Top Treasury Candidate
Is Former CSX Executive
Leads to Questions of Confidence
By BOB DAVIS and JOHN HARWOOD
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- President Bush is gambling that restocking his economic team, most likely from corporate boardrooms and Wall Street, will boost flagging business and investor confidence in his economic leadership and help sell a new round of tax cuts to Congress early next year.
The leading candidate to become Treasury secretary is now John Snow, chief executive of railroad holding company CSX Corp., according to administration officials. Mr. Snow, 63 years old, has been a champion of balanced budgets as a chairman of the influential Business Roundtable and has recently pushed for reforms of corporate governance.![[image]](http://www.wsj.com/public/resources/images/Snow_John-GA06412082002205951.gif)
To coordinate economic policy-making from the White House, the president is expected to approach Stephen Friedman, who once shared the job of running investment bank Goldman Sachs & Co. with Robert Rubin before Mr. Rubin joined the Clinton administration. Mr. Friedman now is a senior principal of Marsh & McLennan's private equity group.
Neither man had been formally offered a job, administration aides cautioned Sunday, and either might yet be cast aside for another choice. But there were signs that an announcement might come early this week.
The shake-up was set in motion on Wednesday when the president instructed top aides to ask for the resignations of Mr. O'Neill and White House economic-policy coordinator Lawrence Lindsey. It comes as the economic outlook is clouded by the prospect of war with Iraq, persistent caution in corporate boardrooms that is restraining business investment, and widespread revulsion at the misdeeds of corporate chieftains and those who were supposed to be watching them.
The economy has sputtered since Mr. Bush took office in January 2001. On Friday, the government reported that unemployment has returned to an eight-year high of 6%. That's up from 4.2% when Mr. Bush was inaugurated, or a net loss of 1.5 million jobs. Much of this stems from the bursting of the telecom and Internet bubbles that occurred before his election. Although Mr. Bush's tax cuts are credited with helping make the first recession in a decade a mild one, his team was unable to shore up business and public confidence -- and sometimes was blamed for eroding it.
Replacing key players isn't a sign that President Bush is rethinking his approach to the economy, which will continue to rely heavily on cutting taxes. It reflects the lessons that Mr. Bush learned from his father's 1992 election defeat -- that it is a huge political mistake to appear complacent about the economy at a time of public anxiety. The White House also wants to capitalize on the Republican recapture of Congress to win passage of its economic agenda.
Rather than looking for decision makers or strategists, the White House is seeking salesmen for its tax cuts, prescription-drug insurance program for the elderly and reshaping of Medicare. It may also try to revisit the deferred plan to restructure Social Security with individually controlled investment accounts.
The administration hopes Mr. Snow, if he gets the Treasury post, would be more of a team player than the outspoken Mr. O'Neill, who had trouble grasping the difference between being a corporate chief executive and a cabinet officer.
It sees Mr. Friedman, 64, as likely to be more organized and more skilled at consensus-building than Mr. Lindsey proved to be. Mr. Friedman would also provide a much-needed link to Wall Street and financial markets that the administration has lacked.
For starters, the White House expects to unveil its economic "growth" plan early in the new year. The phrase "economic stimulus" has been banned at the White House because it implies the economy is sluggish. The current working plan calls for tax cuts and spending measures amounting to $250 billion to $300 billion over 10 years. It is likely to include acceleration of income-tax cuts -- including some aimed at the middle class -- that are now set to take effect in 2004 and 2006; a reduction in the tax on corporate dividends, long a Republican goal; and a further sweetening of tax incentives approved last year to encourage business investment.![[image]](/public/resources/images/Friedman_Stephen-CW84912082002210208.gif)
Mr. Bush also has two other critical economic jobs to fill. He is seeking a new chairman of the Securities and Exchange Commission, a key post as he tries to assure investors and the public that the government is committed to pursuing corporate crooks and avoiding a repeat of the abuses of the late 1990s, as well as a head of the new accounting-standards board. Mr. Bush's first SEC chairman, Harvey Pitt, resigned last month amid withering criticism and the White House has had trouble finding a successor. Among other changes in the economic team is the expected departure of Kenneth Dam, the deputy Treasury secretary, who oversaw international tax issues and a crackdown on terrorist financing.
