But they were about to lose their money.
On Sunday, September 14, Merrill Lynch, the once-solid firm that had brought Wall Street to Main Street, sold itself to Bank of America to avert financial collapse. Merrill was reeling under the bad mortgage investments incurred under CEO Stan O’Neal. He was the former GM director—and by now, the deposed chairman of Merrill Lynch—who had encouraged expanding the mortgage business at GMAC, with equally disastrous results. Over the same weekend, insurance giant American International Group begged for a bailout because its mortgage lending too had gone awry.
Worse still, Lehman Brothers, a once high-flying investment bank burdened by similar bad debts, filed for bankruptcy and plummeted toward liquidation. This time around the government declined to ride to the rescue, as it had with Bear Stearns. “The stunning series of events [on September 14] culminated a weekend of frantic around-the-clock negotiations, as Wall Street bankers huddled in meetings at the behest of Bush administration officials to try to avoid a downward spiral,” wrote The New York Times.
It was futile. The next day—Monday, September 15—the Dow Jones Industrial Average dropped 500 points. Two weeks later, after much congressional wrangling, George W. Bush signed the last major law of his presidency, the Troubled Asset Relief Program (TARP), to inject up to $700 billion into ailing banks to prop up confidence in the financial system. But by late October the stock market plunged another 3,000 points, a total of 30 percent in five weeks. It was worse than the Crash of ‘29 and wiped out billions of dollars of wealth that could have been used to buy vacations or clothes or … cars. Wall Street had come to Main Street in disastrous fashion.
At AutoNation’s headquarters in Fort Lauderdale, Mike Jackson pored over sales records and was shocked by what he saw. No event since World War II—not the JFK assassination, not the attacks of 9/11, nor anything else—had caused such a quick collapse in car sales as the Lehman bankruptcy. For the first half of the month, sales were running at an annual pace of 14 million vehicles, which wasn’t great but was bearable. But from September 15 onward the sales pace dropped another 30 percent, to under 10 million vehicles—the lowest level in nearly thirty years. Consumers were afraid to buy cars. Bankers were just as afraid to make loans. The car companies couldn’t cut costs fast enough to keep up. Even the Japanese and German automakers started hurting.
Hurting, however, was different from desperate, and it was desperation time in Detroit. Wagoner had put out merger feelers to Ford, only to get a polite no thanks. Ford was Detroit’s only car company with its head above water, and it wasn’t about to be dragged down by GM.
Then Wagoner turned to Chrysler. The GM board had nixed the notion a year earlier, but times had changed, and Cerberus now was eager to get out. It also was eager to get paid, but GM was running out of cash. And the same bankers who were balking at car loans weren’t willing to finance a merger of two money-losing car companies.
In October GM’s Washington lobbyists started asking—discreetly, of course—whether the government might pony up $5 billion or so to finance the merger. But this was political dynamite. Any government money used to buy Chrysler would have gone to the private equity moguls at Cerberus and to the big banks that still held Chrysler debt. Even if the deal made sense, which the government types found questionable, it would have made GM look like a bagman funneling more government money to Wall Street. Congress and the Treasury Department weren’t about to bite.
To cope with the crisis, automakers and their suppliers launched into new rounds of cost cutting. In late October Nardelli said Chrysler would cut its management ranks by another 25 percent, or five thousand people, by the end of the year. Delphi made the decision to skimp on bathroom maintenance; the occasional toilet paper outage was unfortunate, but it took a strong stomach to work for a company in its third year of bankruptcy anyway.
On November 5, in the midst of the economic maelstrom and Detroit’s meltdown, Barack Obama made history by being elected the first African American president of the United States. The American people, with their economy in tatters, had opted for change. Not so General Motors, where Wagoner insisted he wasn’t prepared to resign, even in return for government aid. “I don’t think it’d be a very smart move,” he told reporters. “It’s not clear to me what purpose would be served.” Louis XIV had said pretty much the same thing three hundred years earlier, but at least “L’état, c’est moi” had an elegant French snootiness.
