Day 486
Barack Obama, described in today's Globe and Mail as "the president of General Motors," is already de facto CEO of America's crippled banking system. And he might soon find himself chief executive of the troubled U.S. airline industry, as well, if it seeks a second round of bailout funds from Uncle Sam this decade. (The first round followed 9/11, of course.)
What Obama did in sacking GM's Rick Wagoner was an extraordinary intervention by the government in the private sector. But he had no choice. GM repeatedly failed to "get it" on the radical steps it must take to achieve long-term viability. Obama could have punted, as his predecessors have, by providing Band-Aid assistance. Instead, what Obama is intent on, though he's yet to fully articulated it, is to reinvent Detroit into a new Silicon Valley of unsurpassed global leadership in environmentally advanced vehicle development. And that's going to require a whole new mindset in Detroit, reaching down to the middle-management level. The process of Detroit shedding thousands of managers who know things that are no longer true, dating from GM's king-of-the-hill status as late as the 1970s, will be aided by the massive Detroit white-collar layoffs on the horizon.
It won't end there. Unflappable though he is, CEO Obama has heard just about enough from bankers who have balked at the strings attached to their own bailouts, which amount to trillions of dollars that Uncle Sam has spent to prop up the U.S. financial system. And Obama is poised to extract an additional hundreds of billions of dollars in bank bailout funds from Congress, no easy task given the widespread "bailout fatigue" on the Hill and populist anger in the country. But count on the bankers to balk some more at the coming, and long overdue, Obama regulatory reforms. They will also cavil over their "voluntary" participation in the U.S. Treasury's scheme unveiled last week in which banks are to purge themselves of their remaining "toxic waste" at firesale prices, in order to start fresh with clean balance sheets. The banks won't like the low-ball prices offered for this junk by hedge funds and other private-sector players willing to take a risk on nurturing soured loans back to robust health at a handsome profit.
But here's the deal. Until the banking system makes a full recovery, there will be no economic recovery. In the absence of an economic turnaround, Obama's re-election prospects in 2012 are nil. Which means recalcitrant bankers have just become an endangered species. With the American taxpayer now the major owner of the U.S. financial system, Obama has even more legitimacy in firing uncooperative bank CEOs than GM helmsman Rick Wagoner last weekend.
Our guess is that U.S. bankers will get with the program, having seen what happened to Wagoner. But it wouldn't surprise us if Vikram Pandit and Ken Lewis, CEOs of the troubled Citigroup Inc. and Bank of America Corp., respectively, ultimately get the Wagoner treatment. Those banks' own shareholders are keen to see the backs of those gentlemen's heads for the last time. The ineptitude of those CEOs has been matched by their belligerence in resisting what Treasury deems necessary to restore stability to the financial system.
Pandit of Citigroup (above) and Lewis of Bank of America, members of the endangered CEOs club.
A couple things for the bank CEOs to keep in mind. One is the old adage that it's well to fire an admiral once in a while to encourge the rest. The other is that once you've shown yourself capable of an extraordinary act - Obama's sacking of Wagoner - the once-unthinkable act becomes easier every successive time you do it.
Leading indicators
* Air Canada CEO quits amid bankruptcy fears.
* GM bankruptcy now more likely, firm's interim CEO says.
* Credit-card debt worries banks.
* Easing U.S. fears on border issues must be Ottawa's Job 1.
* Albertans sanguine about resource-price downturn.
* U.S. may reward motorists for trading junkers for fuel-efficient vehicles.
Analysis and commentary
* Buttonwood, The Economist: Is this the market bottom or another suckers' rally?
* James Surowiecki, New Yorker: Audacious Obama bank bailout scheme worth the risk.
* Paul Krugman, New York Times: Bush legacy: America can't dictate needed stimulus to G-20.
Funny papers
* Woody Allen, New Yorker, on the Madoff scandal.
Note: While the Great Recession began at different times around the globe, its inception in the U.S., the epicentre of crisis, is for the purposes of this blog taken as the start date. The U.S. has been in recession since December 2007.
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