Friend to China’ Geithner Surprised by Photo at Peking University

Friend to China’ Geithner Surprised by Photo at Peking University

Posted by Maya Jackson Randall

Students at Peking University warmly welcomed news that the new Treasury chief in the U.S. had studied Mandarin at their school almost 30 years ago (summer of 1981). They applauded when Treasury Secretary Timothy Geithner, who delivered a speech at the school Monday, spoke Mandarin and listened closely as the dean of one of the schools Zhou Qiren, described Geithner’s family as “all the friend to China.” (Not only had Geithner studied in China, but his Dad helped establish the Ford Foundation’s Beijing office years ago.)

But what the audience of mostly students and professors seemed to enjoy even more was the proof of his attendance — a picture Geithner’s former teacher presented after the speech she said was from Geithner’s summer at the university.

The Treasury secretary seemed shocked and sincerely surprised to hear his old professor suggest that a close friend, maybe even a girlfriend, was with him in the photo. But the same students who had just moments before grilled Geithner on the U.S. fiscal deficit, the auto bailout, and the state of the financial crisis broke out in laughter. The students also liked that Geithner spoke a Chinese phrase during his speech and suggested that he only studied “reasonably hard” as a student there.

Fed Outlines TARP Repayment Rules, Will Announce Approvals Next Week

Posted by WSJ Staff

The following statement was released by the Federal Reserve.

The Federal Reserve Board on Monday outlined the criteria it will use to evaluate applications to redeem U.S. Treasury capital from the 19 bank holding companies (BHC) that participated in the Supervisory Capital Assessment Program (SCAP).

Redemption approvals for an initial set of these large bank holding companies are expected to be announced during the week of June 8. Applications will be evaluated periodically thereafter. Any banking organization wishing to redeem U.S. Treasury capital must first obtain approval from its primary federal supervisor, which then forwards approved applications to the Treasury Department.

Any BHC seeking to redeem U.S. Treasury capital must demonstrate an ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation’s Temporary Liquidity Guarantee Program (TLGP), and must successfully demonstrate access to public equity markets.

In addition, the Federal Reserve’s review of a BHC’s application to redeem U.S. Treasury capital will include consideration of the following:

• Whether a BHC can redeem its Treasury capital and remain in a position to continue to fulfill its role as an intermediary that facilitates lending to creditworthy households and businesses;
• Whether, after redeeming its Treasury capital, a BHC will be able to maintain capital levels that are consistent with supervisory expectations;
• Whether a BHC will be able to continue to serve as a source of financial and managerial strength and support to its subsidiary bank(s) after the redemption; and
• Whether a BHC and its bank subsidiaries will be able to meet its ongoing funding requirements and its obligations to counterparties while reducing reliance on government capital and the TLGP.

Finally, all BHCs must have a robust longer-term capital assessment and management process geared toward achieving and maintaining a prudent level and composition of capital commensurate with the BHC’s business activities and firm-wide risk profile.

DJ Sentiment Indicator Still Not Signaling Recession’s End

Posted by Gren Manuel

The U.S. economy isn’t convincingly pulling out of recession, according to the Dow Jones Economic Sentiment Indicator, which was published Monday.

The ESI edged up to 29 in May from 27.6 in April. It was the fifth rise for the index in the past six months. The gains that have lifted the indicator modestly from its November bottom of 22.2, but it has yet to show the kind of big jump that flagged substantial recovery in previous recessions. In fact, the rise in May only takes the index back to where it was at the time of the Lehman Brothers collapse.

The ESI aims to identify significant turning points in the U.S. economy by analyzing coverage of 15 major U.S. daily newspapers. It is reported on a scale of 0 to 100, where higher numbers represent increasingly positive sentiment. The index was first published in April but has been run retroactively back to 1990.

Based on previous economic cycles, the ESI would need to return to the high 30s before an end to recession was likely. The economy would remain vulnerable to a pullback until the ESI crossed 50, at which point employment would probably stop contracting.

