The task force didn’t believe that. Rattner was concluding that General Motors might be the worst-managed company he had ever seen. Bloom compared it to Bethlehem Steel, the quintessential industrial dinosaur that had collapsed in 2003 due to a cloistered management culture, crushing debt, costly labor contracts, and multiple retirees for every active worker. It had had problems, in short, not unlike GM’s.
The two men passed the word to Geithner and Summers, all the way up the line to President Obama: removing Rick Wagoner would be good for General Motors and good for America. It wasn’t exactly what Obama’s political advisers wanted to hear. As a Democrat, they knew, the president would get lots of grief—editorials about “creeping socialism,” and headlines about “nationalizing GM”—for sacking the CEO of General Motors. But GM’s fate under Wagoner had been so clearly disastrous that Rattner got the green light from the White House, without much internal debate.
On the morning of Friday, March 27, Wagoner, Fritz Henderson, and GM’s chief financial officer, Ray Young, walked into the anteroom of Rattner’s spacious corner office on the first floor of the Treasury, across the street from the White House. At noon that day, GM’s board would hold its regular weekly conference call, Rattner knew, and he wanted to discuss something with Wagoner beforehand. He asked Henderson and Young to head upstairs to a fifth-floor conference room while he had a private word with their boss.
“We’d like to take you up on your offer,” Rattner said after closing the door, “to resign for the good of General Motors.” As GM’s banker by default, he added, the U.S. Treasury wanted Fritz Henderson to replace him as CEO, and one of the company’s outside directors to become interim board chairman.
Wagoner paused, seeming not entirely surprised, but nonetheless shocked. “Are you going to get rid of Ron Gettelfinger too?” he asked Rattner.
Rattner was dumbfounded. He had expected anger, protest, anything but that question, which convinced him just how foreign the notion of CEO accountability was to the man running GM.
“Well,” Rattner mumbled, “he doesn’t really work for me.” The implied message, of course, was that the CEO of General Motors did. With government money keeping GM on life support, Wagoner was backed into a corner.
Then the two men, who were almost exactly the same age, talked for a few more minutes. Wagoner said he wanted Rattner to know just how hard the job of running General Motors really was. Rattner said he appreciated that. Then Wagoner went upstairs to the fifth floor to tell Henderson and Young the news.
Henderson was shocked. At age fifty he was a GM lifer from a GM family. (His father had worked there, and his brother still does.) As an infant, Henderson had shared the same playpen with the children of other GM executives. He had attended the University of Michigan, the all-but-official academy for future GM executives. Armed with this pedigree, Henderson had emerged early as a GM “high pot,” working for the company in key positions around the world. Henderson always had dreamed of running the company one day but had never expected it would happen like this.
After giving the GM people a few minutes to absorb the news, Rattner, Bloom, and Harry Wilson walked into the meeting room to deliver more disconcerting news. GM’s February 17 restructuring plan was inadequate, they said, because it didn’t go far enough or fast enough to save the company. The atmosphere was calm and businesslike—and therefore absolutely surreal. But it was nothing compared to what happened next.
At noon Wagoner convened the board’s conference call and told the directors the news. They erupted in anger. The “Board of Bystanders” that had reacted with worried hand-wringing, but little real action, while General Motors plunged into penury, finally got its dander up.
They weren’t angry at Wagoner, nor at themselves, at least not outwardly. They were angry at Steve Rattner. No government official, not even the president, had the right to fire Wagoner, they protested. Only the shareholders could fire him, and they—the directors—represented the shareholders. A boardroom revolt was brewing, not against the CEO, as in most such uprisings, but for the CEO.
That afternoon George Fisher called Rattner to register his anger about the ungracious treatment of Wagoner, a man, he noted, who had dedicated his career to GM. Rattner pointed out that the task force had tried to avoid humiliating Fisher himself, by allowing him to remain as GM’s official “lead director.” That title was meaningless now that another outside director was being installed as chairman, but the gesture helped mollify Fisher. If nothing else, peace would be preserved at future meetings of the Brown University board.
