more willingness to respond to new economic realities than the automakers were.
"There is a key difference between GM and Chrysler and the large banks going forward," Ely said. "Those two companies have major questions about their [future] profitability. Whereas the large banks by and large have good business models going forward. The problem is that they've got to pay for the sins of the past."
Two banking executives who may be vulnerable, Ely and others said, are Citigroup's Vikram Pandit and Bank of America's Ken Lewis. Pandit, who took the helm 15 months ago and largely inherited the bank's problems, has stirred questions about whether he is moving fast enough to sell off assets that no longer fit Citigroup's business plan. Lewis has been criticized for his decision to acquire Countrywide Financial and Merrill Lynch.
Citigroup, which recently said it operated at a profit during the first two months of the year, declined to comment. A Bank of America spokesman dismissed talk that its chief executive was vulnerable.
"Bank of America made a $4 billion profit in 2008 and has been profitable in every quarter but one since 1991," said spokesman Scott Silvestri. "We do not see the parallel with the U.S. auto industry."
At a news briefing Monday, White House spokesman Robert Gibbs faced repeated questioning about whether the Wagoner ouster meant the administration could remove any chief executive of a firm receiving federal funds if the government was not happy with his or her performance.
"I think it's imperative or important to ensure that we look at these things all individually," Gibbs said. He added that it was necessary to protect taxpayer money and use it wisely to spur recovery.
The administration also faced continued questioning about the perceived disparate treatment of Wall Street and Detroit, and fielded attacks from Republicans about Wagoner's removal.
"This is a marked departure from the past, truly breathtaking, and should send a chill through all Americans who believe in free enterprise," Sen. Bob Corker (R-Tenn.), who sits on the Senate Banking Committee, said in a statement. "Firing Rick Wagoner is a sideshow to distract us from the fact that the administration has no progress to announce today."
However, some political strategists said the administration's efforts are likely to be well-received by the public.
Democratic pollster Michael Bocian said frustration with the auto bailout was growing and that the public was blaming management. The public also places blame on banking executives but to a lesser degree, he said. The average American voter, he said, is not so concerned about government overreach as it is about accountability.
Wagoner's removal "is the kind of thing that sends a signal that, if they're going to get additional funding, they're going to have to make serious changes," Bocian said.
Rogan Kersh, associate dean and professor of public service at New York University, said replacing Wagoner is not without precedent. In the 1950s, he said, President Harry Truman seized steel mills to prevent a strike, an act later overruled by the U.S. Supreme Court. In wartime and periods of economic unrest, "presidents or prime ministers of every advanced democratic country have taken actions affecting their business sector . . . that would arouse powerful criticism in ordinary times," he said in an e-mail. "This is hardly unprecedented."
Staff researcher Julie Tate and staff writer Scott Wilson in Washington contributed to this report.