Overhaul

by Steven Rattner

  I quickly had my first taste of the popular parlor game of impugning the integrity of government officials, often without regard to facts. On January 9, the New York Post claimed that my appointment was being held up because of a suspicious link between Quadrangle and Cerberus, the owner of Chrysler. There was nothing suspicious: Cerberus had loaned money to a struggling portfolio company of ours that owned Maxim magazine. Later, in lieu of payment, Quadrangle had decided simply to give the company to Cerberus, which resolved the matter.

  Yet, to my distress, the mainstream media picked up the tabloid report without independent verification. Ultimately, when my government vetters questioned me on the matter, they dismissed it as a nonissue.

  What was I getting into?

  Without question, I had a great deal to master. Deese shared with me the work that he, Brian Osias, and Josh had produced, and I began to read everything, from auto industry research reports to books about the history of the Detroit Three. But the only material we had from the Bush period were term sheets for the Chrysler and GM loans. Except for one of Hank Paulson's advisers who had stayed on to help Tim, we would, unfortunately, never meet with or speak to any of the Bush team.

  ***

  Brian Deese greeted me on that first visit to transition headquarters. He looked as young as I'd expected from having spoken with him on the phone, and wore a workaday suit and tie and had a scruffy beard. Remarkably poised and exceptionally intelligent, he reminded me of the White House staffers I'd known as a reporter covering the Carter administration—talented politics-and-policy types who had always dreamed of passing through the White House gates each morning to work for the President.

  Brian and I settled into a small empty office, a few doors away from Tim and Larry, and began discussing the daunting questions. How should we define success? Was bankruptcy a realistic option for GM? Could Chrysler be a viable company? What did "competitive" labor costs mean? What was the most efficient and productive way to assemble an effective team, including outside consultants?

  So much was on the table that not all of it immediately penetrated my consciousness. It would be days before I realized that the problems of the auto finance companies, GMAC and Chrysler Financial, were as great as those of the automakers. No solutions to the automakers' problems could occur without a sustainable restructuring of the finance companies as well.

  Around noontime, I sat with Tim Geithner as he munched what looked like a tuna fish wrap. I later learned that in the course of the morning he had received word that the Senate Finance Committee was in an uproar about his neglecting to pay Social Security and Medicare taxes earlier in his career. Yet I detected no sign of distress.

  This stoicism helped me see why the President-elect had chosen Geithner in the first place. Obama's options for Treasury secretary had been quite limited. Essentially, only Larry and Tim had the necessary government experience, along with the credibility vital in the financial world. Obama could have recruited a leading business figure, but the record of CEOs at Treasury was mixed at best, as evinced by the forgettable performances of Hank Paulson's predecessors, Paul O'Neill and John Snow. Meanwhile, choosing another Treasury secretary from Wall Street, like Hank Paulson, was politically out of the question after the financial meltdown. As head of the Federal Reserve Bank of New York, Tim had facilitated the bailouts of AIG and the banks and helped to prevent a systemic collapse. That had earned him Wall Street support, even though he was neither an economist nor a financier.

  I had long heard great things about Tim and knew he had spent most of his career in public service and that he was almost indifferent to the creature comforts prized by Wall Streeters like myself. His only outside interests seemed to be tennis, basketball, workouts at the gym, and cooking at home on weekends. Like Obama, he had the adaptability of one who had grown up around the world: his dad had worked in international development, and Tim had spent much of his childhood in Zimbabwe, India, and Thailand. In the 1980s, the senior Geithner oversaw the microfinance project of Obama's mother, Ann Dunham, for the Ford Foundation in Indonesia.

  Tim had followed Larry up the ladder at the Treasury Department, where he'd gained a reputation for his ready grasp of difficult issues and sound judgment. The big question about Tim during the selection process had been whether he was personally imposing enough. As Ken Duberstein, ex-chief of staff to President Reagan, told the Washington Post, "Tim at 47 looks 32, and you need to have ... grey hair and gravitas. It's not that he's not qualified; it's how he looks." It was said that Obama chose Tim over Larry both to signal a step past Clinton and because of personal chemistry.

  From Tim's office, I went next door to visit Summers, who was sipping one of the numerous Diet Cokes that he typically consumed in the course of a day. Far more expressive and voluble than Tim, he exclaimed several times, "This is going to be great." I'd known and liked Larry since the Clinton administration and was in awe of his intellect, vast knowledge, and ardent curiosity about unfamiliar subjects—such as the auto industry. His appetite for work was prodigious, but he was also the archetypal absent-minded professor (habitually late, chronically disorganized). Happily, his determination and drive more than compensated. As fast as his mind worked, his mouth was often in a lower gear. He could start a sentence several times before settling on exactly what to say. Early in our relationship, I had learned to resist trying to help him complete his thought. And I'd seen flashes of the intellectual arrogance that contributed to his fall at Harvard, where he was president from 2001 to 2006. But I had been delighted when Obama asked him to take on the pivotal job as director of the National Economic Council (NEC). I could not imagine the new administration tackling problems of the magnitude it was facing without Larry's help.