Rattner also fielded a call from the lawyer for GM’s board, who registered the board’s extreme dismay and asked Rattner to speak to the directors himself. That night Rattner joined another board conference call and conceded that only the directors—not the government—had the power to fire the CEO. But then he cut them off at the knees. Wagoner hadn’t been fired, he noted; he had been asked to resign. Maybe the effect was the same as a firing, but from a legal standpoint the Treasury’s action was altogether different. Wagoner could refuse, or the board could decline to accept his resignation.
No one had to add that, should either of those paths be taken, the Treasury could pull the purse strings, in which case General Motors would collapse. The government might balk at doing that, but none of the directors wanted to find out. The bald fact was that the board that had presided over GM’s downfall wasn’t calling the shots anymore. GM’s banker was in charge, and its banker was the United States of America.
So it was that Rick Wagoner’s meteoric rise to the top of General Motors came to a bitterly ironic end. He had been vaulted to prominence at thirty-nine by being named CFO in the 1992 boardroom coup that was orchestrated by GM’s outside directors. Now, having survived for years despite successive corporate disasters, he was being ousted in another boardroom coup, this one orchestrated by the president of the United States.
Wagoner had once been regarded as a Young Turk reformer, but was ending his GM career as a symbol of a corporate culture that defied reform. He hadn’t solely caused GM’s demise, which had begun before he joined the company in 1977, fresh out of Harvard Business School. But he had failed to take the risky but necessary moves—cutting excess brands, dealers, work rules, the Jobs Bank, and all the other baggage weighing down General Motors—to stem the company’s slide as it accelerated dramatically during his years as CEO. Instead he had bet the company on mortgages, trucks, and SUVs, and they had proved losing bets.
That Sunday, March 29, Wagoner formally resigned as chairman and CEO of General Motors. After convening a scheduled five P.M. conference call of GM’s North American Strategy Board, he told the group he was leaving, turned the meeting over to Henderson, and signed off. It was his last official act as the chief executive officer of GM.
As word of Wagoner’s forced departure spread, the GM old boys’ club reached out in support. One retired executive called to tell Wagoner he should take pride in departing with his integrity intact. General Motors, at its highest reaches, was like that. Members of the club circled the wagons in tough times. Times didn’t get much tougher than this.
The next day in Washington, at 11:07 A.M., President Obama addressed the country on national television. “One of the challenges we’ve confronted from the beginning of this administration is what to do about the state of the struggling auto industry,” he began. “Year after year, decade after decade, we’ve seen problems papered over and tough choices kicked down the road … Now is the time to confront our problems head-on.” (Translation: I won’t just throw money at Detroit, like George Bush did.)
He continued: “GM has made a good faith effort to restructure over the past several months—but the plan that they’ve put forward is not strong enough. I’m absolutely confident that GM can rise again, providing that it undergoes a fundamental restructuring. As an initial step, GM is announcing today that Rick Wagoner is stepping aside as Chairman and CEO. This is not meant as a condemn
ation of Mr. Wagoner, who’s devoted his life to this company and has had a distinguished career.” (Translation: I fired him, but I want to be gracious about it.)
“In this context, my administration will offer General Motors adequate working capital over the next 60 days. And during this time, my team will be working closely with GM to produce a better business plan.” (Translation: Employees will take job cuts; investors will take haircuts on their investments.)
Then the president turned to Chrysler. “It’s with deep reluctance but also a clear-eyed recognition of the facts,” he said, “that we’ve determined that Chrysler needs a partner to remain viable.” The best prospect was Fiat, he said, without adding that in fact the only prospect was Fiat. He committed the government to funding Chrysler for another thirty days while it tried to fashion an agreement with the Italian car company. If the negotiations failed, Obama said, “we will not be able to justify investing additional tax dollars to keep Chrysler in business.”
Those were stark and sobering words. But before his listeners had a chance to digest them, Obama went further and said the b-word out loud, right there on TV. Saving GM and Chrysler, he said, “may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger.” (Translation: Without bankruptcy, these companies won’t have a prayer.)
