Honeywell CEO in the Middle of Fiscal Cliff Standoff

originally appeared in The Wall Street Journal:

Honeywell International Inc. HON +1.00% chief executive David Cote gives the orders at the $48 billion industrial giant, but lately he has been taking directives from President Barack Obama and congressional Republicans, in hopes of finding a fiscal-cliff solution.

At a recent White House meeting with several CEOs, Mr. Obama told Mr. Cote, seated across from him, "Tell Republicans you will give them cover for tax increases if they want tough entitlement reform."

A few days later on Capitol Hill, House Republican whip Kevin McCarthy told the Honeywell chief, "Tell the White House the impact that failing to cut spending will have on the market."

Mr. Cote (pronounced KOH-tee) is the business executive most in the middle of the fiscal-cliff debate. He and senior White House adviser Valerie Jarrett talk or email several times at all hours every day. At the other end of Pennsylvania Avenue, he visits congressional offices a couple of days weekly, bringing along other corporate titans and a newly funded CEO campaign for a deficit compromise.

Mr. Cote's role shows a big change from last year's messy and inconclusive debt-ceiling debate: Business leaders aren't sitting on the sidelines this time. "We're not confident that our guys can govern anymore," says Mr. Cote, who switches out of the jeans he typically wears into a suit and tie when summoned by lawmakers.

He has received signals from both parties of possible compromises on the fiscal-cliff issues, about which Mr. Obama and House Speaker John Boehner met Thursday. Earlier in the day, Mr. Cote said he was getting "worried" that a sizable, credible deal was looking more difficult. His fear: It might be replaced by an "anemic deal requiring this country to keep fighting over these issues while the rest of the world becomes more competitive."

Mr. Cote's efforts are stirring controversy. To show his personal commitment to a fiscal deal, he says he would be willing to pay income tax at 39.6%—the highest rate in the Clinton administration—instead of the current top rate of 35%, or to lose deductions, provided significant cuts are made in entitlement programs such as Medicare.

Small businesses on the right and safety-net groups on the left scoff that Mr. Cote, whose total direct compensation was $25 million last year, can afford to be magnanimous.

Small businesses are more sensitive to personal tax rates—the rates at which many are taxed, via their owners' personal returns. That helps explain why small business is more closely aligned than big business with the GOP opposition to raising personal tax rates for anyone.

"A higher income-tax rate on us means we can't invest in new equipment or personnel," says Albert Macre, an owner of Triple Play Café in Steubenville, Ohio. "Maybe if I were making five to 10 million dollars a year like the big CEOs, I would be willing to pay higher taxes too."

Rep. Dave Camp, the Michigan Republican who heads the House Ways and Means Committee, says Mr. Cote "has tried to put pressure on the president and on us to get a deal...but I don't agree with all the policy specifics he's advocating." Mr. Camp says he told Mr. Cote the CEOs will be less effective in helping get a deal so long as they focus on higher tax rates, which "aren't the way to get Republicans to buy in."

Mr. Cote's efforts could benefit his business. Absent a cliff deal, deep cuts in federal spending on defense and many other programs will kick in. Success in averting them could help Honeywell, an aerospace and defense contractor that draws 10% of its $38 billion in annual sales from the government.

Mr. Cote also is getting on a first-name basis with power players and earning good will, goals that can take companies millions in campaign cash and lobbying fees to achieve.

"I'm being accused of all kinds of nefarious motives just because I'm a CEO," says Mr. Cote. He also concedes his cause diverts a lot of time from his job but says he tries to make it up from his personal time. In any case, "the best for my shareholders is a robust economy," he says, "which can't happen if the country is gridlocked over debt."

Whatever their motives, Mr. Cote and fellow big-business leaders are bringing some financial muscle to the table. They have funded an organization called "Fix the Debt," set up last summer by a bipartisan group to push for a comprehensive fiscal solution. While it can't contribute to campaigns, it can run glowing ads for members who face political consequences.

Mr. Cote is far from the only CEO pushing for a fiscal deal or willing to see tax rates go higher. But he is a central player. "People on both sides of the aisle are sending messages through Dave," says Senate Finance Committee Chairman Max Baucus (D., Mont.). "He's become an active participant…while warning that companies will continue to hoard cash and cut jobs if we fall off the fiscal cliff."

Mr. Cote says he doesn't "want to get dragged into being just a messenger…I tell each side what I think helps resolve this big problem for our economy."

