The company had come through two world wars and the Depression and had stood as the defining corporation of America’s economic hegemony after World War II. But that very success had bred complacency, arrogance, and hubris. It had fostered the isolation of executives who never had to shop for a car, and a union’s transformation from protecting workers’ rights to protecting their “right” to be paid indefinitely for not working.
Had GM’s filing occurred a few years earlier, stock markets around the world would have collapsed in panic. But the day that it really did happen—June 1, 2009—the Dow Jones Industrial Average actually jumped 221 points. America, just like Ray Young, was almost relieved. So were many people in Detroit itself, now that the anxious waiting was over.
Approval wasn’t universal, of course, for spending $50 billion from the public purse to rescue the fallen industrial colossus. The bailout signaled an “America poised to transform into Euro-Flop Social-Marxism, as we juggle open-ended bankruptcy,” said one letter-writer to The Patriot Ledger in Quincy, Massachusetts. “What’s next?” Similar, if less colorful, talk abounded around the country about creeping socialism, bureaucrats designing cars, and the like.
It was all understandable from a bailout-weary nation, especially because of the contrast with Ford. After careening from one disastrous decision to another between 1999 and 2006, the company had come to grips with its fundamental need to change. In 2009 Ford was reducing its debt, shedding dealers, and changing factory work rules without getting billions in federal funding. With the U.S. economy still depressed, Ford was still losing money, but its progress provided plain evidence that GM and Chrysler could have avoided bankruptcy too with better leadership and with a willingness to act decisively before it was too late.
As events had actually unfolded, however, the alternative to saving Chrysler and especially GM was … what? Maybe their outright collapse wouldn’t have deepened America’s worst economic crisis since the Great Depression. But it would have been foolhardy to find out.
Right after entering bankruptcy, GM aired a television commercial that pretty much said it all. “Let’s be completely honest, no company wants to go through this,” the commercial began. “There was a time when eight different brands made sense. Not anymore. There was a time when our cost structure could compete worldwide. Not anymore. Reinvention is the only way we can fix this.” Ironically, those were the very same arguments that GM’s critics had been making, and that the company had been denying, for years.
Only time would tell whether the commercial was simply a PR stunt, or whether GM had finally learned that problems left to fester will result in a reckoning, and the longer the festering, the more painful the reckoning. That was the broad lesson of General Motors—a lesson as old as the Bible, and as fresh as the epic collapse of Wall Street less than a year earlier.
The task of the new GM would be to prove another biblical lesson: that reform and redemption are possible.
AFTERWORD
ANOTHER CHANCE
June 1, 2010, America marked the first anniversary of the bankruptcy of General Motors, once the largest and richest company in the country and indeed the world. It wasn’t exactly a national holiday, understandably. But one year on, despite lingering public resentment of their bailouts, the restructured GM and Chrysler were showing surprising signs of vitality.
Both companies were showing small profits, even though the U.S. car market remained depressed in an economy that was recovering but still shaky. GM’s bailout helped the company mightily by eliminating swaths of debt, at great cost to the bondholders. In fact, GM’s $865 million profit for the year’s first quarter was almost the same amount it saved from lower interest on its debt.
Still, things were good enough that in the summer of 2010 the new General Motors was planning an initial public offering of stock, and Chrysler was preparing to follow. The IPOs would involve a certain symmetry: the Wall Street banks that had gone broke were going to take public the car companies that had gone broke. In America, truly all things are possible.
The timing of GM’s IPO plans was politically convenient for President Obama. At the beginning of the 2010 midterm election season, unemployment remained stubbornly high, but his administration was eager to show that a domestic economy policy success was taking shape. In fact, in late July and early August the president took an automotive victory tour, visiting factories of GM, Ford, and Chrysler to tout the companies’ nascent comebacks. The bailout remained deeply unpopular, but many Americans would accept a little political posturing as the price of getting repaid, at least in part, for saving Detroit.