Obama didn’t lay it entirely on the line: he didn’t say that even if Chrysler cut a deal with Fiat, it would have to be propped up by tax dollars for a couple years until the Dodge Italianos, or whatever the new cars would be called, could start rolling off Chrysler’s assembly lines.
He lavished praise on U.S. autoworkers without mentioning their shared complicity with management for bringing the companies down. He wasn’t about to alienate his supporters in the UAW. Nor did he tip his hat to the nonunion workers in the Japanese, German, and Korean transplants in Ohio, Kentucky, Tennessee, and nearby states, who were every bit as American as the workers at GM, Ford, and Chrysler.
Still, it was an awfully good speech, especially for a president barely two months in office who had never run a business or even worked in one. On March 30 Barack Obama said uncomfortable truths about Detroit that many people had whispered for years but hadn’t dared say out loud.
He offered not only lifelines to GM and Chrysler but also brand-new boats and a chance for a fresh start. But getting into the new boats almost certainly would mean going through bankruptcy. And that would mean tossing some workers, dealers, and investors overboard—because the new boats would be smaller, though hopefully more seaworthy, than their existing creaky craft. Chrysler had thirty days. GM had sixty. The rescue clock was ticking.
THIRTEEN
BAILOUTS, BANKRUPTCIES, AND BEYOND
The good news for Chrysler was that by the time President Obama started its thirty-day clock ticking, the company had already reached the broad outline of a deal with Fiat. The bad news was that actually getting a deal done would require many more parties to agree.
Among them were the Canadian Auto Workers union and the Canadian government, because Chrysler had factories and workers in that country. Then there were Cerberus, the United Auto Workers, Daimler (which still owned nearly 20 percent of Chrysler), and the creditors who held $6.9 billion of Chrysler debt. All were like a little flotilla circling around Chrysler and warily watching the tugboat, the president’s Automotive Task Force, which would have to do the heavy hauling.
Getting all these boats to pull in the same direction would require reconciling different, and often conflicting, courses. The Italians wanted to board Chrysler’s boat and run it themselves. The unions wanted to keep as many jobs, pensions, and benefits on board as possible, but even they were divided. The UAW wanted to keep American jobs, while the CAW wanted Canadian jobs.
The creditors’ boat seemed to be holding the safest place in the water. This boat held the forty-six banks, hedge funds, and pension funds that had lent Chrysler money as part of its acquisition by Cerberus in 2007. The lenders had hoped to resell the debt instruments—originally $10 billion worth, but some had been repaid—for a fast and tidy profit but couldn’t find buyers.
The creditors’ boat was piloted by James B. Lee, Jr.—“Jimmy” to everyone on Wall Street—who might have been cast as Captain Hook, except that he was better dressed. As vice chairman of JPMorgan Chase, Lee was a big-time, hard-nosed moneylender known for the trademark suspenders he wore with his $3,000 suits. JPMorgan Chase had the biggest chunk of the Chrysler debt, some $2.7 billion. Its fellow creditors included the biggest names on Wall Street: Goldman Sachs, Morgan Stanley, and Citigroup.
The debt they held was classified as “senior secured” and guaranteed by a first lien on Chrysler’s assets. The lien was like a life preserver that assured they would be paid, the creditors figured, even if Chrysler crashed over the falls. Lee felt little inclined to participate in a rescue and kept his distance from the rest of the boats.
The flotilla had begun forming on January 2, well before the tugboat appeared, when a team of investment bankers from UBS, representing Fiat, waded into Auburn Hills. What followed was intense negotiating, in which the bankers made clear that Fiat didn’t want to pay actual cash for Chrysler. But Fiat’s small-car technology would save Chrysler billions in development costs, the bankers said, and therefore would replenish a new-product pipeline that had been depleted under Daimler and Cerberus. They were right on both counts.
Besides price, another sticking point was the fate of Chrysler Financial, the division that provided financing to Chrysler dealers and customers. Cerberus wanted out of the car company entirely but was eager to remain tethered to the financial company.