White House Budget Director Mitchell Daniels is weighing a run for governor of Indiana, and may leave by mid-year. Glenn Hubbard, the Columbia University professor who chairs the Council of Economic Advisers, appears to be a survivor.
Plenty of Advice
Given the shortcomings of the initial Bush team, the president is getting plenty of advice to seek more political experience at the Treasury. Conservatives are pushing Republican Sen. Phil Gramm of Texas, who recently retired, and fellow Texas Republican Bill Archer, the former House Ways and Means Committee chairman. Commerce Secretary Don Evans, a longtime Bush friend who is credited with winning a tough fight in Congress to give the president authority to negotiate new trade deals, was called the "safe" choice by an administration senior official.
But advisers say Mr. Bush is more interested in putting business executives in the Treasury and White House economic-coordinator posts.
Picking Mr. Snow and Mr. Friedman isn't likely to please Mr. Bush's most conservative backers. Both are described by associates as pragmatic and bipartisan. When he headed the Business Roundtable, the association of big-company chief executives, Mr. Snow worked closely with the Clinton White House to support its deficit-reduction campaign. Mr. Friedman, who has little political experience, has contributed to Democratic political campaigns and was first invited to sit on advisory panels by the Clinton White House.
Mr. Snow, who has a law degree and a Ph.D. in economics, served in several senior jobs in the Transportation Department in the 1970s and headed the National Highway Traffic Safety Administration for a year. After becoming chief executive of CSX, Mr. Snow was a fixture in business groups pushing policy changes in Washington.
While Mr. O'Neill won acclaim for turning aluminum giant Alcoa Inc. into a model of sleek industrial efficiency, Mr. Snow's performance at CSX has gotten mixed reviews. He gets high marks for shedding businesses unrelated to the railroad, while stepping up investments to improve the railroad's efficiency.
In 1996, he bid for the former Conrail Inc., touching off a bidding war with Norfolk Southern. The two railroads agreed to a $10 billion carve-up of Conrail in 1997, and some analysts said they overpaid. What's more, CSX stumbled for about two years integrating its piece of Conrail, and the freight backups and delays that resulted chased away customers and drove up CSX costs. The chaos that resulted from that and other rail mergers prompted CSX and other railroads to ask regulators to impose a moratorium on major railroad mergers, which was ultimately granted, scuttling a proposed merger between Burlington Northern Santa Fe Corp. and Canadian National Railway Co.
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Mr. Snow revamped CSX procedures after the Federal Railroad Administration several years ago cited CSX for safety lapses, track defects and an adversarial management-labor culture. And for all its progress, CSX still has the worst operating ratio, a common measure of railroad efficiency, among big North American railroads. The operating ratio is defined as operating expenses as a percentage of revenue.
Temperamentally, Mr. Snow and Mr. O'Neill contrast sharply. Mr. O'Neill's crusty, shoot-from-the-hip personality often landed him in trouble in Washington. Mr. Snow is more easy-going and more comfortable in the role of consensus building. After his stint in the Ford administration, he became a railroad lobbyist for three years during the Carter administration.
Along with his railroad work, Mr. Snow regularly traveled to Washington, where he maintains a condominium, as part of his work for the Business Roundtable. He was chairman of the group from 1994 to 1996. At the time the Clinton administration was at loggerheads with the new Republican majority in the House under the leadership of Rep. Newt Gingrich. Mr. Snow pressed both sides to make deficit reduction a priority, worked out a coalition with other antideficit groups and persuaded the business group to bankroll a $2 million television ad campaign attacking deficits.
Earlier this year, he served as co-chairman of a Conference Board committee calling for broad changes in the way corporations are governed. Among the business-research group's recommendations: boost the power of compensation committees, reduce "excessive use" of stock options by expensing them and require executives to give advance notice of their intention to sell stock. It's far from clear the Bush administration will push these changes, but his work may help the administration fend off charges that it is soft on corporate malfeasance and help deflect attention from the turmoil at the SEC.