Keeping GM and Chrysler alive, albeit in shrunken form, had been an expensive undertaking for American and Canadian taxpayers, costing them more than $100 billion in all. That figure included the aid from both governments to the companies, to their financial arms, to their pension funds, to their parts suppliers, and even to the car-buying public, in the U.S. “cash for clunkers” tax rebates on new cars in the summer of 2009. Some Florida retirees used “cash for clunkers” loopholes to buy new golf carts. They didn’t know whether to be proud or embarrassed.
The $100-plus billion was enough to buy 5 million new cars, more than the number sold in America in the first half of 2009. Some of it would be repaid by the IPO stock sales in the reorganized companies, though full repayment was uncertain.
For all the money that Americans shelled out to save Detroit, they should take away some valuable (if expensive) lessons from the experience. Perhaps the most fundamental is that problems denied and solutions delayed will result in a painful reckoning. And the longer the denial and delay, the more costly the reckoning.
Everybody in Detroit knew that paying workers indefinitely not to work in the Jobs Bank was ridiculous and unsustainable, and that the inverse layoffs that allowed older workers to game the system were absurd. Keeping brands that never made money was dumb. So was paying gold-plated pension and health benefits that sapped money from developing new cars.
Nonetheless, despite repeated warnings, all these practices, paid for by mounting debt obligations, continued for decades in Detroit’s thirty-year, slow-motion crash. The government had bailed out Chrysler in 1980. GM had teetered on the brink of bankruptcy in 1992. Ford had posted a record loss in 2006, when the U.S. economy had seemed healthy. In January of that year Jerry York had warned that unless GM committed to drastic reform, “the unthinkable could happen” at the company within a thousand days. York died, at age seventy-one, in March 2010, just ten months after his Cassandra prophecy was fulfilled.
In the wake of the bailouts of Wall Street and Detroit, another relevant question is whether the unthinkable—going broke—also could happen to America itself. In 2009 and 2010 the country began running unsustainable federal spending deficits. A massive financial-reform bill became law, even though it didn’t touch Fannie Mae and Freddie Mac, the government-sponsored agencies whose reckless mortgage lending had helped create the housing crisis.
Many states’ public-employee pension funds were hopelessly underfunded for the level of benefits promised to retirees. The New York public schools even had a program that required underperforming teachers to be paid for not working, just like the Jobs Bank.
The unions representing public employees and teachers resisted reforms on these issues, just as the UAW had done in Detroit. But unions can do only what managements allow. All too often the politicians overseeing public agencies and school boards had been as feckless as the managements in the Motor City. America had bailed out GM and Chrysler. The question was, who would bail out America?
Another broad lesson, applicable far beyond the car business, was that judgment trumps structure almost every time. On paper, pre-bankruptcy GM had the right structure for corporate oversight. The board of directors consisted almost entirely of outsiders, not members of management, who were led by a “lead independent director.” That was the good news. The bad news was that the CEO was Rick Wagoner and the lead
director was George Fisher, who piled mistake upon miscalculation upon misjudgment while the rest of the board simply watched.
In contrast, Ford’s corporate-governance structure was a disaster on paper. The Ford family’s supervoting Class B shares gave family members about thirty-one votes for every share of the Class A stock that nonfamily members owned. Shareholder votes were like elections in North Korea, except that nobody called Bill Ford, Jr. “Dear Leader.”
But the Ford family used its outsize voting power to make the tough decisions that GM ducked. The family hadn’t always made the right calls for the company over its hundred-plus years of history. But in 2006 the Fords and the board hired a new CEO from outside the company, and Bill Jr. volunteered to relinquish command. A few people with a significant emotional and financial stake in the company exercised sound judgment and took action. Nobody on the GM board had either such stake, which helps explain why its directors dithered into disaster.
