How likely is it that Washington will do a better job running GM than the executives who oversaw its decline? Daniel J. Ikenson and Howard Wial finish their debate.
Will Government Motors Do Better Than GM? – Ikenson vs. Wial, LA Times
This week Timothy Geithner completed his first trip to Beijing as U.S. Treasury secretary, and from his account the three-day visit was a great success. The Chinese, he said, backed the Obama administration’s stimulus program, understood the temporary need for enlarged federal budget deficits and supported the dollar’s dominant role in the global economy. Summing up his short stay, Geithner said he received Beijing’s full backing for his plans: “I’ve actually found a lot of confidence here in China, justifiable confidence, in the strength and resilience and dynamism of the American economy.”
Geithner’s hosts seemed equally upbeat and, according to the Treasury chief, did not raise concerns about American deficits or interest rates. Moreover, the Chinese appeared especially hopeful about the plans of the two nations to build a new framework for consultations. “Through the dialogue, we will send a message that China and the United States are cooperating substantively to get over the difficult times, which will help boost the confidence, promote global financial stability and world economic recovery,” said Vice Premier Wang Qishan, Beijing’s economic troubleshooter.
The two nations plan to meet in Washington in late July to kick off the “Strategic and Economic Dialogue,” which will replace the “Strategic Economic Dialogue” maintained by Geithner’s predecessor, Henry Paulson. Paulson ultimately got nowhere with the Chinese on crucial issues, and the question is whether Geithner will make any headway with a China that is now more confident, assertive and stronger than it was just a few months ago.
The answer, in short, is no, for two fundamental reasons. First, Obama’s Washington thinks the U.S. has little or no leverage, economic or otherwise, with China. The new administration is wrong for many reasons. For instance, it grossly underestimates Beijing’s dependence on the American market. In 2007, 97.7% of China’s overall trade surplus related to sales to the U.S., and in 2008 the figure was 90%.
Moreover, American policymakers do not understand that, given the current structure of the Chinese economy, Beijing has little choice but to continue to buy American debt.
Finally, Washington overestimates the Communist Party’s ability to take corrective action and move away from Chinese reliance on exports to the U.S. Until the Obama team substantially changes its perceptions of China, Washington will not use its power to influence the policies of Beijing’s leaders.
The U.S. Has All the Leverage With China – Gordon Chang, Forbes
Jun 102009
It’s starting to look like the spring awakening in bank stocks may not be enough to save the CEOs of America’s biggest troubled banks, Citigroup’s Vikram Pandit and Bank of America’s Ken Lewis.
A top banking regulator is agitating for Pandit’s removal, according to a report Friday in the Wall Street Journal. The clash between Pandit and Sheila Bair, the head of the Federal Insurance Deposit Corp., comes just a month after restive shareholders at Charlotte-based BofA (BAC, Fortune 500) stripped CEO Lewis of his chairmanship.
The FDIC told CNN it had no comment on the story. Citi (C, Fortune 500) says it stands behind Pandit, who took over as CEO at the end of 2007 and has spent much of his tenure trying to clean up the messes left by his predecessors Chuck Prince and Sandy Weill.
In a statement to CNN Friday, Citi chairman Dick Parsons said the company was “confident in our management.”
BofA has similarly endorsed Lewis, and the three-month-long rally in bank stocks has quieted talk of wholesale government takeovers of these firms.
But given the massive investor losses at these banks and the failure of their top managers to anticipate the industry’s meltdown last year, few would shed a tear at either executive’s departure.
“These companies are sort of the poster children for the excesses that created this crisis,” said Eric Jackson, an activist investor and managing member of Ironfire Capital in Naples, Fla. “I think it’s appropriate for the regulators to push for substantial changes in management and on the boards.” Jackson’s firm does not own shares of either bank.
Citi and BofA have been the two biggest bank recipients of federal aid since the financial crisis erupted last fall. Together they have taken some $500 billion in federal aid, the lion’s share of which has come in the form of federal guarantees of their troubled assets.
Recently, both firms have shown some signs that they have broken out of what earlier this year looked like terminal decline.
Shares of Citi have tripled since Pandit surprised Wall Street by saying Citi was on track for its first quarterly profit since mid-2007. BofA’s stock price has quadrupled during the same time frame.
Both banks went on to report better-than-expected first-quarter results in April. Those surprises further boosted the shares even as many observers warned the numbers were padded by one-time gains and legal but incredible accounting maneuvers, such as profits tied to the declining value of the banks’ own debt.
The hopes of a banking sector recovery only intensified after regulatory stress tests showed banks didn’t need that much more money. The findings helped spur a surge of capital raising from the private sector that has bolstered the balance sheets of many big institutions.