Five days after the election GM’s stock sank to $3.36 a share, its lowest level since 1946. The stock that GM’s loyal retired executives had bought in August had lost 70 percent of its value in just three months. Later in November both Chrysler and GM said they would run out of money by the end of the year. General Motors—once the richest company on earth, the originator of tail fins and muscle cars, the font of the organizational principles used by every modern corporation—was actually, and incredibly, going broke.
For GM and Chrysler, the waterfall threatening their corporate rowboats was no longer just a menacing but unseen roar in the distance. The falls were now in plain view. Everyone on board, from the pilots to the people doing the rowing, stood powerless to prevent the plunge over the precipice. The only hope was that somebody would throw a lifeline—in the form of cold, hard cash.
The usual lifeguards, America’s banks, were nowhere to be found. They were too busy trying to save themselves to keep the car companies from capsizing. The only hope was for a lifeline of money from the U.S. government.
So the government had to decide what to do, but who in the government? The lame-duck President Bush, or President-elect Obama? GM and Chrysler were draining so much cash that they couldn’t wait for Obama to take office. Wagoner continued to say, incongruously but consistently, that bankruptcy was “not an option” for GM. But gallows humor in the Motor City suggested otherwise.
One joke was about a man with financial problems who went to see his priest. The priest told him to bring a Bible down to the beach, let the wind ruffle through the pages, and when the pages stopped ruffling to look down. The first words he saw would tell him what to do.
A year later the man returned to the priest, driving a new car and flush with obvious prosperity. “What words from the Bible,” the priest asked, “inspired you to solve your problem?”
The man replied, “Chapter 11.”
TWELVE
AS THE PRECIPICE APPROACHES
On November 15, 2008, Bob Lutz and his wife attended a Saturday night performance of Madame Butterfly at the Detroit Opera. Patrons in the next box noticed he was furiously thumbing his BlackBerry right up until the opera began, and then again all during the intermission. Was Lutz, they wondered, exchanging ideas with Rick Wagoner and other GM executives on how to present GM’s request for billions in government aid to Congress? Not exactly. The seventy-six-year-old executive was playing BrickBreaker. Just three days before Wagoner would give testimony to the Senate Banking Committee that might decide the fate of General Motors, the company’s vice chairman was fully absorbed in a video game.
It was just as well, actually. Any distraction would be welcome in the days to come.
Washington was tricky terrain for Detroit, especially during the interregnum between Bush and Obama. Both the outgoing president and the new one, it was quite clear, wanted the other guy to deal with the car companies. In Congress, Republicans were historically sympathetic to business. But the party’s free-market types were skeptical about “corporate welfare,” especially after the public backlash over the $700 billion bank bailout.
As for Democrats, the party’s power base was shifting. The UAW had helped Obama win the election and still packed political clout. But blue-collar barons such as Representative John Dingell from Detroit, whose wife was a GM executive, were giving way to bicoastal suburbanites who championed the fuel economy and environmental regulations that Detroit had long resisted. Long the car companies’ protector in chief, Dingell was being ousted as head o
f the House Energy and Commerce Committee by California’s Henry Waxman, a leader of the ascendant greens. It was a sign of the times.
So was, in its own way, the e-mail blast that GM sent to its 100,000 U.S. employees just days before the congressional hearings The company urged them to contact their congressmen and provided a fill-in-the-blanks script to help them do it. “Hello, Senator/Congressman _________, my name is_________and I have been an employee of [GM plant, city, and state] for_____years,” the instructions began. Leaving little to chance, the script continued: “Add personal detail here.”
It was easy to imagine someone saying just that—“Add personal detail here”—to some puzzled congressional staffer. To clarify one sensitive point, the company told its employees it was “not asking Congress for a bailout, but rather a loan to be repaid.” Bailout, like bankruptcy, was a b-word that GM executives didn’t want to hear. If the message seemed a little heavy-handed, well, GM was never known for being subtle, and the company’s very survival was at stake.