In the Detroit bailout, like so much in life, many things weren’t what they seemed on the surface. Economists fretted that the bailout would foster moral hazard, their term for a willingness to act recklessly without fear of consequences. But the major actors in the GM and Chrysler debacles suffered plenty of painful consequences, despite getting bailed out.
Shareholders got wiped out. Creditors took major hits. Tens of thousands of workers and managers lost their jobs, with little prospect of landing work in the auto industry again. After closing twenty-two factories between 2004 and 2008, GM and Chrysler were scheduled to shutter another sixteen by 2011.
Executives lost part of their retirement packages, including the two free lease cars that Chrysler executives had gotten every year for life. (They were given just ten days to turn the cars in.) More than two thousand dealers lost franchises. The Jobs Bank was abolished, albeit belatedly. So was no-cost health insurance. UAW members were told their prescription-drug insurance, alas, no longer would cover Viagra.
Some of these cuts represented the curbing of comical excess, but many more caused real pain—plenty, it seemed, to discourage future moral hazard. Letting the companies liquidate would have produced far more pain, especially for innocent bystanders—ordinary citizens participating in an economy that was already on its knees in the spring of 2009. It was too great a risk to run. Bailing out Detroit, like bailing out Wall Street, was like changing a diaper: a dirty job that had to be done because the consequences of inaction were worse.
Ironically, success nearly destroyed Detroit. But can failure save it? That’s no sure thing, even though Chrysler and GM made it through bankruptcy with startling speed and were financially stable a year later.
Experts had expected GM’s and Chrysler’s bankruptcy cases to take years to resolve. But Chrysler’s took just forty-two days, including an appeal that went to the U.S. Supreme Court but was quickly denied. GM’s took all of forty days, despite being the second-largest bankruptcy in American history. (The biggest was WorldCom, a fraud-ridden telecom company that tanked in 2002).
Both companies’ recuperations were lubricated by the political capital of a popular new president and his decision to commit copious amounts of cash. But a year later Obama’s popularity was waning amid a weak economic recovery and mounting government deficits. GM and Chrysler were lucky that their crises had occurred early in the president’s term.
At the cost of tremendous expense and sacrifice, both Chrysler and GM are getting another chance—a precious gift, as anyone who has survived a serious illness knows. The two companies restarted their assembly lines in July 2009 after two-month shutdowns to reduce inventories. Now they are facing challenges, some similar, some particular to themselves.
Chrysler must make its intercontinental tie-up with Fiat work. That will be no easy matter, as its debacle with Daimler showed. But at least there were no early fights with Fiat about the size of the business cards or about putting the company logo on paper napkins, as there had been with the Germans.
The company has a great brand in Jeep and a proven CEO in Sergio Marchionne, who remains as CEO of Fiat too. He took command at Chrysler quickly, requiring executives who wanted to fly to Europe to get his personal permission and even then to fly coach. Chrysler-ites called it the “St. Francis” management method, referring to the austere ways (if not the gentleness) of the Italian saint from Assisi.
Making good on Marchionne’s technology-transfer promise, Chrysler built a fuel-efficient Fiat four-cylinder engine at a factory in Michigan. Marchionne introduced Fiat cars into some Chrysler dealerships as a niche brand, starting with the stylish Cinquecento minicar. He was targeting young buyers who wouldn’t remember Fiat’s disastrous quality record in the United States and Canada in the 1970s.
The CEO constantly, and wisely, warned against a return to the old ways, even invoking the father of communism in the process. “With apologies to Karl Marx, an economic recovery is the opiate of dysfunctional industries,” he said. “The great danger is that we retreat into denial once more and mistake an economic recovery for a sound business model.”
As for GM, it emerged from bankruptcy with just $17.6 billion in debt, only one-third of its previous financial burden. The company’s restructuring plan called for the number of U.S. employees to drop from 91,000 to less than 69,000. A downsized company should have a smaller executive suite, said Fritz Henderson, who promised to cut GM’s executive ranks by 35 percent.
