Job losses have been most severe in the areas that experienced a big boom in housing, those that depend on manufacturing and those that already had the highest unemployment rates. (Updated March 19 with January data.) Related Article
Talk about a re-structuring.
Paul Sancya / APGeneral Motors Chairman and Chief Executive Rick Wagoner.
In one fell swoop, the White House has made it clear it will re-make America's largest auto maker from the top down.
This goes way beyond dumping the CEO of a company gasping for air.
This is the start of the Treasury Department actively changing who and how GM operates.
So what happens next for GM?
Here's my take on the biggest questions swirling around GM.
- Wagoner out/Henderson in
The White House asked GM chairman and CEO Rick Wagoner to step down. Call him a political sacrificial lamb if you want, but the White House is sending a strong message that GM needs a new approach, new ideas, and new leadership. Fritz Henderson has long been considered Wagoner's heir apparent so his move to the top job is not a surprise. He's also a long time GM executive who was the architect of the company's recent restructuring plans. It brings up the question as to whether he is an interim CEO to get GM through this re-structuring or if he will keep the job long term.
- How active will the White House be in re-shaping GM?
Very active. Put it this way, the White House says it will have people in Detroit working to make GM leaner, more efficient, and likely a more conservative company. Don't be surprised if GM cuts more plants and sheds even more brands as Washington strips this company down to a more manageable, and hopefully, more profitable level.
- Will GM go into bankruptcy?
Maybe. The White House says it may consider a "quick rinse" pre-packaged bankruptcy that would let the government use the bankruptcy code to eliminate costly liabilities. That's code for Washington telling GM bond holders, "You better agree to cut the company's debt even further or we'll force that to happen in bankruptcy court." There is a lot of saber rattling in that threat aimed at GM bond holders, but it is also a very real threat.
- Will GM become smaller?
Probably. I expect the White House to pursue a Toyota-type strategy (similar to what Ford is doing) of paring the company down to three brands (Chevy, Cadillac, GMC) and focusing on a more limited line-up of vehicles. Also, the government will back GM developing more fuel efficient models like the Chevy Volt.
A record 1,484 chief executive officers left their jobs in 2008, according to Challenger Gray & Christmas, a global outplacement firm. And experts expect those numbers to rise this year. CEOs joining in tough times must act more quickly and decisively than usual. "But, leaders need to resist the pressure to be a know it all, have all the answers and be the savior," says Jim Citrin, a Stamford, Conn., senior director at Spencer Stuart and co-author of "You're in Charge, Now What?" For starters, you'll need to "find some people you can trust to really tell you the way things are and give you the lay of the land," says John Challenger, president of Challenger Gray in Chicago. Here are other ways to smooth the transition.
![[CEO]](http://s.wsj.net/public/resources/images/OB-DI865_CJ_90D_D_20090323175827.jpg)
iStock PhotoConduct a review and consider worst-case scenarios. During an economic downturn, cash is king. That means new CEOs need to rigorously review every line item to align costs with revenues and "must account for every penny of cash flow in today's economy," says Thomas Lutz, a Dallas senior partner in Boston Consulting Group's consumer and retail practice. It's even more critical in this environment, he says and recommends that new CEOs personally review monthly cash-flow statements, just as they review profit-and-loss statements or detailed operating plans. Once the review is done, take action. Since Kimberly Till took the helm last October as CEO of Harris Interactive, a New York market-research company, she has cut the work force 8% and cut discretionary expenses like company travel to internal meetings. "I needed to reduce our annual budget as quickly as possible to be prepared if the economy doesn't turn around as quickly as we would like," says Ms. Till.