Meanwhile the halls of Congress were filled with supplicant car dealers, including Gene Benner from Maine. At the behest of the National Auto Dealers Association and Chrysler, Benner dropped by the office of Senator Olympia Snowe, a Republican, whom he had known since their high school days. Benner was still steaming from the way he had been treated by Chrysler Financial earlier in the year. But he had a lot to lose if Chrysler went out of business and took his dealership down along with it, so it was a time to set his anger aside. He and thousands of other car dealers were a potent political force and were pulling out all the stops, just like the car companies themselves.
On Monday, November 17, the day before the hearings, Banking Committee staffers summoned the Washington lobbyists for the automakers and the UAW to review some questions in advance. Would the $25 billion that the companies were seeking really be enough, or would it be just the first installment? How would it be divided among the three companies? What was the UAW doing to help Detroit get competitive?
The questions were predictable, but the lobbyists couldn’t provide clear answers. That surprised the staffers, who told the lobbyists—in no uncertain terms—that their bosses should come prepared to provide clarity tomorrow. As it happened, however, Wagoner was getting just the opposite advice from a high-powered Washington consulting firm, which GM had hired to prep him for the hearings. The consultants advised Wagoner to keep his answers general and broad and to avoid being pinned down on specific numbers wherever possible. Wagoner, unfortunately, would take the advice to heart.
The Banking Committee convened at three P.M. Tuesday in room 538 of the Dirksen Senate Office Building, which was so crowded that Chairman Chris Dodd quipped that the panel should be meeting in RFK Stadium. Wagoner took the lead for the Detroiters. “What exposes us to failure now is not our product lineup, or our business plan, or our long-term strategy,” he said in his prepared remarks. “What exposes us to failure now is the global financial crisis.” It was the “not our fault” argument stated with conviction, because that’s what Wagoner really believed. Mulally and Nardelli chimed their agreement. The problem, however, was that the senators didn’t believe it.
Around six P.M., after three hours of long-winded questions and winding answers, Democrat Robert Menendez from New Jersey vented his frustration. “Part of the problem here is a credibility issue,” he said. “In the 1970s all automakers argued that fuel efficiency standards would force them to make nothing but subcompact cars. Well, we did it, and we were flooded with sport-utility vehicles …
“I’m inclined to be helpful, but I’ve got to have a fundamental understanding of why this [$25 billion] number wasn’t just picked out of the sky. I just don’t see how the $25 billion is finite.” Time would prove him remarkably right.
Menendez had cut to the two questions at the heart of the matter. Could anything Detroit’s car companies said be believed, after their track record of missteps and blown opportunities over the last thirty-five years? And if they got the $25 billion, would they burn through it quickly and come back begging for more? The CEOs hemmed and hawed.
Then Bob Corker, a Tennessee Republican, asked how the $25 billion would be apportioned among the companies—the same question his staff had asked the lobbyists the day before, without success. “I just want the numbers,” he said to Wagoner.
WAGONER: “Senator, sir, I think you have to be fair and look at it.”
CORKER: “I just want, of the $25 billion, how much of it have you guys decided is going to GM?”
WAGONER: “We felt that, if we get our proportionate market share of that …”
CORKER: “Well, just give me the number.”
WAGONER: “… which would be in the $10 billion to $12 billion [range] of that—that we would have …”
The exchange fit the tone for the entire day. Senators would ask the same question three or four different ways, but the CEOs seemed unprepared to answer. So did Gettelfinger.
“I find it very difficult [to believe] you’re asking for $25 billion,” Corker asked him, “when you have an agreement in place to pay 95 percent to workers who are not working … for how long?”
GETTELFINGER: “I’d have to look at the contract.”
CORKER: “You got to be kidding me.”
The answer, of course, was forever, which was why Gettelfinger deemed evasiveness better than telling the truth. Nonetheless, this was the moment when Congress and the American public were formally introduced to the insanity of the Jobs Bank. It had existed nearly twenty-five years in Detroit, so long that people just took it for granted. But politicians in Washington, and the public at large, were shocked.
