Administration strikes cautious economic tone as G.M.'s new C.E.O. makes the Sunday rounds

General Motors' new C.E.O., Fritz Henderson, appeared this morning on NBC's Meet the Press and CNN's State of the Union to say that G.M. would survive as a company, even though bankruptcy loomed as a viable option. Henderson took the reigns at G.M. after the Administration asked former-C.E.O. Rick Wagoner to resign.

Henderson said that G.M. was focused on quickly returning to profitability so that they could repay the taxpayer's money.

"The day we took money from the taxpayer was one of the -- one of the most difficult days of certainly my career and of the history of General Motors," he said. "We need to respect the fact that we need to look after the taxpayer, we need to justify to the consumer and the taxpayer that we’re going to succeed going forward. And one of the -- one of the happiest days of my future career is going to be the day we pay the loans back."

Henderson refused to rule out the possibility of bankruptcy, saying that the company would do whatever was necessary to meet the goals set by the President's Task Force on the Auto Industry.

"Now we’re 55 days, not 60 days away -- and we either accomplish this job outside of bankruptcy in the short term; or alternatively, if it’s necessary, we’ll go into bankruptcy in order to get this job done," he said.

White House Senior Advisor stressed on Fox News Sunday that G.M. still had much work to do. "Whether it comes through some sort of structured bankruptcy or another process," he said, "there is no doubt that for General Motors to survive and prosper, as we all want them to, they’re going to have to do serious restructuring."

Speaking to the broader economy, Treasury Secretary Timothy Geithner stressed on CBS' Face the Nation that even as the economy recovers, it may take some time for the unemployment rate to fall.

"The typical pattern of recoveries," he explained, "is that growth recovers, growth starts to turn positive, people start to spend more, people -- businesses hire more, they invest more, before you see unemployment peak. That’s the crude reality of recoveries."

Geithner also left open the possibility that the government would ask bank executives to resign.

"If, in the future, banks need exceptional assistance in order to get through this, then we’ll make sure that assistance comes with conditions, not just to protect the tax payer but to make sure this is the kind of restructuring necessary for them to emerge stronger," he said. "Where that requires a change of management of the board, we’ll do that."

Geithner also emphatically denied reports that the Administration was working to circumvent Congress' restrictions on executive pay.

"Our obligation is to apply the laws that Congress just passed on executive comp," he said. "And we’re going to do that."

The Sunday talk shows also discussed North Korea's failure this morning to launch a missile that could deliver a payload into orbit. Susan Rice, the U.S. Ambassador to the U.N., appeared on ABC's This Week before heading to New York for an emergency meeting of the Security Council.

"Our assessment is that their pursuit of a missile capability is of grave concern and that their aim is to achieve the capability to deliver a weapon as potentially as -- to North America. I think we have to look at exactly what transpired today and make a new assessment of the consequences," she said.

Obama's Detroit determination: GM "can rise again," Chrysler needs a partner

President Barack Obama broke the bad news to the General Motors and Chrysler, officially announcing that neither of the struggling companies will be given the money they need to survive without the government stepping in.

Plans submitted to the Obama administration by the two auto giants did not meet the White House's expectations for restructuring, the president said today, and neither Chrysler nor GM warrants "the substantial new investments that these companies are requesting."

However, funds will be provided to allow time for a more aggressive plan to be developed. (See the good and the bad Consumer Reports found from Chrysler and GM.)

GM did get a slightly more upbeat appraisal from the president, sending the struggling automakers to go back to the drawing board.

"While GM has made a good faith effort to restructure over the past several months, the plan they have put forward is, in its current form, not strong enough," Obama said. "However, after broad consultations with a range of industry experts and financial advisers, I’m confident that GM can rise again, provided that it undergoes a fundamental restructuring."

The government will give GM enough cash to operate for another 60 days, but there are strings attached. Rick Wagoner, the company's CEO and chairman, will step down. (Read more about GM’s executives on CR’s Cars Blog.)

GM will have to work with the White House's autos task force to come up with a plan to meet four points:

• Sustainable profitability: A viable GM should be able to generate meaningful positive free cash flow in a normalized business environment, generate net free cash flow over the course of a business cycle and invest capital in research and development and capital expenditures sufficient to maintain or enhance its competitive position while also earning an adequate return on its capital.
• A healthy balance sheet: The restructuring must substantially reduce GM’s outstanding debt and existing liabilities to a level where they are consistent with both its normalized cash flow and the cyclical nature of its business. Given the deterioration in the auto market since late last year, this will require substantially greater balance sheet concessions than those called for in the existing loan agreements.
• More aggressive operational restructuring: The restructuring plan must rapidly achieve full competitiveness with foreign transplants and more aggressively implement significant manufacturing, headcount, brand, nameplate and retail network restructurings.
• Technology leadership: The new GM will have a significant focus on developing high fuel-efficiency cars that have broad consumer appeal because they are cost-effective, have good performance and are reliable, durable and safe.

