Crash Course

by Paul Ingrassia

  The bankruptcy would be grim enough. Chrysler’s plan called for dismissing 6,500 more employees, 20 percent of those remaining, while closing eight more factories and eliminating about 25 percent of the company’s 3,200 dealers. In a federal bankruptcy court, the state franchising laws that required compensating those dealers didn’t matter. Federal bankruptcy law trumped the state statutes, so Chrysler would owe the dealers nothing if the court approved its plan.

  The taxpayers would feel pain too. The Treasury Department pledged to provide $8 billion to keep Chrysler going until Fiat could revive the company, on top of the $4 billion the government already had provided to keep the company afloat.

  Along with those jolting numbers, the court filing also described the intricate mechanics of the bankruptcy process. Chrysler would transfer assets to “New CarCo Acquisition LLC,” described as “an indirect wholly owned subsidiary of Fiat,” a term only lawyers could love. And it would shut its factories for a couple months, while the dealers tried to work off the excess inventories sitting on their lots. UAW workers would get paid 80 percent of their wages during that time. In a way, it was the last remnant of the Jobs Bank before it disappeared.

  Not since Studebaker in 1966 had a major American car company filed for bankruptcy. And for the last thirty years, ever since Chrysler’s crisis in 1979, experts had been debating whether a car company could survive the process without customers simply walking away. Soon they would stop debating and find out.

  At 12:08 P.M., for the second time in thirty days, President Obama went on television to talk about the auto industry. “Today, after consulting with my auto task force,” he began, “I can report that the necessary steps have been taken to give one of America’s most storied automakers, Chrysler, a new lease on life.

  “Over the past month,” Obama continued, “seemingly insurmountable obstacles have been overcome. I am pleased to announce that Chrysler and Fiat have formed a partnership that has a strong chance of success.”

  It sounded remarkably like a victory speech instead of an announcement that one of America’s largest companies had gone bankrupt. In fact, the president didn’t use the b-word until he was two-thirds finished, and then he made it sound like an achievement. Bankruptcy “is not a sign of weakness,” he said, “but rather one more step on a clearly charted path to Chrysler’s revival.”

  Some of the hedge fund holdouts, whom Obama had vilified as a “small group of speculators,” quickly caved after the president’s speech. But most opted to have their day in court. That was the right of every American, after all, even accused criminals. The hedge funds weren’t exactly that. (In fact, some weren’t even hedge funds, as it turned out, but public employee pension funds in the Midwest.)

  In Auburn Hills, some Chrysler managers watched the president’s speech with tears of joy, even though their individual fates remained unclear. Many employees stood to lose their jobs under the Fiat deal, but the alternative was worse: everyone losing their job in a quick corporate collapse.

  In South Paris, Maine, Gene Benner concluded that Chrysler Financial’s threat a year earlier to cut off his credit actually had been a blessing in disguise. It had forced him to make the painful changes that had kept his dealership afloat, even while Chrysler itself was tumbling into bankruptcy. He never would have made those moves, Benner admitted to himself, if he had avoided facing reality. His wake-up call had come in time, although it hadn’t for Chrysler itself.

  Obama’s speech left Benner torn between relief and worry. Chrysler was still alive, which was good for his dealership. But would Bessey Motors make the cut when Chrysler culled its dealer ranks? And even if it did, would Chrysler’s bankruptcy drive his customers away?

  In Belvidere, assembly worker Gene Young was hoping it wasn’t BOHICA time again. The factory shutdown was supposed to be temporary, but despite what Obama had said, Young still wasn’t feeling sanguine about his future. Nor was his father, Fred, who didn’t know what further benefits, on top of previous reductions in health insurance, he might lose in retirement. “I’m seventy-one; where can I go get a job if I have to?” he asked plaintively. “I’m worried.”

  And Chrysler’s bankruptcy, it was clear, was just the nation’s warm-up for the main act: General Motors.

  Unlike Chrysler, GM didn’t have to convince the task force that it was too big to fail. Nor did GM have a potential buyer, like Fiat, requiring intricate negotiations and a complex transaction. But GM had other complications. It was a public company, for one, unlike Chrysler.