His new role has been a "revelation," he says, on how dysfunctional Washington is. "I meet people on both sides I like and find reasonable, but they aren't working together."

A onetime cod fisherman, Mr. Cote became a General Electric Co. GE +1.04% executive and was in the running to succeed CEO Jack Welch 12 years ago. Once Mr. Cote realized he wouldn't get the top spot, he moved first to TRW Inc. and then to Honeywell in 2002, where he is credited with leading a turnaround.

He also made the company more of a political player. Its political giving has grown. Roughly 60% went to Republicans and 40% to Democrats in the 2012 election cycle, according to the nonpartisan Center for Responsive Politics.

President Obama named Mr. Cote to the Simpson-Bowles deficit-cutting commission in 2010. The role, Mr. Cote says, impressed him with the depth not only of the country's fiscal but its political problems. Commission co-chairman Alan Simpson recalls a day after months of partisan warfare when Mr. Cote took off his coat and told the group: "Who are you people? Is this the way you do the nation's business? I'd fire all of you."

During the bitter fight over raising the debt ceiling in the summer of 2011, Mr. Cote signed a letter with about 450 other CEOs urging the president and Congress to compromise for the good of the economy. He says the effort fell flat without any follow-up. The debt fight helped set the stage for the fiscal cliff by dictating mandatory spending cuts in January 2013 unless a bipartisan "supercommittee" could agree on deficit reductions, which it couldn't.

This year, with fiscal uncertainty hanging over the economy, Mr. Cote took steps to protect Honeywell from economic weakness. He says he started letting 300 job openings go unfilled each month and cut capital spending 15%, allowing $5 billion to pile up in corporate coffers.

On July 17, he hosted a dinner at Honeywell's Washington office for Mr. Simpson, a former Wyoming GOP senator, and Erskine Bowles, the Democratic former White House chief of staff who co-led the deficit-reduction commission with Mr. Simpson. Also there was Sen. Mark Warner (D., Va.), who was an entrepreneur before running for office.

"How can CEOs make something happen?" Mr. Cote recalls asking. After hearing two hours of debate, he summed up: engagement, money and message. Mr. Cote said he would recruit fellow CEOs and ask each for $1 million in corporate donations to Fix the Debt.

Sen. Warner questioned whether he could accomplish that before Congress returned after the November election. "Mark, you're dealing with CEOs now," Mr. Cote says he replied. "It will be done by Friday."

Mr. Cote started recruiting the heads of big corporations. By week's end, he says, he had raised $12 million. It has since grown to about $43 million.

"Our role is pretty simple: to make sure that every political leader understands the consequences of the fiscal cliff," says Caterpillar Inc. CAT +0.24% CEO Douglas Oberhelman. "If solved, companies will pour jobs and capital into the economy; if not, our economy remains fragile."

Mr. Cote sought a message that would resonate with his peers. His answer: calling for a "market-credible" plan to cut $4 trillion over 10 years from what the national debt would otherwise climb to. "We liked Dave's term," Mr. Oberhelman says. "It shows that this budget deal must address the short and long term to the financial markets."

Once legislators returned after the election, Mr. Cote and the CEOs descended on the Capitol to meet with them. Mr. Cote was in demand by both parties.

When the president invited a few CEOs to discuss the fiscal cliff three weeks ago, the staff seated Mr. Cote directly across from Mr. Obama. Afterward, Mr. Cote did on-camera interviews on the North Lawn.

In late November he led an entourage of CEOs for a flurry of meetings on Capitol Hill. This time, the Republicans told him to deliver a message. Senate Republican Leader Mitch McConnell told him, "You need to tell the president that we're willing to do tax reform if he does significant entitlement reform."

On the House side, Mr. Cote chatted with Republican whip Mr. McCarthy in his office, where they bonded over their interest in history. Mr. McCarthy showed him a window that survived a fire set by the British during the War of 1812.

When they joined the CEO group for a meeting with Speaker Boehner, Mr. Cote observed that "there's a lot of money on the sidelines waiting to be invested," with some estimates of $1 trillion on corporate balance sheets that could be released if CEOs had certainty on the country's fiscal condition.

Some economists are skeptical. "CEOs aren't passing up profitable opportunities waiting for a fiscal deal," says Dean Baker, co-director of the liberal-leaning Center for Economic Policy and Research. He estimates that a new law would spur "modest" investment by U.S. companies of about $30 billion to $40 billion over the next year.