Chrysler got a less hopeful review from the White House.

"It is with deep reluctance but also a clear-eyed recognition of the facts that we have determined, after a careful review, that Chrysler needs a partner to remain viable," Obama said. "Recently, Chrysler reached out and found what could be a potential partner – the international car company Fiat, where the current management team has executed an impressive turnaround."

The president said that Chrysler has 30 days to make a Fiat deal happen. The government will hand out enough money for Chrysler to keep running in that time. If the two can make a partnership happen, the government will "consider lending up to $6 billion to help their plan succeed."

Obama left open the option that one or both of the companies may have to declare bankruptcy. He did try to make that prospect less threatening for employees, consumers, and shareholders.

"I know that when people even hear the word 'bankruptcy' it can be a bit unsettling, so let me explain what I mean," Obama said. "What I am talking about is using our existing legal structure as a tool that, with the backing of the U.S. government, can make it easier for General Motors and Chrysler to quickly clear away old debts that are weighing them down so they can get back on their feet and onto a path to success; a tool that we can use, even as workers are staying on the job building cars that are being sold. What I am not talking about is a process where a company is broken up, sold off, and no longer exists. And what I am not talking about is having a company stuck in court for years, unable to get out.”

The president also said that the government will back GM and Chrysler warranties. That may or may not alleviate the fears of car buyers, 78 percent of whom said they were unlikely to consider buying a new car from an automaker in bankruptcy, according to a recent Consumer Reports survey.

General Motors C.E.O. resigns ahead of federal aid announcement

General Motors C.E.O. Rick Wagoner resigned this morning at the urging of the Obama Administration ahead of an announcement detailing plans developed by the Presidential Task Force on the Auto Industry.

Wagoner, a G.M. employee for 31 years, presiding over losses totaling $82 billion during his eight-year tenure as C.E.O.

The President will announce tomorrow whether General Motors will receive $16.6 billion in requested government aid. The company is currently operating on a $13.4 billion infusion from the federal government.

On CBS' Face the Nation Obama this morning said that automakers faced significant challenges.

"They’re not quite there yet," he said, adding: "That’s going to mean a set of sacrifices from all parties involved, management, labor, shareholders, creditors, suppliers, dealers. Everybody is going to have to come to the table and say it’s important for us to take serious restructuring steps now in order to preserve a brighter future down the road."

Chrysler, which has also requested government aid, is expected to keep their C.E.O., Robert Nardelli. It is not yet known who will take the helm at General Motors.

Obama and team flood Sunday talk shows to discuss the economy, Afghanistan

President Obama joined the Secretaries of Defense and the Treasury this morning on the Sunday talk shows to discuss the economy and the commitment of additional troops to the war in Afghanistan.

Speaking on CBS' Face the Nation the President recounted his tough conversation with the leaders of the nation's top banks.

"What I said was, look, first of all, there are a lot of bankers that are doing good work in the community, that are acting responsibly, that haven’t taken huge risks. I understand that. But understand that for the average single mom who is just barely struggling to pay her mortgage or medical bills for her kid, who is paying her taxes, who is playing by the rules, and then finds out that a taxpayer-assisted firm is paying out multimillion-dollar bonuses, that’s not just not acceptable."

The President reaffirmed his commitment to make permanent the two-year middle class tax cuts passed as part of his recent stimulus package. "I’m going to be pushing as hard as I can to get it done in this budget," he said. "If it’s not done in this budget, then I’m going to keep on pushing for it next year and the year afterwards, so that we don’t see a drop-off after the two-year tax cuts."

Over on ABC's This Week, Treasury Secretary Timothy Geithner stressed that the government's response to the crisis would not end soon. "The lesson of financial crises is governments tend to do too little," he said, "They wait too long to escalate."

On NBC's Meet the Press, the Secretary defended his decision to provide nearly $1 trillion public-private loan guarantees as a simple choice between action and prolonged economic turmoil. "We can let -- leave that as it is, hope that banks earn their way out of this over time. That would be a mistake," he said. "That would leave us with a strong -- with a deeper, longer recession."

The President also discussed his decision to commit additional troops to the war in Afghanistan, saying it was a vital step in combatting Al-Qaida.

"What we want to do is to refocus attention on Al Qaida.," he said. "We are going to root out their networks, their bases. We are going to make sure that they cannot attack U.S. citizens, U.S. soil, U.S. interests and our allies’ interests around the world."