Nevertheless, his rich compensation package at CSX is bound to attract attention. He earned $2.2 million in cash in 2001, plus $7.1 million in restricted stock awards. In addition he received $753,057 in additional compensation, including $117,900 in life-insurance premiums and $323,266 in "above market" interest on deferred earnings, according to CSX's most recent proxy statement. Upon retirement, he also qualifies for "maintenance of country club memberships, executive physicals, discounts at The Greenbrier" -- the posh West Virginia resort owned by CSX -- "and use of private aircraft for the remainder of his life," the proxy states. While serving as Treasury Secretary, he would have to give up those perks.
On Friday afternoon, Mr. Snow said it "would be the biggest surprise" if he was eventually offered the Treasury job, though he didn't deny having heard from Bush aides. But over the weekend Mr. Snow declined to comment further.
Tenacious Executive
In Mr. Friedman, the White House would get an aide very different from Mr. Lindsey, who has a Harvard Ph.D. in economics and strong views on the efficacy of tax cuts. Former colleagues at Goldman Sachs describe him as a conservative Republican and deficit hawk, but one who only recently has studied policy or politics. Rather, he is considered a tenacious, organized executive who looks to extract the best ideas from his subordinates.
He gave $1,000 to Bush rival John McCain's presidential bid, $2,000 to Democrat Bill Bradley's presidential run, $500 to the Democratic Congressional Campaign Committee. Mr. Friedman also contributed $2,000 to President Bush's presidential run and, since 1995, has given $123,000 to the Republican Party campaign committees.
The decision to replace Mr. O'Neill and Mr. Lindsey, a former Federal Reserve board member who was director of the National Economic Council, came after months of unhappiness at the team's performance and regular criticism of Bush economic-policy making by Wall Street and top Republicans and Democrats. Vice President Dick Cheney, who played a critical role in choosing Mr. O'Neill, was also instrumental in dumping him. The vice president had been sounding out conservatives for replacements as early as August, according to a Republican strategist outside the administration. He phoned Mr. O'Neill on Thursday to deliver the bad news that the president wanted his resignation.
The White House had hoped that the word of the changes wouldn't quickly become public, so that officials could announce the successors along with or shortly after the resignations. But Mr. O'Neill told White House chief of staff Andrew Card on Thursday night that he would resign the following day, administration officials say. He did so with a terse letter that made his anger clear. After informing his senior staff on Friday, Mr. O'Neill got into his car and headed for his Pittsburgh home.
Mr. Lindsey, who got no response to a suggestion he made months ago to Mr. Card that he might be interested in leaving and repeatedly denied reports of his imminent departure, got the word on Thursday that the president also sought his resignation. The decision to announce it Friday came only after Mr. O'Neill made public his departure.
Democrats were quick to describe the departures as a sign of weakness, but financial markets reacted positively to the news. Before the markets opened on Friday, news of the rising unemployment rate for November prompted major stock indexes to fall 1.4% in futures trading. They rebounded on news of the resignations.
Mr. Bush's primary response to a weak economy and a deteriorating stock market was to pursue his campaign promises to cut taxes, and he did -- by $1.35 trillion over 10 years, much of it benefiting the best-off Americans. Even some of his critics credit the tax cuts with beefing up consumer spending and cushioning the impact of falling stock wealth. Consumers, perhaps reassured by the president's confident response to the terrorist attacks, kept spending as business investment collapsed and that -- plus interest rate cuts by the Federal Reserve and an irrepressible housing market -- kept the recession mild.
But a third-quarter surge in the economy appears to have been followed by a sharp slowdown in growth in the fourth quarter, prompting Mr. Bush to ask his aides for proposals to help the economy. New political developments could have some influence on the details of the package Mr. Bush is assembling. In the final electoral skirmish of the year, Democrat Mary Landrieu pulled off an upset victory in her re-election bid Saturday in Louisiana. By narrowing the Republican hold on the Senate to 51-49, the victory is likely to reinforce the White House in shaping a package that isn't vulnerable to Democratic charges that it only helps the rich. Such a package might even draw some Democratic votes.
Among Mr. Bush's top advisers, Mr. O'Neill was the most skeptical about the need for broad tax cuts to stimulate the economy, and the most worried that escalating deficits would ultimately undermine the economy. But his departure wasn't a signal of deep policy rifts. Rather, he was seen as a stumbling messenger of the Bush economic team, whose comments sometimes embarrassed the president and undermined his policy objectives.