  In due course, our conversation turned to the controversy swirling around me. "We underissued that one," Larry said, introducing me to a new bit of Washington jargon. I took him to mean that the Obama team should have anticipated the flap and acted to head it off. I offered to step aside on the spot. "You shouldn't feel any obligation to me," I said. But Larry responded that both he and Tim were convinced that my Wall Street experience and part-time political work were the right skills for the job.

  I wasn't so sure. I had accepted the job welcoming the fact that I would be reporting to Tim and Larry, and now the press had turned me into a czar (which would have amused my Rattner ancestors who were fur merchants in Moscow). I felt that I had a huge bull's-eye painted on my back.

  I made only one other visit to transition headquarters, coincidentally on the day the Senate agreed to the second $350 billion of TARP funding, January 15. Pushing through the second tranche of the unpopular program was a heady success for an administration that hadn't yet taken office. The news occasioned high-fives in the economics corner of the eighth floor and a victory-lap appearance by Rahm. I met Haley Stevens that day, even younger than Deese and a native of Michigan, who had wanted more than anything to assist with autos and had gotten a mutual acquaintance to send me her résumé. Haley had spent most of the three and a half years since graduating from college in one political job or another while also earning a master's degree. After the election, she'd worked on confirmations for cabinet-level appointees. Since she was already on the transition team's payroll, Deese and I quickly decided to make her our chief of staff. We would come to find her tireless, cheerful, and blessed with a social conscience and a talent for improvisation.

  A little later, I met a far more senior new colleague, Diana Farrell, who was slated to join Larry's NEC as a deputy director. Like me, Diana came from business. Unlike me, she was versed in management consulting, having been the director of the McKinsey Global Institute. While neither she nor I knew what her exact role on the team would be, Larry had inserted her to provide some senior support for Deese during the muddled early days, and I was delighted. From the start, Diana realized that GM and Chrysler were going to need much more of an overhaul than the President's political advisers and even Larry ex
pected, a point she helpfully tried to drive home to them.

  When inauguration day arrived, I deliberately remained in New York and watched Barack Obama be sworn in on TV. I had decided to keep my trips to Washington at a minimum until my appointment went through. I saw culture shock ahead: my career had involved moving to smaller and smaller firms with less and less red tape—from Morgan Stanley to Lazard to Quadrangle. Suddenly I was entering the world's largest bureaucracy, a realm of meetings and memos. The new administration was drowning in questions, often with higher priority than those of our team, and almost no one knew how to make things happen. I would have to be polite, work the system, and keep nudging. But the inefficiency sobered me. It was what Wall Street would call a risk factor.

  Like nature, government abhors a vacuum. I was flooded with e-mails and calls even though my appointment was by no means official. Seemingly small matters foretold of major issues to come. For example, in mid-January GM blew its first deadline under the Bush loan agreements, failing to satisfy certain reporting requirements for its second installment of $5.4 billion. The company's accounting systems, it emerged, were simply incapable of producing data on GM's cash position in the form that the Treasury wanted. The GM bureaucracy was equally unsuccessful at revising its corporate expense policy on time. Five days later, it complied and got the money.

  Automotive suppliers started to fail, which was how I discovered that the scope of my assignment was much broader than I'd anticipated. GM and Chrysler had dominated the conversations with Tim and Larry. None of us appreciated that, with auto sales down 40 percent, the collateral damage among related businesses would be vast. These companies, which provide factories and repair shops with raw materials and parts, were in deep trouble, and because of their interconnectedness, the trouble could become wildly contagious. Bailing out the giant automakers wouldn't be enough if they could no longer get the parts they needed to build cars. A collapse of just a few key suppliers could cause the Big Three (and possibly some transplants as well) to shut down abruptly, triggering widespread economic disarray. Yet no government money had been allocated to help the auto parts manufacturers. Like the seven-second delay in live television, the suppliers' problems took a little while to surface. This was because the Big Three usually didn't pay for parts until forty-five days after delivery. A slowing of the assembly lines actually made the suppliers temporarily more flush—they could collect on prior deliveries without having to spend money to fill new orders. But when the shock wave from collapsing demand caught up with them, its effect was brutal. And with capital markets frozen, they had nowhere to turn.

