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CEO Daily: Monday, 6th March

March 6, 2017, 12:04 PM UTC

Good morning.

I was in Washington this weekend, where prospects for major tax reform, or indeed any ambitious legislation, are viewed with significantly less optimism than in the stock market.

One problem is the continued split among both administration officials and congressional Republicans over the border adjustment tax—a key part of the tax reform plan. White House strategist Stephen Bannon is pushing the idea, but Treasury Secretary Steve Mnuchin and economic adviser Gary Cohn are said to have concerns.

A second problem resolves around the process for making a deal. Democrats seem determined to play the unified opposition. That means Republicans need near-unanimity to get anything done. But congressional Republicans have more experience blocking legislation than moving it forward. As the Washington Post reports, “there aren’t many Republicans around with muscle memory of what it’s like to craft large pieces of legislation that rely almost entirely on votes from their side of the aisle.”

And the third problem is the continued self-imposed distractions, exemplified by the President’s Saturday morning Twitter accusation that his predecessor had wiretapped him, which appears to be unfounded.

I spent Saturday night at the annual white tie dinner of the Gridiron Club, a 132-year-old organization that I’ve belonged to for two decades. The dinners aren’t as fun as they once were; emotions are too raw, the jokes have an edge, and too many major players decline to attend—a list that this year included the President and most of his cabinet.

But there were still a few good moments. Among them:

—Gridiron President Lynn Sweet of the Chicago Sun-Times compared the Democrats’ losses to the Cubs’ World Series losing streak, saying “Democrats can win back control…and these 100 years will fly by.”

—Democratic leader Nancy Pelosi said President Trump, watching the Oscars, thought “Fences was about his travel ban, Arrival was about his immigration policy, La La Land was about his first weeks in office, and Hidden Figures was about his tax returns.”

—Republican Senator Joni Ernst said: “I’m not saying men in the Senate are old” but “Donald Trump isn’t the only one concerned about leaks.”

—And Vice President Pence, commenting on reports he used a private email account as governor, said it was “embarrassing for millions of Americans to learn I’m one of the few people that still has an AOL account…This is the most anyone has heard about America Online since I last saw the free disks on a counter at Blockbuster.”

On a more uplifting note, Fortune and Time editors are helping to lead the conversation at the Innovation by Design conference in Singapore this week, an event that will bring together thought leaders in industrial and product design, architecture, digital experience, and other disciplines to discuss how the revolution in design thinking can unlock new opportunities for growth. You can read more about the conference here and follow the conversations through coverage of the event here on over the next couple of days.

More news below.

Alan Murray

Top News

Claims and Counter-Claims

The impression of a complete breakdown in trust between the administration and its intelligence services gets ever stronger. The Justice Department has refused a request by FBI head James Comey to refute President Trump’s allegations, made without any supporting evidence, that the bureau wire-tapped Trump Tower during the election campaign. Comey and James Clapper, who served as Director of National Intelligence until January, both denied Trump’s allegations Sunday, while Democrats suspected an attempt to deflect attention away from investigations into the Trump campaign’s alleged ties to Russia. White House spokesman Sean Spicer declined to elaborate. Fortune

GM Sells Opel to PSA

France’s PSA Group, the maker of Peugeot and Citroen cars, will buy GM’s Opel and Vauxhall brands for 2.2 billion euros ($2.3 billion), a move that will make it Europe’s second-largest carmaker, with 16% of the market behind Volkswagen (24%). GM will get 1.32 billion euros for the actual carmaking operations, half in cash and half in PSA share warrants, and another 900 million euros for Opel’s financing arm. Rather than immediately shutting plants, PSA said it will revive a 4-year-old cooperation agreement on purchasing and R&D to return Opel to profit. It is targeting a 2% operating margin by 2020 and 6% by 2026. Mary Barra is expected to use the windfall to invest in autonomous and electric vehicle technology. Reuters

