Obama Clears the Air With Auto Industry

Today is one of those increasingly rare situations where business news is also the front page news. The New York Times plants on its front page three big business stories: Today, President Obama will announce tightened fuel-efficiency and emissions standards for U.S. automakers; the nation's credit card business will likely see an overhaul, as other outlets report that American Express (AXP) is taking cost-cutting measures; and, finally, a look at BlackRock, which the paper says, is emerging from the financial maelstrom as one of the strongest players. The Wall Street Journal conducts its own stress tests on small banks (that's so Journal!). Reuters says a GM bankruptcy is pretty much inevitable, and Bloomberg and the Financial Times report on big banks that are rushing to pay back government loans—a move that will cost taxpayers, the NYT adds.

The WSJ off-leads with the announcement today that U.S. cars will by 2016 need to provide at a minimum 35.5 miles per gallon and 39 mpg for passenger cars, changing a law that requires this standard be met by 2020. This could add $1,300 to the average cost of making a vehicle, which is bad news for Detroit as it struggles to maintain its head above water. What this means for consumers is they will likely be buying gas-electric hybrids or subcompacts "outfitted with fuel-stingy engines," as the Journal puts it. In an abrupt departure from expectations, as well as from previously uttered gripes, the auto industry says it welcomes a national fuel-efficiency standard, the NYT says. "For seven long years, there has been a debate over whether states or the federal government should regulate autos," Dave McCurdy, president of the Alliance of Auto Manufacturers, the industry's largest trade association, explains to the paper. "President Obama's announcement ends that old debate by starting a federal rulemaking to set a national program."

Meanwhile, Reuters reports that auto industry experts and analysts say there's almost no way General Motors will be able to avoid bankruptcy court. "The only way it is not inevitable is if the government accepts whatever percentage of bondholders have tried to exchange, whether it is 40 percent or 50 percent or 60 percent," Peter Kaufman, president and head of restructuring and distressed mergers and acquisitions at the Gordian Group LLC in New York tells the site. GM (GM) has said that it must have 90 percent of the $27 billion of bonds participate in the exchange or it will be forced to file for bankruptcy, and the June 1 government-imposed deadline for the company to restructure is looming.

The NYT takes a look at the ailing credit card industry, which, it says, is moving to make it more expensive for the long-rewarded, pay-on-time customer to buy on credit. "Banks are expected to look at reviving annual fees, curtailing cash-back and other rewards programs and charging interest immediately on a purchase instead of allowing a grace period of weeks, according to bank officials and trade groups," the paper says. The change comes as Congress is trying to "limit the penalties on riskier borrowers, who have become a prime source of billions of dollars in fee revenue for the industry." On Thursday, the Senate is scheduled to vote on legislation that does not provide a cap on interest rates, so credit card companies and banks will be able to lift them, "albeit at a slower pace and with greater disclosure." American Express, Citigroup (C), and Bank of America (BAC), among others, have already begun to raise interest rates even on customers who pay their bills on time.

AmEx, which is "reeling from rising defaults and delinquencies on its credit cards," will make a second round of employee cuts, eliminating 4,000 positions, or 6 percent of its work force, largely through layoffs, the WSJ and Reuters report. The decision will save the company $800 million this year with $175 million coming directly from personnel cuts. Another $500 million will come from cutbacks in marketing and business development. Last fall, AmEx announced it shed 7,000 jobs. AmEx remains in better shape than many of its rivals; it was one of 19 banking companies to be stress tested by the government and was among eight others told it would not have to raise capital. The company has said it intends to pay back the $3.4 billion it accepted through Troubled Asset Relief Program as soon as possible.

Speaking of TARP, Bloomberg and the FT report that Goldman Sachs Group (GS), JPMorgan Chase & Co. (JPM), and Morgan Stanley (MS) applied to pay back an aggregate $45 billion in government loans, which must first be approved by the Federal Reserve. Treasury Secretary Timothy Geithner said last month he would welcome firms returning TARP funds as long as their regulators signed off on the measure. However, an insider tells Bloomberg that before TARP funds will be allowed to be paid back, he expects the government to issue "industry-wide compensation guidelines." Geithner said yesterday that he wants to put in place "some broad constraints" on compensation incentives rather than set pay limits. The NYT puts the move into perspective for taxpayers, saying that banks wanting to get "Washington out of their hair are pushing to undo those investments as quickly—and cheaply—as possible." If they are allowed to pay back the funds, "billions of taxpayer dollars could be left on the table."

BlackRock, according to the NYT and WSJ, may become a household name in the post-credit crisis era. The risk-advisory and asset-management firm has been granted preliminary approval to become one of a few money managers to buy toxic assets from U.S. banks, using taxpayer money. Chief Executive Lawrence Fink aims to raise as much as $7 billion to invest through the program (which would mean millions in fees for his firm). BlackRock has already been selected to manage mortgage assets from Bear Stearns and American International Group (AIG) and to analyze assets of Freddie Mac (FRE) and Morgan Stanley, to name a few. But, as the NYT asks: "Can a company that is being paid to price and sell troubled assets for the government buy the same kinds of assets for private clients without showing preference? And should the government seek counsel from a company whose clients stand to make or lose billions if those policies are enacted?" The answer, derived from a number of analysts and other managers is, no.

The Journal, not to be outdone by the government, went ahead and did its own tests on 940 small banks around the nation and found that most will be in much worse shape than the big banks if the economy worsens. For example, defaults on commercial real estate loans, which fund the construction of malls, offices, apartments, and hotels, could generate losses of $100 billion by the end of next year under a bad-case scenario. "Under that scenario, more than 600 small and midsize banks could see their capital shrink to levels that usually are considered worrisome by federal regulators. The potential losses could exceed revenue over that period at nearly all the banks," the paper writes.