Yet Henderson himself was one of the first to go. On December 1, 2009, after just eight months as CEO, GM’s new board forced him out because it concluded, logically enough, that a company lifer couldn’t really change the place.
His successor was a craggy-faced Texan named Ed Whitacre who had been chairman of AT&T before the Auto Task Force plucked him out of retirement. The impatient Whitacre tore through GM’s once-insular executive suite like a weed wacker.
In the year after its bailout, only one of the company’s fifteen top executives remained in place. The seemingly eternal Bob Lutz was handed his walking papers at age seventy-eight. In the year following its bankruptcy, the company had four different marketing chiefs. Cadillac had three different bosses, including a hot-shot young designer who was sent back to the styling studios after just a few months on the job. It had three different PR chiefs.
And, as it turned out, GM would go though four different CEOs in just eighteen months, thanks to Whitacre’s own decision to depart in September 2010. With GM nearing an IPO, the company needed a chief executive willing to remain for several years, but at age sixty-eight, Whitacre wasn’t willing to do that. So the board tapped Daniel Akerson, another former telecommunications man, who, like Whitacre, had no prior auto experience except for serving on GM’s post-bankruptcy board.
Although Akerson was sixty-one, fully half of GM’s senior executives were under fifty years of age. Unfortunately, that made them younger than the average Cadillac and Buick buyer. The company still has lots of remedial work to do to attract younger consumers to brands long damaged by quality gaffes and lackluster designs.
The good news: After decades in which tradition was sacrosanct, suddenly nothing was sacred at GM. One new executive hired from outside the company noticed that his underlings were producing reams of written reports. He suspended them to see if anybody would notice, and nobody did. It was a stark illustration of how General Motors had become more focused on pushing paper than on producing great cars.
Other aftershocks followed GM’s corporate earthquake. Pontiac and Hummer met quick demises. Barring an unexpected buyer, their cars will become candidates for display at the annual Orphan Car Show for dead brands—Packard, DeSoto, and the like—held each year near Detroit.
After several false starts, GM finally sold Saab to a little Dutch car company named Spyker, ensuring that sherry-sipping Shakespeare scholars in American faculty lounges can continue to buy their car of choice, at least for a while.
The quest to rescue Saturn didn’t end as well. Roger Penske, the race-
car driver turned automotive entrepeneur, tried to save the brand by procuring cars from various manufacturers and branding them as Saturns. But Penske couldn’t find car companies to supply him with cars, and his quest collapsed. It was a sad end to GM’s noble if naive attempt at reinvention.
Spring Hill, Tennessee, site of the former Saturn plant, still has a street named for Don Ephlin, the visionary UAW leader who was committed to making Saturn a success. Another street there is named, improbably, for Steve Yokich, the UAW president who helped destroy Saturn. Neither Yokich nor Ephlin lived to see Saturn’s demise. Nor did Roger Smith, the 1980s GM chairman who had championed Saturn, even while presiding over the beginning of GM’s decline.
Many people whose lives were disrupted by Detroit’s debacle would have a harder time recovering than the companies themselves. In Belvidere, Gene Young got a $75,000 severance package from Chrysler—$48,000 after taxes—plus a $25,000 voucher to buy a new Chrysler vehicle. He chose a small SUV, the Jeep Liberty. Young took a part-time job as a school-bus driver, but a year after he left Chrysler he was struggling, personally and financially. His Facebook status updates sometimes reflected his frustrations: “Why is it that bottom has to be so far freakin down?” he asked in one.
Fred Young, for his part, kept receiving his full pension and thus averted his nightmare of having to return to work in his seventies. But he has to pay more for prescription drugs and other medical benefits—such as dental care—which for years were virtually free.
In South Paris, Maine, Gene Benner’s dealership got a boost in the summer of 2009 from “cash for clunkers.” By mid-2010 he was profitable, though only modestly so. “We have a hard-working dealer body that could use a little pepping up,” said Benner, reflecting the challenges he faced.
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