Secretary of Defense Robert Gates agreed on Fox News Sunday that Al-Qaida remained a serious threat, saying that Administration was willing to consider alternate proposals if the troop increase proved ineffective. "I think [The President has] been clear -- and frankly, it was my view in our discussions -- that we don’t want to just pursue -- settle on this strategy and then pursue it blindly and open-endedly," he said.

Senator McCain speaking on Meet the Press endorsed the President's approach, saying: "I think this -- the outlines of this proposal are good. The best way to get out of Afghanistan fast is people to think we’re staying."

Obama goes online to talk about the economy

President Barack Obama hosted an online town hall meeting today from the White House.

The president answered 12 questions in a little more than an hour--six were from the web site and six were from the audience. About 3.5 million people voted on which questions should be asked, the president said.

The White House said that 104,081 questions were submitted by 92,933 people and that about 67,000 people watched on WhiteHouse.gov, in addition to those who watched on television. 

The general topic was the struggling economy, but the questions ranged from the job market to small business loans to what the government is doing about the auto industry.

The president did answer one question which wasn't officially asked, but was one of the most popular topics in the voting on WhiteHouse.gov.

"I have to say that there was one question that was voted on that ranked fairly high and that was whether legalizing marijuana would improve the economy and job creation," Obama said with a chuckle. "And I don't know what this says about the online audience, but I just want--I don't want people to think that--this was a fairly popular question; we want to make sure that it was answered. The answer is, no, I don't think that is a good strategy ... to grow our economy."

Stock markets soar after Treasury details plan to buy bad assets

With just about every member of the financial world looking on, Treasury Secretary Tim Geithner detailed his department's plan to launch a public-private partnership to buy toxic loans from struggling banks. And, if the stock market is a barometer of their mood, they liked what they saw.

The Dow Jones Industrial Average climbed 6.8 percent, closing up almost 500 points.

The S&P 500 ended the day more than 7 percent higher.

The NASDAQ Composite jumped more than 98 points.

Treasury Department's plan to fix banking starts with at least $75 billion

The Treasury Department's effort to clear bad loans off banks' books will begin with an investment of $75 billion to $100 billion, with the option to commit more funds later.

The government's money will be used to kick start investment in the "Public-Private Investment Program" which will buy up to $500 billion in troubled assets from banks.

Once those toxic assets--the Treasury calls them "Legacy Assets"--are cleared from the banks' balance sheets, those banks can begin offering new loans to power the economy, or so the Obama administration hopes.

The Treasury Department said its plan was designed around three basic principles:

• Maximizing the Impact of Each Taxpayer Dollar: First, by using government financing in partnership with the FDIC and Federal Reserve and co-investment with private sector investors, substantial purchasing power will be created, making the most of taxpayer resources.
• Shared Risk and Profits With Private Sector Participants: Second, the Public-Private Investment Program ensures that private sector participants invest alongside the taxpayer, with the private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns.
• Private Sector Price Discovery: Third, to reduce the likelihood that the government will overpay for these assets, private sector investors competing with one another will establish the price of the loans and securities purchased under the program.

The government also described how the process will work:

Banks Identify the Assets They Wish to Sell: To start the process, banks will decide which assets – usually a pool of loans – they would like to sell. The FDIC will conduct an analysis to determine the amount of funding it is willing to guarantee. Leverage will not exceed a 6-to-1 debt-to-equity ratio. Assets eligible for purchase will be determined by the participating banks, their primary regulators, the FDIC and Treasury. Financial institutions of all sizes will be eligible to sell assets.
Pools Are Auctioned Off to the Highest Bidder: The FDIC will conduct an auction for these pools of loans. The highest bidder will have access to the Public-Private Investment Program to fund 50 percent of the equity requirement of their purchase.
Financing Is Provided Through FDIC Guarantee: If the seller accepts the purchase price, the buyer would receive financing by issuing debt guaranteed by the FDIC. The FDIC-guaranteed debt would be collateralized by the purchased assets and the FDIC would receive a fee in return for its guarantee.
Private Sector Partners Manage the Assets:Once the assets have been sold, private fund managers will control and manage the assets until final liquidation, subject to strict FDIC oversight.

The initial reaction from the financial community to the Treasury Department's plan seemed to be positive, as stock markets climbed in early trading. At 11:30 a.m., the Dow was up about 275 points and the NASDAQ was up around 50 points.

More information about the Treasury Department's "Public-Private Investment Program" is available at financialstability.gov.

Administration set to announce regulatory reform and recovery proposals

The Administration tomorrow will announce a long awaited plan to help banks grapple with the financial crisis, along with a regulatory reform proposal that would grant the government broad new powers to protect the economy against financial shocks.

The Administration is preparing to spend up to $1 trillion to lift the toxic assets at the heart of the financial crisis from banks' balance sheets. The government plan would create a new entity called the Public-Private Investment Program to held distribute the risk between taxpayers and private investors.