Other recent sentiment indicators have been upbeat, most notably the Conference Board Consumer Confidence Index, published May 26.

Dow Jones selected the 15 newspapers used to compile the indicator because they include extensive original reporting on economic issues. They are also geographically diverse and represent eight of the 10 largest metropolitan areas in the U.S.

Guest Contribution: GM Risks Cutting Capability in Trimming Costs

Posted by Guest Contributor

Susan Helper, an economist at Case Western Reserve University’s Weatherhead School of Management, says GM needs to build cars people want to buy. How the company answers that question is key to its survival, but also is important to the entire country.

Much of the discussion about GM has focused on the need for cuts — in the number of workers, engineers, and dealers. Clearly, cuts were necessary. But cutting costs also cuts capabilities, so going forward GM needs to figure out how it is going to create the capability to make cars that people want to buy. For years, GM has been losing market share even though its cars sell for $2,000-$3,000 less than comparably equipped Japanese cars. It is this problem that GM urgently needs to solve.

A key part of the value chain in auto manufacturing involves suppliers (who account for about 70% of the value of a car) and GM’s own white-collar workers (who play a key role in designing and engineering the car). Cars are quite “integral” products (in contrast to more “modular” products like desktop computers), in which the interaction of the parts is key to good performance. Most of the problems U.S. consumers complain about with U.S. cars have to do with their systemic properties — for example, the way the steering and the suspension interact to create unpleasant noise and vibration. If GM is to improve its market share, it will need to fix these problems. Fixing these problems is important not just for GM, but also for the U.S.

The auto industry has long been known as “the industry of industries,” since making cars absorbs much of the output of industries like machine tools, computers, and semiconductors. Innovations pioneered for the auto industry spread to other industries as well (See this article). In some cases, it makes sense to deal with capabilities unavailable in the U.S. by buying from abroad — the U.S. has no monopoly on good ideas. But, because of the integrality mentioned above, wholesale importing of capabilities threatens the viability not only of GM but also of U.S. manufacturing.

Thus, maintaining the industry now keeps capabilities alive that may be crucial in meeting crises we have not yet thought of. Traditional trade theory has little room for such “irreversibility”; it assumes that if relative prices change, countries can easily re-enter businesses that they were once uncompetitive in. But, it’s very expensive to recreate the vast assemblages of suppliers, engineers, and skilled workers that go into making cars and other manufactured goods.

We should not assume that the United States will keep “high-skilled” engineering and design jobs even if we lose production jobs. In fact, the reverse may well be true. Asian and European car companies do most of their engineering in their home countries, precisely because of the need for intense coordination. These auto makers do the lower-skilled manufacturing in the US in part because cars are bulky to ship. Even the Detroit Three are outsourcing engineering to Europe (for small cars) and India (for computer-aided drafting). In addition, it is difficult to remain competitive for long in design when one doesn’t have the insight gained from actual manufacturing.

ISM Index: Manufacturers on Brink of Recovery

Posted by Justin Lahart

The message from the Purchasing Managers’ Index, according to Institute for Supply Management chair Norbert Orr: With inventories much lower, and orders on the rise, manufacturers are on the brink of recovery.

The Purchasing Managers’ Index rose to 42.8 in May, up from April’s 40.1, putting below the 50 that the ISM says represents an expanding manufacturing economy. But for a second month, more purchasing managers said that their customers’ inventories were too low than said they were too high. And for the first time since November 2007, the purchasing managers said that there was an increase in new orders.

“I believe we’re in the recovery stage right now,” said Mr. Orr. “we’ve seen a dramatic improvement in new orders that comes as a result of the major inventory correction.”

The next challenge, he says, will be whether manufacturers can grow fast enough, once recovery sets in, to add job to their payrolls. Here, Mr. Orr isn’t optimistic, particularly with the construction sector still in a funk and with the auto makers deeply distressed. “I expect that we we’ll continue to see declines in [manufacturing] employment but not at as fast a rate.”