  And it was enormous: more than ninety thousand U.S. employees (although the number was steadily shrinking), by now an incredible ten retirees or dependents for every active employee (that number, alas, wasn’t shrinking), and $172 billion in liabilities—nearly as much as the national debt of Mexico. Beyond that, GM had operations in virtually every country on the globe, befitting the company that had long been called “the General” in Detroit. Its European operations, while not bleeding as badly as those in the United States, nonetheless were draining cash and facing likely sale.

  Being worldwide, however, hadn’t made GM worldly. In March, before Fritz Henderson replaced Rick Wagoner as CEO, Harry Wilson asked him what he thought of GM’s culture. “I think it’s fine,” Henderson replied. He paused and added, “In reality, it’s the only culture I know.” That was true of GM’s senior management, nearly all of whom were company lifers. At least Henderson recognized the problem. How could he or other GM executives find fault with practices that, in fact, were all that they knew?

  The company’s cash management system, for example, was so inexact that on any given day, GM didn’t know its working balance within half a billion dollars. To Wilson, GM was like a guy who only occasionally bothered to balance his checkbook. That required keeping lots of extra cash in the checking account, just in case, but idle cash was wasteful.

  Wilson, as the task force’s point man for GM, knew that Wagoner’s abrupt departure and Obama’s sixty-day bankruptcy deadline had shocked the company. So he waited a few days after Obama’s speech on March 30, to let things settle in. Then he reached out to Henderson and other executives.

  “You started this turnaround in 2005 and you propose finishing it in 2014,” Wilson told them. “I’ve been through a lot of restructurings, and they just don’t work that way.” GM had to move much faster, he said, pointing out that Nissan and Fiat had pulled off their dramatic turnarounds in just a couple years. GM’s latest turnaround plan, he thought, was just another example of a culture of delay.

  He suggested that GM and the task force collaborate, like partners, to develop a more aggressive viability plan that would go beyond GM’s halfway measures of the past. Henderson quickly agreed (what choice did he have, really?), and task force members moved into conference rooms a few levels below the executive floor at GM’s headquarters in the Renaissance Center.

  Inevitably, their presence rankled some executives. In one meeting GM people and the Treasury team were sketching out product strategy on a white board, crossing out models with little profit potential and increasing spending plans for core vehicles that could actually make money. The task force members sensed increasing enthusiasm among the dozen or so GM people, when suddenly they all glanced at their BlackBerries and asked to be excused.

  A few minutes later the GM executives filed back in together, obviously having held an impromptu caucus in the hallway. The options being discussed, they said, really weren’t worth exploring after all. Somebody’s sacred cow was being threatened, and plenty of those remained at GM, even though the company was keeling over.

  In another meeting a GM executive pointedly asked the task force attendees how many of them had prior auto-industry experience. Not a single hand went up.

  But experience had its drawbacks. GM executives had come to believe that solving their problems was impossible, and that living with them was inevitable. Despite the occasional flashes of resistance, however, Wilson and his colleagues
kept asking fundamental questions that GM executives should have been asking themselves all along. When one executive praised a new model to be launched in 2011 as “a credible entry,” Wilson asked, “Why shouldn’t we have a compelling entry instead?” The GM man seemed surprised.

  In the third week of April, the weather in Detroit was volatile, ranging from marble-size hail in midweek to eighty-degrees-and-sunny on Sunday. Events at General Motors were volatile too. On Wednesday, April 22, the Treasury loaned GM another $2 billion, on top of the previous $13 billion. With car sales remaining depressed and losses mounting, the company was once again running out of cash.

  Five days later GM announced a public offering to exchange $27 billion of unsecured debt for GM stock. Because GM couldn’t afford the interest payments, the task force insisted that the company get 90 percent of the debt off its books to retain any hope of staying out of bankruptcy.