Under the plan, the government would offer billions in low-interest loans to help the private sector purchase toxic assets. Using money from the $700 bank bailout fund, the government would match private investments dollar for dollar and share in both the losses and the potential profits.

The Treasury would also expand its recently-launched $1 trillion Term Asset-Backed Securities Loan Facility to help sweep up toxic assets. The TALF is currently setup to guarantee the loans behind securities backed by consumer debt such as auto loans, student loans, and credit card debt.

The FDIC would also be called upon to share their expertise in managing the toxic assets retrieved from failed banks.

“We’re going to move quickly to lay out a new financing program to deal with these legacy assets,” Treasury Secretary Timoth Geithner told Bloomberg News. “We have and expect to see a lot of support for this program.”

Under the proposed regulatory framework, the Treasury Secretary, with the permission of the President and the Federal Reserve, would be empowered to place into government conservatorship ailing institutions whose collapse could threaten the financial system.

The Treasury Secretary would then be permitted to dissolve contracts and limit payments to creditors. These powers would largely prevent a recurrence of the bonus debacle currently plaguing A.I.G.

The Public-Private Investment Program will be announced tomorrow, with an announcement concerning the new regulatory framework coming by Tuesday.

Fannie and Freddie bonuses in the crosshairs

Fannie Mae and Freddie Mac, the mortgage giants taken over and bailed out by the federal government, appear to be next on Washington's target list of failing companies which have given out executive bonuses.

Rep. Barney Frank, the House Financial Services Committee chairman, sent a letter to the director of the Federal Housing Finance Agency, which oversees the groups, asking him to cancel bonuses at Fannie and Freddie.

"I am writing to urge strongly that you rescind the retention bonus programs at Fannie Mae and Freddie Mac, prohibit any further payment of bonuses to executives under that program, and pursue repayment of any already-paid bonuses," Frank wrote. "The public, having provided significant support for the purpose of restoring trust and confidence in our country’s financial system, rightfully insists that large bonuses such as these awarded by institutions receiving public funds at a time of a serious economic downturn cannot continue."

It was revealed that top executives at Fannie Mae would likely get bonuses in excess of $1 million as part of an employee retention program. The same is expected of Freddie Mac, but details are not public yet.

Fannie and Freddie own or back about half of the nation's mortgages. Both groups have asked for billions in federal money to prevent their collapse.

Fannie Mae's chief executive wrote a memo to employees this morning saying that eliminating the bonuses could jeopardize the rebuilding of the housing market.

"I am deeply concerned that eliminating our retention plan would jeopardize our ability to fulfill the mission the Government has given us to address the housing crisis, including the Administration's Homeowner Affordability and Stability Plan that so many of you have been working nights and weekends to carry out," Herbert Allison wrote, according to the Washington Post. "Your experience and expertise make you highly competitive in the job market, especially as so many other companies need your talents to work through this crisis."

Frank, in his letter, tried to head off that line of argument.

"I remain very skeptical that retaining and rewarding people who made the mistakes that contributed to the unsatisfactory performance is a good idea," Frank wrote. "Further, in this troubled economy, and in this job market, it is difficult to imagine that the companies would not be able to find competent and talented replacements for anyone who chooses to leave."

House passes bill taxing bonuses at AIG, other bailed-out companies

A day after a House panel vented its fury on AIG's CEO, the representatives voted to take back nearly all of the bonuses money handed out by the bailed-out insurance giant.

From an Associated Press report:

The Democratic-led House overwhelmingly approved a bill on Thursday to slap punishing taxes on big employee bonuses from AIG and other firms bailed out by taxpayers. The vote was 328-93. "We want our money back and we want our money back now for the taxpayers," said House Speaker Nancy Pelosi, D-Calif.

The bonuses, totaling $165 million, were paid to employees of troubled insurer American International Group, including to traders in the unit that nearly brought about the company's collapse.

In all, 243 Democrats and 85 Republicans voted "yes" on the bill. It was opposed by six Democrats and 87 Republicans.

The Senate has its own punitive measure for bonus-giving, bailed-out companies, charging a 35 percent tax on the company and a 35 percent tax on the employee receiving the bonus. The Senate is expected to take up the matter next week.

UPDATE: The White House released a statement from President Barack Obama regarding the House's bill.

"Today's vote rightly reflects the outrage that so many feel over the lavish bonuses that AIG provided its employees at the expense of the taxpayers who have kept this failed company afloat.  Now this legislation moves to the Senate, and I look forward to receiving a final product that will serve as a strong signal to the executives who run these firms that such compensation will not be tolerated.

In the end, this is a symptom of a larger problem – a bubble and bust economy that valued reckless speculation over responsibility and hard work. That is what we must ultimately repair to build a lasting and widespread prosperity."