Set an agenda and be decisive. At times of transition, employees hunger for leadership, even more so during troubled economic times, says Mr. Citrin. He recommends new CEOs identify three clear themes to focus on and organize efforts around for the near future. "A new leader really needs to have some quick wins, as people are looking for some evidence of progress," says Mr. Citrin. That was Patrick Geraghty's plan as the incoming president and CEO of Blue Cross Blue Shield of Minnesota last October. He made changes to his senior leadership team "within six weeks of my first day on the job," he says. The move signaled to the employees the Eagan, Minn., company's new direction and solidified his leadership position, he says.
Communicate constantly. To help keep the work force engaged during the transition, employees need to know and understand the actions and direction that you are taking. "I keep all the employees in the loop through weekly emails, town hall meetings and forums, video clips of big decisions and visits to the offices," says Ms. Till. This sort of interaction can help employees feel better about changes, says Mr. Lutz. And it can offer a change for employees to buy into a new leader's plans.
Be aware of personal habits. Whenever someone moves into a leadership position, "the things they do become increasingly interesting to employees," says Mr. Lutz. For example people notice if the CEO takes over a front-row parking spot and subordinates pay close attention to how he or she engages employees in the hallway. "These interactions make up how your employees feel about you" and will have an impact on how you engage your work force," says Mr. Lutz. Don't create reasons to be talked about negatively by your employees, he says.
The best news about the new Treasury bad bank asset purchase plan is that Secretary Timothy Geithner has finally settled on a strategy. The uncertainty was getting almost as toxic as those securities. Now all Mr. Geithner has to do is find private investors willing to "partner" with the feds (Congress!) to bid for those rotten assets, coax the banks to sell them at a loss, and hope that the economy doesn't keep falling lest taxpayers lose big on their new loan guarantees.
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APOther than that, General, how was the siege of Moscow?
Markets nonetheless roared their approval yesterday, though also for the increase in existing home sales and for the Obama Administration's (belated) pushback against Congress's rage against bankers and private contracts. In simplest terms, Treasury is using loan guarantees and $100 billion in remaining TARP money to create a more liquid market for dodgy financial assets. These include those infamous mortgage securities, as well as various loans that may be nonperforming. The idea is to create new buyers for those assets, perhaps leading to higher prices than now exist in a illiquid market, and thus help banks gradually clean up their balance sheets.
This isn't the worst idea the federal government has ever had, and if it works it will help banks take their losses and burn down debt. A Resolution Trust Corp. would have been a simpler and more politically transparent way to do this, especially six months or a year ago. But this Administration and the entire bailout have already lost too much standing with the public to pull that off now. So in essence this is an attempt at a slow-motion bank workout without a fight over a new resolution agency or having to ask Congress for more money.
On the other hand, none of this will be easy to execute. Start with the problem of attracting private investors, who will have to accept Uncle Sam as a 50-50 business partner. Mr. Geithner says investors won't be subject to the same compensation limits as TARP recipients, but what happens if their asset purchases pay off in big profits? Will Congress settle for only half the upside -- especially as it faces epic deficits in the years ahead? Most likely, cries will go up that the buyers were allowed to underpay for the assets and thus make a killing.
Especially after last week, every investor has to ask whether the potential payoff is worth the risk of appearing in the future before a Congressional committee, saying "I do solemnly swear . . ." Maybe Treasury should also sell investors some Nancy Pelosi-political risk insurance.
Then there is the question of whether the banks will sell enough of those assets to make a difference. Mr. Geithner's bet is that the banks will judge that they are better off disposing of their bad assets, even if it means taking losses. With a cleaner balance sheet, they would then have an easier time raising more private capital and repaying their TARP money to Treasury more quickly. The stronger banks may well find this attractive, since they'd emerge faster from asset purgatory and get a competitive jump on the laggards.
The harder call is the weaker banks, such as Citigroup, which fear that taking big losses will weaken them further. Citigroup CEO Vikram Pandit has publicly said that he'd be violating his fiduciary duty to shareholders to take such losses when he thinks the market value of its assets is artificially low. Citi and Bank of America already have federal guarantees against tens of billions in future losses, so they have even less incentive than most to sell and write them down. Much will depend on how much Treasury can raise asset prices with this new liquidity play. Some banks -- some of them big -- will undoubtedly fail anyway.
