Marketplace Scratch Pad

That’s more like it…?

Scott Jagow Mar 30, 2009

The President is playing hardball with GM and Chrysler. His auto task force has rejected the carmakers’ turnaround plans, forced out GM’s CEO, and warned of bankruptcy if Detroit doesn’t get its act together quickly. It sounds like progress, but does the administration really intend to follow through? And why isn’t Wall Street getting this kind of treatment?

First of all, as 24/7 Wall Street points out allowing GM and Chrysler to go bankrupt would seriously undermine the President’s efforts to create or save 3.5 million jobs in the next two years:

A million jobs lost in Detroit would also cut deeply into the receipts that the IRS is forecasting over the next year. That puts the revenue projections in the budget at real risk. The government wants the car companies to believe that it has put a Sword of Damocles over the head of the industry. If GM and Chrysler look up, they will see it is not really there at all.

Well, it might be there for all to see, but whether the blade is sharp is another matter. The President has given Chrysler 30 days to strike a deal with Fiat or there will be no more government loans. Either the administration knows that deal is very likely and bankruptcy won’t be needed yet or it thinks that deal won’t happen in 30 days, and it’s greasing the wheels for a Chrysler bankruptcy. (Update – obviously, based on today’s news that Chrysler and Fiat are close to a deal, it appears it’s the former).

As for GM, Seeking Alpha says Rick Wagoner’s departure is largely symbolic but might also shake things up just enough:

GM is in a hole that took decades to dig, and Wagoner has helped position the company to crawl out. Someday. He’s cut billions in costs, closed 12 factories, slashed payroll by more than 100,000 workers and overseen a restructuring plan that calls for winding down half of GM’s eight divisions. “If he has one flaw, it’s that he hasn’t done it all fast enough,” says William Holstein, author of Why GM Matters. “He might not be enough of a sonofabitch.”

The Obama administration is looking for somebody who is.

His name is Fritz Henderson, GM’s new CEO. He’s an insider. He’s been GM’s President and COO. Henderson needs to act swiftly and decisively while he has the momentum of the administration’s threats. Make deals with labor unions and creditors right away. If he can’t do this, it will seriously handicap other efforts, like continuing to shrink and refocus the company.

The Wall Street Journal raises the question, why aren’t the banks getting the same treatment as the carmakers?

For the nation’s top banks, a test of whether President Barack Obama’s tough stance will extend to Wall Street will likely come in late April with the result of the government’s “stress tests.” These financial examinations are designed to see how well banks can weather even tougher economic conditions. Those that don’t make the grade will be required to raise more capital.

The President would do well to take the same hard line with the banks that he’s seemingly taking with the carmakers. It’s what the American people expect at this point.

Of course, he can’t just make idle threats. He has to follow through, or everyone will see right through his “tough” stance.

We’re here to help you navigate this changed world and economy.

Our mission at Marketplace is to raise the economic intelligence of the country. It’s a tough task, but it’s never been more important.

In the past year, we’ve seen record unemployment, stimulus bills, and reddit users influencing the stock market. Marketplace helps you understand it all, will fact-based, approachable, and unbiased reporting.

Generous support from listeners and readers is what powers our nonprofit news—and your donation today will help provide this essential service. For just $5/month, you can sustain independent journalism that keeps you and thousands of others informed.