The CEO meetings in Washington got the attention of opponents on the left and right. Small-business groups such as the National Federation of Independent Business launched their own campaigns; some owners pushed for and got separate sessions with House Republicans, who criticized the president for holding a second meeting with big-company CEOs.

Liberal groups, including Campaign for Community Change and Social Security Works, protested outside a hotel where Fix the Debt held a conference last week. They called Mr. Cote "an odd choice for spokesman" with his "retirement assets of more than $78 million and his company's pension underfunded by $2.8 billion." (Mr. Cote says Honeywell's pension will be 85% funded at year-end, with company contributions of more than $5 billion since 2009.)

At the same time as Mr. Cote prods lawmakers to deal with the fiscal cliff, he and his executives are preparing for a possible tumble off it. At Honeywell's Morris Township, N.J., headquarters on Monday, Mr. Cote, wearing jeans and drinking Diet Mountain Dew, led his team through semiannual planning under the assumption there will be no deal and the automatic spending cuts will kick in.

"For months, we've been teeing up our businesses with that assumption," he says, in his office filled with Boston Red Sox mementos and hunting and fishing trophies.

Mr. Cote then flew back to Washington to press more politicians to act. But signs of frustration were starting to show. "Everything they need to know, they know," he said as he boarded a company plane. "I can keep talking about a market-credible fiscal plan…but it's time to say, 'You are the leaders—lead.' "

In Sen. Bob Corker's office, the Tennessee Republican told Mr. Cote that the unity among corporate leaders would evaporate when the "platitudes turn to specifics," particularly on tax changes. "At some point, the CEOs will become divided and fight each other," he said.

Mr. Cote stuck to his script: "If we keep putting the business community off, we wait, we don't invest, we cut jobs."

Through it all, Mr. Cote doesn't make a point of his party preference. One Republican senator suspects Mr. Cote is an independent. Democratic Sen. Baucus expressed surprise when he learned Mr. Cote is a Republican.

Mr. Bowles has urged Mr. Obama to put Mr. Cote in his cabinet for the next term, as Treasury or Commerce secretary. Mr. Cote says he plans to stay at Honeywell. Speaking of his fling with Washington politics, he says, "I can't wait to get out of here and back to my day job."

Third California City Files for Bankruptcy

Story first reported from CNN.com


A California city filed for bankruptcy Wednesday, the third in the Golden State to do so in recent weeks, stoking experts' concerns that other cities could follow suit.

The city of San Bernardino, with more than 200,000 residents on the eastern tip of greater Los Angeles, "filed an emergency petition for Chapter 9 Bankruptcy" with a regional U.S. bankruptcy court, according to a news release from the city's interim manager.

The other two to file recently were Stockton, with around 300,000 residents, according to 2010 U.S. census data, and Mammoth Lakes, a resort town, where visitors and seasonal residents outnumber the just over 8,000 permanent inhabitants.


Many municipalities in the Golden State and around the nation are struggling to cover their costs as the economic malaise continues to hurt tax revenue streams, experts said. This will lead to more municipal bankruptcies, which have been rare until now.

"This is not the end. This is the beginning," Peter Navarro, business professor at University of California, Irvine, told CNN recently. "As cities see it can be done and is being done, it will give them the idea to do it."

Eric Hoffman, an analyst at Moody's Investor Service agreed, saying more city bankruptcies are likely in California and throughout the nation.

Cities have also struggled from budget changes made on the state level. Because of massive budget shortfalls, Gov. Jerry Brown and the state legislature made changes to vehicle tax money and redevelopment agencies that stripped locales of hundreds of millions in state funding.

San Bernardino said it will continue to provide services during the bankruptcy phase.

"There will be no immediate service reductions or changes in service to the community as a result of the filing," interim city manager Andrea Travis-Miller said Wednesday. But "reductions may occur" in the future.

In a prior statement Travis-Miller hinted the city may continue to "negotiate in good faith with its creditors."

In early July, Miller and finance director Jason Simpson issued a report stating that the city was facing insolvency and its expenditures were projected to exceed revenues by $45 million. The city's general fund reserves had been as high as $19 million in 2001 but are now depleted, the report said.
"The city has reached a breaking point," the report said.

Some $10 million to $16 million in annual revenue has evaporated in recent years as taxable sales dried up and property values plummeted in the city, the report said.

Mammoth Lakes sought protection July 2 after a property developer won a $43 million court judgment against the resort town. Experts say this filing should not be lumped in with the other two California municipal bankruptcies since it was an unusual circumstance.