Of course the largest risk, as always, is to the taxpayers. Don't be fooled because Treasury isn't going to Capitol Hill for more cash. The Obama Administration is instead leveraging the balance sheets of the Federal Reserve and Federal Deposit Insurance Corp., which will lend to the new public-private entities to buy the toxic assets.
In the case of the FDIC, it will lend at a debt-to-equity ratio of 6-to-l to the buyers. This means, according to the Treasury example, that the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses. Better hope the recovery really is, as the White House says, just around the corner.
Whatever the Geithner plan's pitfalls, we sincerely hope this works. The feds have so thoroughly botched the TARP execution and various bailouts that Treasury has few options left. No accounting change can make bank losses vanish, or inspire investors and short sellers to value bank assets at more than their market price. Yes, banks need to earn their way out of trouble, and many are doing that, but they also need to burn losses. Might as well get on with it.
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The House Financial Services Committee will consider legislation to prohibit any bonus payments by companies who have received government bailout funds, until investments are repaid in full, chairman Barney Frank said on Thursday.
The measure, to be considered next Tuesday, would prohibit any compensation arrangements that are unreasonable or excessive for these companies, the panel said in a statement.
The bill would also bar bailed-out companies from paying any bonus to any employee, regardless of when any bonus was agreed to, the statement said.
The panel said the full House of Representatives would be able to consider the legislation the following week.
In the face of public outrage over $165 million in bonuses that American International Group
[AIG 1.62 --- UNCH 
] paid out after receiving $180 billion in government aid, the House on Thursday voted 328-93 to approve a 90 percent tax on bonuses for certain executives at companies that are getting taxpayer-financed help.
Text SizeThe U.S. Federal Reserve on Wednesday, in a surprise move, said it will buy up to $300 billion worth of longer-term U.S. government debt over the next six months and expand purchases of mortgage-related debt to help ease credit market conditions.
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CNBC.com |
In a statement at the end of a two-day meeting, the central bank's policy panel also said it had decided to hold its target for overnight interest rates in a zero to 0.25 percent range —the level reached in December.
It said rates would stay low for "an extended period," a more explicit vow to stay on hold for a prolonged time.
"In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability," the Fed said.
Prices for U.S. government bonds shot higher and U.S. stocks jumped on the move, with the blue chip Dow Jones industrial average moving into positive territory. The dollar fell sharply.
"This is a pretty dramatic move ... They are trying to bring down all consumer rates," said James Caron, head of global rates research at Morgan Stanley in New York.
In addition to the purchases of U.S. Treasury debt, the Fed said it would expand an already existing program to buy debt and securities issued by the government-backed mortgage finance agencies.
It said it would expand those purchases by a combined $850 billion to a total of $1.45 trillion this year.
The program has already been effective in lowering U.S. mortgage rates.
"Bottom line is the Fed is adding a trillion dollars to their balance sheet and that's a lot of taxpayer money," said Greg Salvaggio, vice president for trading at Tempus Consulting in Washington.
With benchmark rates virtually at zero, the Fed has turned its focus to pumping money into stressed credit markets in the hope of restarting lending and restoring growth -- a policy Fed chief Ben Bernanke has dubbed "credit easing."
Bernanke on Sunday said repairing the tattered financial system was necessary to secure a recovery for the U.S. economy, which has been stuck in recession for more than a year.
The Fed this week began taking bids for a program designed to spur student, auto, credit card and small business lending, and it said Wednesday it would consider expanding that program to cover a wider array of assets.
The consumer and small business credit program will initially aim to inject $200 billion into the market for securities backed by these loans, but the Fed has already said that program could be ramped up to $1 trillion.
While the Fed has gone to extraordinary lengths to try to get credit flowing, the economy is still in a nose dive.