  But there were thousands and thousands of GM debt-holders, ranging from big mutual funds and pension funds to mom-and-pop investors. One eighty-one-year-old man in suburban Chicago had invested much of his life savings in 2004 to buy $270,000 of GM notes because of their 9 percent interest rate. The new stock GM was offering had little attraction for him. The face value of his investment would shrink to $10,000 or less, and the stock wouldn’t pay a dividend, at least not initially.

  There were plenty of others for whom the prospect of getting new GM stock had little appeal, even though the likely alternative would be taking significant losses in a bankruptcy. The bottom line was that getting 90 percent of the debt-holders to exchange their bonds for stock was virtually impossible. Henderson said he still hoped to avoid Chapter 11, but the already-slim odds were dwindling.

  Investors’ confidence was shaken further on May 7, when GM posted a horrific loss of $6 billion for the first quarter. The company’s quarterly cash burn was even worse: more than $10 billion, or $113 million every single day—twice the rate it had been during the waning months of 2008. The company’s first-quarter production plunged more than 40 percent, to just 1.3 million cars, which CFO Ray Young candidly conceded was “a staggering number.”

  The company that couldn’t make money in good times was melting down dramatically as industry-wide sales plunged to thirty-year lows. In discussing the results with reporters and analysts, Young added: “We prefer to restructure outside of bankruptcy, but if we have to go in, we need to go in and out quickly.”

  The very next day GM got some unexpected relief, but only in the sense that misery loves company. Toyota, which had just supplanted GM as the industry’s global sales leader, posted a loss of $7.74 billion for its fiscal fourth quarter (the same as GM’s first quarter). It was a staggering loss, even greater than GM’s, and enough to saddle Toyota with its first annual deficit in fifty-nine years.

  For more than three decades the only direction Toyota had known was up—pretty much like, well, General Motors in the 1950s and 1960s. Despite the loss, Toyota had hefty cash reserves of $33 billion, as well as leadership in hybrid technology, and it remained the most formidable car company on the planet. But that only made the latest results more baffling.

  The ironic truth was almost too simple. In its headlong rush to build new factories and become the world’s largest car company, Toyota had succumbed to quality glitches and excess capacity, just as GM had done years earlier. Ford’s cars now surpassed Toyota’s in quality, Consumer Reports found.

  What’s more, Toyota’s two-year-old pickup-truck factory in Texas was running at just half its capacity and was bleeding red ink. While Toyota didn’t have the UAW or the Jobs Bank, it did adhere to a decades-old “no layoffs” policy that now amounted to the same thing: paying workers full wages for not building cars. That situation had rarely occurred during the company’s decades of nonstop growth, but the global economic crisis that began in 2008 was leaving no automaker unscathed.

  GM executives couldn’t take much solace, however, in the troubles of Toyota or any other car company. They were too busy trying to convince the UAW to accept another 21,000 job cuts, on top of the 20,000 union jobs eliminated since the middle of 2008, and to deal with a host of other issues. As April turned to May, meanwhile, Fritz Henderson said GM was at a “defining moment.”

  May 14 began D-Days in America, as in dealer days. Nearly ten thousand General Motors and Chrysler dealers across the country got letters from the companies, telling them whether they would be kept or culled.

  The logic for reducing the ranks of dealers was simple. Detroit’s dealer networks were too big, relics of the companies’ glory days of the 1960s, as opposed to reflecting the realities of the twenty-first century. In 2008 GM’s dealers sold fewer than five hundred new cars on average, while the typical Toyota dealer sold more than three times that many.

  The extra sales made Toyota dealers more profitable, with more money to invest in attractive showrooms, local marketing campaigns, and better service facilities. Dealer overload was another “legacy cost” to be eradicated. But one man’s legacy cost is another man’s living.

  At ten A.M. on May 14 a brown UPS truck pulled into the parking lot at Bessey Motors in South Paris, Maine, with a letter from Chrysler. Benner had known a letter was coming that day—to him and to all the other 3,180 Chrysler dealers in America. Would it wipe out all he had worked for since he progressed from car salesman to car dealer over the last twenty-five years? “Dear Eugene N. Benner,” the letter began in the stiff style of a mass mailing, which in fact it was.