Stockton, however, filed for bankruptcy in late June after three months of mediation when creditors failed to close a $26 million budget shortfall. The city had already addressed $90 million in deficits over the past three years, mainly through reducing services and employee compensation.


Both Stockton's and San Bernardino's fiscal troubles are due in large part to the massive housing downturn and recession that swept across California. Both towns were hit particularly hard by the foreclosure crisis, which left numerous abandoned homes and reduced property values in its wake. That led to lower property tax revenues, critical to supporting public services.

While some areas of the Golden State are starting to recover, the regions containing those two towns are not, said Chris McKenna, executive director of the League of California Cities.

By filing for bankruptcy, cities will be able to keep police and firefighters on the street and possibly keep some parks and libraries open while they work out their finances, he said.

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Regrets of Ex-Citigroup Execs don't Satisfy Federal Panel

LA Times

Apologies from Chuck Prince and Robert Rubin -- but no acceptance of blame -- for the near-collapse of the giant firm that led to a $45-billion bailout leaves fiscal crisis panel members frustrated.

 

Two former top executives of Citigroup Inc. on Thursday publicly apologized for the financial crisis and the near collapse of the giant firm that required a taxpayer bailout of $45 billion, but took heat from a federal panel investigating the crisis for not accepting blame for the company's dramatic fall.

"Let me start by saying I'm sorry. I'm sorry the financial crisis has had such a devastating impact on our country," former chief executive Chuck Prince told the federal commission investigating the causes of the financial crisis. "I'm sorry that our management team, starting with me, like so many others, did not see the unprecedented market collapse that lay before us."

Prince's mea culpa came on the second of three days of hearings by the Financial Crisis Inquiry Commission into the subprime mortgage meltdown. He was followed by former Citi board chairman, Robert Rubin, who expressed regret for the failure of himself and others to see the approaching financial turmoil.

"Almost all of us in the financial system, including financial firms, regulators, rating agencies, analysts and commentators, missed the powerful combination of forces at work and the serious possibility of a massive crisis," said Rubin, who served as Treasury secretary under President Clinton. "We all bear responsibility for not recognizing this, and I deeply regret that."

But Prince and Rubin did not take direct responsibility for leading the company into a financial morass. They said they were not aware until the fall of 2007 of the high risks of the mortgage-backed assets the company was holding and largely blamed the company's problems on a confluence of outside market forces.

Democrats and Republicans on the panel ripped the two executives for diverting blame.

"At the end of the day, the two of you in charge of the organization did not seem to have a grip on what was happening," said commission Chairman Phil Angelides, a Democratic appointee.

"I'm not so sure apologies are as important as assessment of responsibility. . . . Instead of asking what did you know and when did you know it, I should be asking what didn't you know and why didn't you know it," he said.

The panel's vice chairman, Bill Thomas, a Republican appointee, slammed Prince and Rubin for not returning any of the tens of millions of dollars in compensation they received before Citigroup's fall. He said a "simple apology" isn't enough "no matter how often you feel really really sad."

Citigroup has been the most contrite of the firms that received a major bailout, and because of the large amount of assistance it received, has been a major focus of lawmakers and the panel investigating the crisis.

Last month, Citi's current chief executive, Vikram Pandit, publicly thanked taxpayers for the $45 billion in federal money that helped save the company in late 2008. The bailout also included a government guarantee of $102 billion for a large portion of Citi's assets. That guarantee has since been removed. Citi in December repaid $20 billion of the bailout. The remaining money was converted into a $27-billion government ownership stake

The Treasury Department said last week it intends to cash in those shares, which could result in an $8-billion profit for the government.

Prince said risk assessments by Citigroup on about $40 billion of highly rated securities based on subprime mortgages turned out to be "dramatically wrong." But he said he could not fault company employees for acquiring those assets because of their AAA-plus credit ratings.

"Having $40 billion of AAA-plus-rated paper on the balance sheet of a $2-trillion company would typically not raise a concern," Prince said. But the value of those assets began deteriorating amid the collapse of the housing market. Prince resigned in Nov. 4, 2007, after Citigroup announced $8 billion to $11 billion in write-downs for those investments, which ultimately cost the company $30 billion.

Although Prince and Rubin said they were not alone among financial executives to miss signs of the coming crisis, commission member Byron Georgiou, a Democratic appointee, said they and others were "hallucinatory" given the risks being taken with subprime mortgages.