Three weeks later, after intense negotiations, the two companies and Cerberus agreed to a structure: Fiat would get 35 percent of Chrysler up front and an option for another 20 percent. Ownership of the rest was left to be determined, along with the fate of Chrysler Financial. Meanwhile Chrysler, Fiat, and Cerberus sought a truce with Captain Hook.
They wanted the banks to clear the path for the Fiat deal by reducing Chrysler’s debt, preferably exchanging at least half of it for shares in Chrysler. Such debt-for-equity exchanges were common in corporate restructurings, but Jimmy Lee wouldn’t discuss it—at least not for free.
He asked for tens of millions of dollars to serve as Chrysler’s debt-restructuring adviser. It would be a blatant conflict of interest because, as Chrysler’s biggest creditor, JPMorgan Chase couldn’t possibly give Chrysler objective advice on restructuring its debt. Chrysler wisely hired a different adviser instead.
In late January one of Fiat’s UBS bankers tried to open a channel to Lee by dialing into a conference call between the banks and Chrysler. It didn’t work. “Fiat isn’t a party to this discussion,” Lee barked over the phone. “We have no interest in hearing from you.” He ordered the banker to get off the call. Backed by the legal power of first-lien debt, Lee wanted payment in full for the banks. Period.
So despite all the frantic maneuvering, all the boats remained fixed in position, waiting for the tugboat to arrive and set the rescue course. Then on March 5 Sergio Marchionne went to Washington.
For his first meeting with the Automotive Task Force, Fiat’s CEO wore his trademark black sweater and black slacks, the same thing he always wore to work as opposed to a jacket and, God forbid, a tie. (Well, he had made an exception a few years earlier, when he met the pope.)
The presentation began at ten A.M. in the ornate Diplomatic Room on the first floor of the Treasury. True to form, Marchionne didn’t bring a large entourage. He was accompanied only by Andrew Horrocks, Fiat’s investment banker from UBS, and a couple of others.
Marchionne began by describing Fiat’s history and its dramatic turnaround since 2004, which had been helped in no small part, ironically, by the $2 billion “divorce settlement” that he had beaten out of GM. Then he provided his vision for the auto industry. Companies the size of Chrysler and even Fiat, he said, would be too small to survive i
ndependently. They would need larger economies of scale to support research on hybrid vehicles and other new technologies that would be critical to the cars of the future. Then he outlined why Fiat and Chrysler would make a good fit.
Fiat was strong in international markets, he said, but had little presence in the United States, which was Chrysler’s citadel. Chrysler had strengths in trucks and SUVs, he added, while Fiat’s strong suit was small cars. Without Fiat, Marchionne argued, Chrysler wouldn’t meet future fuel-economy requirements under the CAFE law. But to his surprise, the task force members really didn’t care. Their mission was to save jobs and the economy, not the environment.
Horrocks then launched into the proposed financial structure. Fiat would give Chrysler small-car technology and product blueprints, he said, that the Italians valued at $4 billion. Rattner and Bloom started picking away at that number—and at the fact that Fiat wouldn’t put any cash into the deal. Marchionne replied that if the world’s economic crisis intensified and Fiat found itself needing aid from the Italian government, the company would be crucified in Italy for having used cash to buy Chrysler.
The answer seemed to mollify the task force, at least somewhat.
There were dozens of other questions, polite but pointed, and Marchionne fielded them all—without the blue-suited supporting casts that his Detroit counterparts usually required. He impressed the task force with the depth of his knowledge and amazed his colleagues by going a full four hours without a smoke. The meeting ended at two P.M., and Marchionne quickly lit a cigarette on the steps outside the Treasury.
When the foursome sat down for a late lunch, Marchionne asked how the presentation went.
It’s hard to tell,” replied Horrocks, who came away discouraged. He couldn’t be sure that the task force wouldn’t try to find another partner for Chrysler, maybe even reviving the GM-Chrysler deal yet again. “We did the best we could,” he added, “but they didn’t seem all that interested.”
Crash Course Page 29