Stocks Slip as Yellen Puts a Hand on the Punchbowl

World stocks opened lower Monday, a belated reaction to comments from Federal Reserve Chairwoman Janet Yellen on Friday that all-but sealed an interest rate hike in March, leaving plenty of time for two or even three more later this year. U.S. stocks are still remarkably sanguine about the effect of higher rates—understandably so, since it’s over 20 years since the last aggressive tightening cycle, and less than four since Ben Bernanke’s epic retreat after the ‘Taper Tantrum.' Signals that the dollar’s rally is topping out may have encouraged the Fed to think that it can raise rates without tightening financial conditions too much. With a fiscal stimulus promising to ramp up the party mood, the signs are increasing that the Fed will be more confident about taking away the punchbowl this time.  Fortune

Tyson Catches Bird Flu

A strain of bird flu was detected in a chicken breeder flock on a Tennessee farm contracted to Tyson Foods, triggering a cull of the 73,500 birds to stop the virus entering the food system. It’s the first confirmed case of highly pathogenic H7 avian influenza (HPAI) in commercial poultry in the U.S. this year and the first time ever that HPAI has been found in Tennessee, government officials said. The health risk to humans is extremely low, but the latest outbreaks had sharp, if ultimately short-lived, effects on chicken and egg prices. Fortune

Around the Water Cooler

Cryan Cashes in on the Trump Bump

Deutsche Bank CEO John Cryan ripped up his own restructuring plan and announced an 8 billion euro ($8.5 billion) capital raising and another 2 billion euros of asset sales. The move is recognition of its failure to bolster its balance sheet by selling Postbank, its big German retail bank. Cryan is hoping to finally banish talk of Deutsche—a key part of the global financial system—being undercapitalized. The bank will now target a core tier 1 capital ratio of “comfortably above 13%.” The new shares will be offered at a 39% discount to Friday’s close. The existing ones fell by a relatively modest 6.3% early Monday. Fortune

Lee’s Labors Lost

Samsung heir apparent Lee Jae-Yong asked President Park Geun-Hye for a lot more than just a merger approval, according to a report published by Korean prosecutors Monday. They accused Lee of planning a complex series of restructuring deals designed to secure his succession at the head of the conglomerate. The most important allegation remains that bribes were paid to get the government-backed National Pension Service to vote in favor of a merger of two Samsung affiliates (Samsung C&T and Cheil Inc.), even though it stood to lose at least $120 million from the deal.  WSJ, subscription required

What Could Possibly Go Wrong?

China’s banking system is now the world’s biggest. At $33 trillion as of the end of 2016, its asset base overtook the Eurozone’s $31 trillion and is now more than twice the size of the U.S.’s ($16 trillion). Now, think how many bad loans have lurked in the Eurozone’s system for the last 10 years, despite all the discipline that democracy and capitalism are supposed to impose. Now think that China created $16 trillion in bank assets in the last four and a half years alone, much of it at state-owned banks with (by U.S. standards) irregular corporate governance; think that this has generated ever slower gains in GDP; and think that the Chinese central bank complains constantly about a shadow-banking sector that has also mushroomed. The two consolations are that this spectacularly over-extended system is less directly interconnected with the rest of the world than the Eurozone’s, and that its government is more solvent. As for the rest, well, there’s nothing new under the sun. It’s just a question of when, not whether. FT, metered access

Wanted: Viable French Conservative Presidential Candidate

Francois Fillon, the embattled Republican candidate for the presidency, drew 40,000 supporters to a weekend rally, in a last-ditch effort to save his campaign. Key advisors and party bosses have been abandoning Fillon since he confirmed he would face charges for suspected abuse of public money. He’s now a distant 3rd in the opinion polls behind Marine Le Pen and Emmanuel Macron. Alain Juppé, who came second in the Republicans’ primary contest, ruled himself out as a last-minute pinch-hitter Monday, which seemed inconsistent after a week of doing nothing to stop his allies deserting Fillon. Despite frequent appearances to the contrary, chaos in French politics is not a monopoly of the Left. Time

Summaries by Geoffrey Smith;