Citigroup’s Vikram Pandit Is On the Hot Seat – Colin Barr, Fortune
Jun 102009
By any reading of the man, George W.P. Hunt — Arizona’s first governor — was a progressive Democrat. He favored creating an income tax, extending the right to vote to women, and passing compulsory education laws. But when it came to drafting a constitution that would bring Arizona into the union as the 48th state, “Old Walrus,” as he was called for his weight of about 300 lbs and his handlebar mustache, presided over a convention in 1910 that banned nearly all government subsidies to private business.
Hunt would probably be amazed at what’s happening in Arizona today, as the old battles are once again being fought — this time in the state Supreme Court, which is taking up a lawsuit to determine whether cities can give subsidies to private companies.
Arizona’s founders banned gifts to private companies as the result of bitter experience. In the closing decades of the 19th century, local governments borrowed money to force-feed private railroad development. Pima County outside of Tucson, for example, took out $300,000 in bonds in 1882 for a railroad that promised to build some 100 miles of track. The money was spent but the railroad dissolved after a mere 10 miles of track was constructed. The bonds were worthless, but taxpayers were still on the hook for the money.
This time around it’s shopping malls and the like, and the preferred subsidy is tax rebates rather than bonds. But the result is the same. Local governments are foisting the cost of private development onto taxpayers as private companies promise that with just a few tax dollars they will create a wealth of new jobs.
People aren’t buying it, and there’s a revolt underway against government subsidized megaprojects. In November, voters elected mayors in Mesa, Scottsdale and Tempe who promised to fight taxpayer subsidies. In Phoenix, voters have elected three candidates to the city council who oppose wooing developers with taxpayer money. And it is in Phoenix where the biggest fight is taking place.
Two years ago, the city signed a contract with developer Thomas J. Klutznick, who is building an outdoor mall. The city has to rebate to him $97.4 million in sales taxes over the next 11 years, in return for which it gets 200 parking spaces for commuters catching a municipal bus. The mall, called CityNorth, will be home to an Ann Taylor Loft and other retailers, as well as residential apartments that are already being rented. Arizona Republic columnist Laurie Roberts summed up the deal earlier this year by noting the city will spend about $487,000 for each commuter parking spot. “Wouldn’t it be cheaper to just chopper them in to work?” she wrote.
Nonetheless, CityNorth is the kind of project that city planners dream about as they seek to remake urban landscapes — grand in scale as it stretches 144 acres, and grand in impact as it serves tens of thousands of residents and shoppers. City officials promise it will create a “second downtown” for Phoenix.
That second downtown will be at the expense of employers who are lured away from other cities, and give companies in the new mall a tax advantage over business outside of it. That’s hardly fair, so the Goldwater Institute, a free-market think tank in Phoenix that I run, sued Phoenix Mayor Phil Gordon in state court on behalf of Meyer Turken, who owns a real estate company, and five business owners. The suit seeks to enforce the provision in Old Walrus’s constitution that bans government handouts. The provision is known as the “Gift Clause.”
We lost the first round in the case, but two days before Christmas last year the Arizona Court of Appeals unanimously reversed the lower court ruling and said, “We think these payments are exactly what the Gift Clause was intended to prohibit.” Phoenix then took Turken v. Gordon to the state Supreme Court, which this week agreed to hear the case.
Cities across Arizona are waiting to see what the court does. This has become a fight over just how involved in the economy government should be allowed to get — whether local and state governments should be in the business of bolstering some, but not others, with tax breaks.
Government-sponsored development isn’t popular. Public Opinion Strategies polling found earlier this year that 80% of Phoenix taxpayers oppose their city’s subsidies for CityNorth and agree that the developer and the retailers who move into the new mall “should pay their own way.” The subsidy is also attracting opposition outside of Phoenix. Last week, Mayor W.J. Lane of neighboring Scottsdale won support from his city council to file a friend-of-the-court brief in support of our lawsuit.
New York, Maryland and 34 other states have gift clauses similar to Arizona’s. Thus, Arizona’s legal precedent could influence how local and state governments approach redevelopment across the country. On the federal level, any member of Congress upset with the bailouts of the auto or financial industries might want to consider proposing a Gift Clause amendment to the U.S. Constitution that would explicitly ban bailouts that benefit one company or industry.
When asked about the lawsuit, Phoenix Deputy City Manager David Krietor told a reporter that “This is a landmark case that will dramatically impact our ability to do economic development.” He’s right. But Mr. Krietor should be considering whether it’s right for the government to “do” this at all. As his Democratic progressives came to understand in Old Walrus’s day, government payouts to private businesses don’t always pay off — and often it’s taxpayers who end up having to pay up.
Ms. Olsen is president & CEO of the Goldwater Institute of Phoenix, Ariz., which is litigating Turken v. Gordon.
Arizona’s Landmark ‘Bailout’ Battle – Darcy Olsen, Wall Street Journal