As bad as the Senate hearing was, the next day was worse. As the House Financial Services Committee’s hearing was concluding, an ABC News reporter buttonholed Wagoner and Mulally at the witness table to ask a question. How could they plead poverty, he wanted to know, when they had flown to Washington on their luxury corporate jets?
The CEOs bolted like a Corvette peeling away from a stoplight, which only made the damage worse when their hasty retreats were replayed on the evening news. ABC reported that the corporate jet flights had cost the companies $20,000 each, compared to the price of $200 for a commercial airline ticket.
The congressmen, predictably, pounced. “There’s a delicious irony in seeing private luxury jets flying into Washington and people coming off them with tin cups in their hands,” snapped one Democrat. “It’s like seeing a guy show up at the soup kitchen in high hat and tuxedo.”
Obfuscation and obtuseness. All the stereotypes about Detroit being removed from reality—in everything from products to public policy to PR—came to life in two days before the television lights in the Capitol. It was Detroit’s worst drubbing in Washington since the hearings about GM’s spying on Ralph Nader more than forty years before. The three CEOs and Gettelfinger, like errant schoolboys, were dismissed to do their homework and come back for another round of hearings with better answers.
As they retreated to lick their collective wounds, executives at all three companies kicked themselves, belatedly, for the corporate jet fiasco. No one even had considered the potential danger. Corporate jets were as integral to executive life in Detroit (and at many other companies too) as the free cars, free car washes, and free gasoline in the company parking garage.
In the damage-control meetings that followed, some executives consoled themselves by saying that, had anybody tried to flag the issue beforehand, he or she would have been brushed off. They probably were right. Detroit executives justified their jets as productivity tools—even though Honda, no slouch in the productivity department, didn’t have any corporate jets. Detroit’s fundamental problem wasn’t jet-set but mind-set, one that seemed woefully out of touch with the American public.
The hearings debacle proved irresistible to the comedy writers on Saturday Night Live, who penned their own version of round two for broadcast TV. “I would like to apologize to the commi
ttee for the fact that we arrived in Washington so late,” intoned the actor playing Rick Wagoner, with mock dignity. “As many of you know, instead of flying, the three of us decided to, um, drive here from Detroit. (Snickers.) But we had car trouble. (More snickers.)
“I was going to drive my 2009 Cadillac XLRV, a model that we at GM are very proud of. But every time I tried to start it, I just got a powerful electric shock and the upholstery would catch on fire. (Ripples of laughter.)
“Bob here wanted to come in his new Chrysler 300. But the brakes, steering, engine, and transmission all went out. (Pause.) And also, I believe, the windshield came off. (Roars of laughter.) So we all piled into Alan’s brand-new Ford Fiesta. Which worked out pretty well except that when you turned on the lights, the heater and the car alarm would come on. (More roars.) Plus the GPS system wasn’t working too well, and we were just outside of St. Louis when we figured that out.” (Sustained roars.)
Then he displayed a chart with the “revised” bailout plan: another $50 billion or so in government funding for the three companies, every three to six months, for years to come. “We really worked hard on this,” said the fictional Bob Nardelli.
Detroit’s beleaguered CEOs had become targets for the sort of ridicule once reserved for, well, members of Congress. Which was ironic, because Congress wasn’t without blame in Detroit’s downfall. The CAFE law (Corporate Average Fuel Economy) that counted only American-made cars toward the gas-mileage standard had forced the companies to build small cars at expensive UAW wage rates. The same congressmen who pointed to Europe’s small cars as examples for Detroit to emulate didn’t acknowledge that European taxes pushed gasoline to $8 a gallon, which provided a strong incentive for people to buy small cars instead of SUVs. But higher gas taxes were anathema to American voters, so few congressmen had the courage to support them. It was easier to write a law that required companies to build small cars, profitable or not.
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