The breaking point for the White House was an interview Mr. O'Neill gave to the Financial Times in late November in which the newspaper said he "hinted" that tax-reform proposals might raise revenue -- that is, a tax increase, which is anathema to White House tax cutters. Given his strained relations with the White House, Mr. O'Neill checked about his status shortly before traveling to Afghanistan last month. But he was given no signal that he soon would be ousted.
Mr. Lindsey is a longtime Bush partisan who worked in the first Bush administration. He assembled the current president's campaign economic agenda, including its signature tax cut and its plan to privatize Social Security, as well as the soon-to-be-unveiled growth package. But he ran afoul of the White House for appearing undisciplined in his public statements, and for having a chaotic work style, which clashed with a president and vice president who prize discipline and order.
Whatever chance that the White House would try to keep him ended with a Wall Street Journal interview in which he estimated that war with Iraq could cost the U.S. government $200 billion, which made it seem as if the White House was preparing an attack at a time when Bush diplomats were trying to convince allies of the opposite.
-- Jeanne Cummings, Greg Ip, John D. McKinnon and Daniel Machalaba contributed to this article.
Write to Bob Davis at bob.davis@wsj.com and John Harwood at john.harwood@wsj.com.
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Bush Moves to Fill Posts By GREG IP and DAN MACHALABA
After Shuffle of Advisers
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- President Bush is trying to assemble the economic team he thought he had two years ago: a seasoned corporate executive at the Treasury Department, a Wall Street pro with management skills at the National Economic Council, and a solid academic at the Council of Economic Advisers.
The hope is that CSX Corp. Chief Executive John Snow, the leading candidate to replace outgoing Treasury Secretary Paul O'Neill, will bring Mr. O'Neill's corporate savvy and public-service credentials without his habit of roiling the administration and the markets with unscripted public-policy pronouncements. In Stephen Friedman, expected to head the NEC, the White House gets a Wall Street hand comparable to Robert Rubin, who served President Clinton both as NEC director and Treasury secretary. Mr. Friedman and Mr. Rubin were co-chairmen of Wall Street investment bank Goldman Sachs & Co. Outgoing NEC director Lawrence Lindsey was a gloomy economist with no special feel for Wall Street and without the organizational skills considered crucial for a coordinating job.
The survivor in the shake-up is R. Glenn Hubbard, chairman of the Council of Economic Advisers, a low-key academic whose solid credentials on tax policy and organizational discipline have helped his panel go beyond its historical role as a font of abstract economic advice.
Messrs. Snow and O'Neill share similar background: degrees in economics, service in the Ford administration, and stewardship of a major industrial company. Mr. Snow, 63-years old, received his doctorate in economics in 1965 and a law degree in 1967. From 1972 to 1977, he held positions at the Department of Transportation and the National Highway Traffic Safety Administration. He joined CSX's predecessor company in 1977 and became the Richmond, Va., railroad's chief executive in 1989.
His fans say he has the wide-ranging experience and political and business connections that would make him well-suited to the task. He has gotten to know many business leaders in industrial America as the customers of the railroad and through his years at the Business Roundtable, which he led during the mid-1990s. Mr. Snow is close to senior Republicans in the administration and in Congress from his more than 20 years of engagement in Republican Party activities, and he combines a gregarious personality, quick intellect and keen interest in policy and economic issues.
"John is a person of many talents," says Linda Morgan, a member and until a week ago chairman of the Surface Transportation Board, the federal agency that reviews railroad mergers. "He knows a lot about a lot of things, and he can facilely move from one issue to the next and communicate about complex issues very clearly."
He sits on the boards of Verizon, Circuit City Stores Inc., U.S. Steel, Johnson & Johnson and Sapient Corp., a Cambridge, Mass. technology-consulting firm. He has sat on the boards of Textron Inc. and NationsBank, now Bank of America.![[image]](http://www.wsj.com/public/resources/images/Hubbard_Glenn-FX12111042002220507.gif)
While Mr. O'Neill won acclaim for turning aluminum power Alcoa Inc. into a model of sleek industrial efficiency, Mr. Snow's performance at CSX has gotten mixed reviews. Mr. Snow, who lives in a house near CSX headquarters, with a commanding view of the James River and the CSX coal line along it, gets high marks for shedding businesses unrelated to the railroad, while stepping up investments to improve the railroad's efficiency.
