White House Throws Wagoner and Market Rally Under the Bus

by Steven M. Cohen  •  Mar 30, 2009 at 2:43 pm

http://www.buyselljump.com/2009/03/white-house-throws-wagoner-under-bus

There is no hope for print media. It's March 30 and I'm reading the April 6^th issue of Business Week that may already be irrelevant. Specifically, the article I'm looking at is entitled "This Rally May Be For Real." Problem is, it's a rather blue Monday and the market is down nearly 300 points mid-morning. Future-dated, backward-looking material out of sync with the present is enough to give you whiplash.

But I have digressed already, something that should not be done in the first paragraph, so let's get back on point. The reasons for today's market indigestion are complex and perhaps not readily apparent. The most obvious one might be Treasury Secretary Timothy Geithner's weekend observation that many banks will need a lot more financial help before they are out of the woods. This splash of ice water predictably has cooled off financial stocks, some of the best performers during the market's recent surge of about 20% from its early March lows.

But I think the most jarring news for investors was the government's ouster of General Motors CEO Rick Wagoner. It is true that supporters of Wagoner are becoming about as extinct as GM SUV buyers. He was widely viewed as sort of the captain of the Titanic. GM employees saw him as the enemy, industry analysts gave thumbs-down on his vision and management, and he probably will not be mourned. In all likelihood, he was a goner soon anyway.

But his removal specifically by government decree is a stark reminder that the car companies, at least Chrysler and GM, have been de facto nationalized. Sure, GM still has shareholders, and even a board of directors, but they are becoming increasingly irrelevant. It is now the government's prerogative whether to remove managers and replace board members. Clearly it will be the government's decision whether one or both of these companies enter bankruptcy, prepackaged or not. Thus, Wagoner's removal symbolizes the federal government's final consolidation of power over a major American industry. It is the most emphatic evidence yet that we are well on the way to a Central Planning economy.

(Financial types continue to play various and sometimes conflicting roles for the administration. After weeks of bashing Wall Street, the president recently did an about-face in an effort to conscript the financial community into the new public-private bank bailout plan. And the hit-man who actually gave Wagoner the word yesterday was Steven Rattner, precisely the type of Wall Street financier recently condemned as greedy miscreants, who now moonlights as head of the White House auto industry task force.)

Despite the abruptness with which Wagoner was removed, this all seems part of a gradual, and perhaps inevitable, process by which the car companies are incrementally proceeding towards the kind of prepackaged bankruptcy that probably was the best solution in the first place. Except now the government has spent months pouring billions into GM and Chrysler, with nothing to show for it but continued hemorrhaging. A bankruptcy with the details worked out in advance would be the most cost-effective, organized way to proceed, and it's puzzling why the government continues to resist this option.

Equally puzzling was the president's commentary in today's homily on the government's intervention. He was surprisingly gracious to Wagoner, absolving him of blame for GM's collapse, an extraordinary gesture from someone who has gotten so much mileage out of bashing business and business executives, especially industries that are receiving bailout funds. Nor were the workers at fault, according to the president; instead, they were victims of this collapse. Perhaps the president is not familiar with the contracts the auto unions negotiated on behalf of these workers, with their obscene legacy costs and bloated health care guarantees, not to mention the requirement to pay workers at full scale who were sitting around unoccupied. Such is the president's debt to Big Labor that he could maintain with a straight face that the auto workers shared no part in where the industry finds itself today.

The White House is in danger of overplaying its hand with these symbolic sacrifices. By making it appear that the management selected by a company's board of directors is not up to the task, and that instead government has all the answers, the administration is actually undermining the very confidence that must be restored in the business community as part of an economic recovery. It should be pretty plain that there is little that government runs effectively and efficiently. Instead, waste and bureaucracy are the order of the day. It would have been better to let nature take its course and do away with Wagoner naturally, a process which appeared to be under way without the government throwing him off the ledge. That way at least it would not have looked like the government is now completely in charge, a role it can only play clumsily, notwithstanding the skills of the car czar and his colleagues on the White House panel.

Another exercise in making executives look weak preceded the Wagoner exile. The president's meeting with the bank executives he summoned to the White House last week almost seemed staged to make the bankers look weak and even silly. The administration made it a point to announce that the president's guests were given only water and were not offered anything to eat. While perhaps the White House sought to create the impression of austerity in hard times, it instead conveyed the message that the president thought they weren't worth the cost of lunch. The press photos of a line of similarly-dressed, somber-faced bank leaders filing across the lawn with the White House in the background at the meeting's conclusion certainly made them all appear small, whether intended or not. They looked like a group of boys in a fancy private school exiting the headmaster's office after a reprimand. Making these bankers look foolish, even in subtle ways, is not the best way to buoy the public's confidence in the banking system and those ostensibly running it.

Vast amounts of taxpayer dollars are being spent to stabilize the economy and even prop up whole industries, like the car business. It might also make sense to try to create a renewed sense of confidence in the private sector managers responsible for running American companies assuming, of course, that the government eventually will get out of the way and return control to the private sector. The White House managed to do the opposite today, and its symbolic sacrifice of Rick Wagoner served to undermine confidence and beat the stuffing out of a market that had recently had shown signs of recovery, at least according to a an already-outdated article in a future issue of Business Week.

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