  “We are pleased to inform you on May 14th,” the letter continued, “Chrysler designated your Sales and Service Agreement(s) to be assumed and assigned to a new company that is purchasing the primary assets of Chrysler. You can remain our dealer as we move forward with establishing a new company.”

  The man who had been cut decades earlier by the Cleveland Browns breathed thanks that he had made the cut with Chrysler. Small dealerships were bearing the brunt of the cutbacks, he knew, and with sales of only about two hundred new cars a year, Bessey Motors certainly was small.

  Despite his size, however, Benner was the only Chrysler dealer in his area of rural Maine, and he had all three company brands—Jeep, Dodge, and Chrysler—under one roof. Plus he had taken his future into his own hands and made the tough decisions to return his dealership to profitability, despite the slump in sales. Those things made all the difference.

  Benner got on the dealership’s intercom system and said, simply, “We’re good to go.” Every employee knew exactly what he meant. A few exchanged smiles of grateful relief before turning back to their work.

  In 789 other Chrysler dealerships, however, people weren’t smiling. A dealer in Kentucky got a letter from Chrysler the same day saying he hadn’t made the cut. The very next day he got a similar letter from GM, terminating the Chevrolet franchise his father had started half a century earlier. The back-to-back blows were “more than I can handle right now,” he said.

  Also that day the Chevrolet dealership in Belvidere—just a few miles from the Chrysler factory where Gene Young worked—got its termination letter too. The dealership had been run by the same family since 1924 and was displaying an eighty-five-year anniversary banner in its window when the bad news arrived.

  In a two-day period, three of Belvidere’s six car dealers got termination letters. The “new math” of the twenty-first century auto industry made six dealers too many for a town of 22,000, but the dealers were part of the fabric of Belvidere. For decades they had supported Little League baseball, youth hockey, and other civic causes. Those and other groups, not to mention the local tax base that provided everything from teachers’ salaries to city services, were going to take a hit.

  GM’s timing surprised many dealers, because the company hadn’t filed for bankruptcy. Without filing, the company would have to pay them damages, but they knew GM didn’t have money for that. The letters were the latest clue that D-Days soon would give way to B-Day.

  Meanwhile, bad news c
ame to Gene Young via e-mail instead of a letter. At eleven P.M. on Tuesday, May 19, he got an automated message saying that the second shift at the Belvidere factory would be eliminated indefinitely, even after production resumed in mid-July. In years past Young, and the 991 other workers on the second shift, wouldn’t have been unduly worried. They simply would have slid seamlessly into the Jobs Bank, waiting for an increase in production or an inverse layoff to bring them back to work. But now the Jobs Bank—like the DeSoto, Oldsmobile, and tail fins—was passing into automotive history.

  At forty-two, with four children, two cars, and a mortgage, Gene Young faced a brutal choice. He could hope that the second shift would be restored before long and in the meantime scramble to find temporary work. Or he could take a buyout from Chrysler, hoping the money would tide his family over until he found a new occupation.

  With a high school education and a good work record but no special skills, Young was under no illusions. Any new job was unlikely to command the compensation of his old one. “Everything we have has been financed with my Chrysler pay level,” he said ruefully. “So what happens when I don’t have a Chrysler pay level anymore?” But there was little use waiting around for a job that might never return.

  On May 26, the day after Memorial Day, Young decided to bid Chrysler, the assembly line, the Jobs Bank, and (hopefully) BOHICA good-bye forever. Maybe he would find another job or start a small business of some sort. The days when he could finance a new car just by saying he worked at Chrysler were gone for good.

  Detroit was ground zero of the car crackup of 2009. But the meltdown of the Motor City’s corporate giants was slamming tens of thousands of people throughout America in little towns like Belvidere too—dealers, workers, suppliers, and all the doctors, drugstore clerks, and others who depended on them. Economic evolution was ending a way of life across America for many people who had depended on the auto industry. It wasn’t clear what would take its place.