In 1996, he bid for the former Conrail Inc., touching off a bidding war with Norfolk Southern Corp. The two railroads agreed to a $10 billion carve-up of Conrail in 1997, and some analysts said they overpaid. Moreover, CSX stumbled for about two years in integrating its piece of Conrail, and the freight backups and delays that resulted chased away customers and drove up CSX costs. That chaos prompted CSX and other railroads to ask regulators to impose a moratorium on major railroad mergers, which was granted, scuttling a proposed merger between Burlington Northern Santa Fe Corp. and Canadian National Railway Co.
Mr. Snow revamped CSX procedures after the Federal Railroad Administration several years ago cited the company for safety lapses and track defects. Yet for all its progress, CSX still has the worst operating ratio, a common measure of railroad efficiency, among large North American railroads. The operating ratio is defined as operating expenses as a percentage of revenue.
Mr. Friedman, 64-years old, is described by former associates as smart and creative with the management skills essential to a coordinating job.
"Steve is an exceptionally good listener," said Henry Paulson, current chief executive of Goldman Sachs Group Inc., who worked for years under Mr. Friedman in the firm's investment-banking division. "He's able to listen to a lot of different people. That's what you do in an investment bank: bring people together to close deals."
Mr. Friedman joined Goldman in 1966, became co-chairman with Mr. Rubin in 1990 and sole chairman in 1992 when Mr. Rubin joined the Clinton administration. Mr. Friedman pushed Goldman into many new areas, including mergers advisory, leveraged buyouts and investing in closely held firms ("private equity"). He developed Goldman's specialty in helping companies fend off hostile takeovers.
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Mr. Friedman hasn't been especially active politically; though a Republican, he also has donated to Democrats. He got his first taste of Washington policy-making under the Clinton administration, which named him to a board re-examining the role of intelligence in the post-Cold War era, and then to the President's Foreign Intelligence Advisory Board. He has remained on the latter board under President Bush. As a board member of the Brookings Institution, a Washington think tank, he endowed a fellowship that is now held by President Clinton's deputy national security adviser James Steinberg.
He may be more hawkish on deficits than the supply-siders in the current administration who consider cutting taxes more important than balancing budgets. "Steve Friedman's a pragmatist more than an ideologue," said Sen. Jon Corzine, a New Jersey Democrat and former co-head of Goldman who once worked for Mr. Friedman.
"And I think that's good, because I think the administration has been too ideological, honing to supply-side economics when, in fact, we need to create demand in this economy," Mr. Corzine said on Fox News Sunday. He noted Mr. Friedman is vice chairman of the Concord Coalition, which warns of the dangers of budget deficits.
The shortcomings of Mr. O'Neill and Mr. Lindsey have resulted in a steady rise in respect for Mr. Hubbard, 44-years old, who is regularly described as disciplined and organized. He starts work every day at 5 a.m. His 19 months at the council's helm have been nearly gaffe-free.
Late Friday, rumors swirled that Mr. Hubbard was either returning soon to Columbia University in New York, where he taught economics, or would move over to Treasury, possibly as deputy secretary under Mr. O'Neill's replacement. But people close to the White House said during the weekend that Mr. Hubbard would stay at his current post.
He is a key participant in the administration's tax-change efforts. Jerry Jasinowski, president of the National Association of Manufacturers, said in recent weeks that Mr. Hubbard and Commerce Secretary Don Evans have been the "principal players" soliciting advice for short-term tax-stimulus measures. Mr. O'Neill "wasn't very involved."
Mr. Hubbard also has played key roles in responding to the West Coast dockworkers' labor disruption, prodding the Japanese government to address its serious financial problems, and developing the administration's alternative to the Kyoto treaty on controlling carbon-dioxide emissions to curb global warming.
Mr. Hubbard was one of the few administration insiders to oppose steel tariffs, said several people familiar with that decision.
The imposition of the tariffs outraged U.S. trading partners, but it did help the White House win expanded trade negotiating authority from Congress.
Write to Greg Ip at greg.ip@wsj.com and Dan Machalaba at daniel.machalaba@wsj.com