"When you look at the fundamentals, it belies logic," to say the crisis was impossible to foresee, he said.

The financial crisis inquiry panel is focusing much of their three days of hearings on Citi's problems. On Wednesday, Richard Bowen, the former senior vice president and business chief underwriter of CitiMortgage Inc., testified that he began warning company officials in 2006 about the risks being taken with securities backed by subprime mortgages. He finally sent an e-mail on Nov. 3, 2007, to Rubin and other top officials "resulting in significant but possibly unrecognized financial losses existing" within Citigroup.

Rubin said Thursday he referred the e-mail to the appropriate company officials and "I do know factually that was acted on promptly." Angelides asked Rubin to submit details on who acted on it and how.

The Real Greek Tragedy

Newsweek / Robert J. Samuelson

Why this is just the opening act.

It would be possible in other circumstances to disregard the ongoing story of Greece and its debts as a tedious tale of financial markets. But there's much more to it than that. What's happening in Greece speaks to two larger issues that affect hundreds of millions of people everywhere: the future of the welfare state and the fate of Europe's single currency, the euro. The meaning of Greece transcends high finance.

Every advanced society, including the United States, has a welfare state. Though details differ, their purposes are similar: to support the unemployed, poor, and aged. All face similar problems: burgeoning costs as populations age, an overreliance on debt financing, and pressures to reduce borrowing that create parallel pressures to cut welfare spending. High debt and the welfare state are at odds. It's an open question whether the collision will cause social and economic turmoil.

Greece seems the opening act in this drama; already, its budget problems have spawned street protests. By the numbers, Greece's plight is acute. In 2009, its government debt—basically, the sum of past annual deficits—was 113 percent of its economy (gross domestic product, or GDP). The budget deficit for 2009 was 12.7 percent of GDP. Two thirds of the debt is owed to foreigners, reports the Institute of International Finance.

The crisis originated in fears that Greece wouldn't be able to refinance almost €17 billion of bonds (about $23 billion) maturing in April and May, says the IIF's Jeffrey Anderson. If lenders balked, Greece would default on its bonds. A default would inflict losses on banks and other investors. By itself, this wouldn't be calamitous, because Greece is small (population: 11 million). But a Greek default could undermine market confidence in other euro countries' ability to service their debts. Serial defaults would threaten the global economic recovery. Most often mentioned are Spain, Portugal, and Ireland.

Preventing that is what the 16 euro countries, led by France and Germany, are now debating. Greece's adoption of the euro contributed to the crisis. For years, it enabled Greece to borrow at low interest rates, because the prevailing assumption was that the euro bloc wouldn't allow one of its members to default. It would be rescued by the others.

But in practice, a bailout is proving hugely controversial. If Greece is aided, won't other countries demand—or require—rescues? Is this possible, considering that even France and Germany have high debts and that a Greek bailout is unpopular, especially in Germany? One way to mute the problems is for Greece to embrace a harsh austerity that reduces its borrowing. Greece has already pledged to cut government workers and to raise taxes on alcohol, tobacco, and fuel. The other euro countries want more. Their dilemma is that either rescuing or abandoning Greece is a gamble.

To some economists, the dire situation makes default inevitable, though it may be a few years away. The required austerity would be too punishing, says Desmond Lachman of the American Enterprise Institute. Greece would need spending cuts and tax increases equal to 10 percent of GDP, he says. The resulting savage recession would worsen the existing unemployment rate of about 10 percent. "No sane country is going to accept that," says Lachman. Greece may get a temporary rescue, he thinks, but will someday miss debt payments and might revert to its old currency (the drachma).

Conceived as a way to unite Europe, the euro increasingly fosters conflict. No one wants Greece to default, but no one wants to pay the price of prevention. With its own currency, Lachman thinks, Greece will pursue depreciation to spur exports and economic revival. If other countries dump the euro, currency wars could ensue. But the threat to the euro bloc ultimately stems from an overcommitted welfare state. Greece's situation is so difficult because a low birthrate and a rapidly graying population automatically increase old-age assistance even as the government tries to cut total spending. At issue is the viability of its present welfare state.

Almost every advanced country—the United States, Britain, Germany, Italy, France, Japan, Belgium, and others—faces some combination of huge budget deficits, high debts, aging populations, and political paralysis. It's an unstable mix. The unpleasant choices now confronting Greece await most wealthy nations, even if they pretend otherwise.