U.S. gross domestic product shrank at a 6.2 percent annual rate in the fourth quarter, the deepest contraction since early 1982, and the unemployment rate has shot to a 25-year high of 8.1 percent.
However, there have been some signs recently that suggest consumer spending may be stabilizing and hints the battered housing sector is beginning to heal.
After a $700 billion bank bailout approved by Congress in October and a $787 billion tax-cut and spending bill passed this year to lift the economy, public resentment at the large tab taxpayers are picking up has grown more strident.
Fury over $165 million in bonuses paid to executives of insurer AIG [AIG 1.31 
0.35 (+36.46%) ] which has received up to $180 billion in government aid, has eroded support for extensive government efforts to heal the financial sector.
The Nasdaq and the S&P 500 shot up more than 1 percent Wednesday, while the Dow Industrials turned positive, after the Federal Reserve said after its policy meeting it will buy long-term U.S. Treasuries.
The Dow's initial modest gains picked up speed, lifting the blue-chip average by more than 1 percent, while both the S&P and the Nasdaq extended their jumps to gains of more than 2 percent.
The Dow Jones industrial average shot up 120.98 points, or 1.64 percent, at 7,516.68.
The Standard & Poor's 500 Index was up 17.42 points, or 2.24 percent, at 795.54, just off its session high at 795.68. The Nasdaq Composite Index was up 38.42 points, or 2.63 percent, at 1,500.53.
The last time the Fed set out to influence long-term interest rates was during the 1960s with Operation Twist, conceived by the Kennedy administration.
Across the Atlantic, the Bank of England last week began buying government bonds from financial institutions as it turned to other ways to help revive Britain's moribund economy. The Bank of England, like the Fed, already had lowered its key interest rate to a record low of 0.5 percent.
Finance leaders from top economies have discussed coordinating actions from their governments and central banks to provide a more potent punch against the global financial crisis.
Futures activity suggested that stocks would pull back after the previous day's rally, as investors await the outcome of a two-day Federal Reserve meeting.
About 30 minutes before the start of trading in New York, futures on the Dow Jones Industrial Average were lower by about 80 points. S&P 500 and Nasdaq futures each declined roughly five points. Futures trading isn't always a reliable indicator of the market's early trajectory.
A surprising jump in housing starts last month helped drive stocks to the fifth winning session in six Tuesday. The Dow industrials rallied by 178.73 points, leaving the blue-chip gauge 13% above the bear-market lows it hit on March 9. Major indexes are at their highest levels in a month.
The Federal Reserve will conclude a two-day meeting Wednesday. The central bank is expected to leave interest rates unchanged, but investors will be parsing the Fed's post-meeting statement for any signals that its outlook has changed or that it will take more measures to lubricate money markets. The Fed had said in its last statement that it was prepared to purchase long-term Treasurys if needed to improve credit conditions.
Most commentators expect that the Fed won't announce such steps Wednesday as long-term interest rates remain low, which has driven down mortgage rates. Data Wednesday from the Mortgage Bankers Association showed mortgage applications rose 21% last week as the average 30-year fixed rate fell to 4.89%. But economists expect the Fed will keep the possibility of such purchases open.
Treasurys were gaining in recent trading as stocks weakened; the yield on the 30-year bond was around 3.81%. In other economic news, consumer-price data were released for February, showing a 0.4% increase and raising the odds that the U.S. will avoid a protracted deflationary spiral.
Shares of Sun Microsystems jumped 50% after the Wall Street Journal reported thatInternational Business Machines is in talks to acquire the company. IBM is likely to pay at least $6.5 billion in cash, or double Sun's closing price Tuesday. IBM shares were down about 3%.
Most European stock markets fell. The pound dropped against the dollar after a dismal report on U.K. employment. Asian indexes gained; the Nikkei 225 rose 0.7%. The Bank of Japan said that it will increase its purchases of government debt and that it was considering providing loans to banks.
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