  Most of the failures were companies that I had never heard of—like Contech, a privately owned, one-thousand-employee metal-casting company outside Kalamazoo, which declared bankruptcy after revenues fell by nearly one-third in 2008. Multibillion-dollar businesses whose names I vaguely knew—like American Axle, Lear, TRW, and Dana—saw their stocks collapse. As I later learned, the rule of thumb is that for every automaking job there are two supplier jobs, suggesting that 650,000 jobs were at risk among suppliers.

  Since early January, Brian Deese had been thinking about a definition of success for our team. It was clearly not just a matter of dollars and cents. How should we balance the bailout's huge cost and risk against the need to preserve communities and jobs and limit the economic ripple effects? We quickly settled on two principles to propose to Larry and Tim. First, further government funding should come only in exchange for fundamental restructuring that made automakers truly viable and got them off the federal dole. Second, all stakeholders in GM and Chrysler—investors, creditors, employees, and retirees—ought to share the pain of such an overhaul.

  This definition was notable in part for what it did not say. It pointedly did not include protecting all jobs. Or rule out bankruptcy. And it did not include industrial-policy goals, such as the development of electric vehicles. Instead it mirrored the hard-nosed approach that a private owner might have taken—except the new owner was to be the American taxpayer.

  We expected objections from other parts of the administration, in the form of an "interagency process" in which Energy, Commerce, Labor, and other departments would weigh in. I braced for compromise. But perhaps because of the magnitude of the crisis, or because everyone in the new administration was equally overwhelmed, no other part of the executive branch got involved. Indeed, as we worked, Obama's "climate czar," Carol Browner, mediated between the administration and Congress on tougher fuel-efficiency rules without ever asking us to twist arms at Chrysler or GM.

  The flow of auto industry issues became a torrent as I tried to calm colleagues and hand off leadership at Quadrangle. As I began to address the task force's logistical issues, from staffing and space to computers and phones, I struggled to comply with onerous vetting requirements and spent countless hours helping to search for ways to defuse questions on my qualifications.

  Being vetted can be a full-time job. At Josh's suggestion, I had begun talking to my attorneys in mid-December, in part to ascertain whether public office was feasible for me. Every senior appointee has to complete two massive documents: the SF-86, an impossibly tedious security-clearance statement that requires listing—j ust for example—every foreign trip an applicant has taken in the previous seven years, and the SF-278, which involves the disclosure of every financial interest and obligation. Like most recent administrations, this one had added its own questions, derived from past debacles, such as Zoe Baird's failure to become Bill Clinton's attorney general after neglecting to pay the so-called nanny tax. I can't count the hours I spent complying, but I do know that the honor of working for the federal government cost me more than $400,000 in legal fees.

  The vetting rules were more than a personal nuisance; they hampered our effort to assemble a first-class team. As part of his pledge to rid government of special interests, Obama layered new conflict-of-interest strictures on top of the statutory rules that applied mostly to financial holdings. He targeted lobbyists with rules that barred any candidate who had worked for an organization that would be a party to the matter that the individual would be handling in government. This seemingly logical concept had the unintended consequence of severely restricting our ability to hire anyone who knew anything about the automobile industry, a limitation that fueled the very criticism we were trying to counter.

  I didn't see Larry Summers again until two weeks after the inauguration, in his new West Wing office, a 16-by-17-foot space that appeared to have been last renovated in the Eisenhower era. The view was of a white parapet perhaps two feet away. Larry didn't care; offices in the West Wing are all about proximity to "the Oval." Neither did Deese. In what must originally have been a reception area were jammed a half-dozen desks for support staff. Deese had commandeered one, and for the first few weeks was sure he'd get evicted. But eventually he was told that he could either stay or decamp to a real office, in the Eisenhower building across the driveway. Always wise, Deese also understood the value of proximity and elected to remain in a location that gave a huge boost to our efficiency by guaranteeing ready access to Larry during a period when his every moment was precious.

  My visit was motivated by my growing despair. Every day had brought additional evidence of the seemingly intractable problems of GM and Chrysler—loss of market share, overwhelming structural costs, bleeding cash. Having had experience in the mosh pit of restructurings, overhauling entities the size and complexity of the automakers on tight deadlines felt impossibly daunting. Simultaneously, the Greek chorus of criticism intensified. On February 2, I saw Senator Carl Levin of Michigan, whom I knew slightly, at the swearing-in of Hillary Clinton. When I reintroduced myself, he politely but firmly announced, "If you're going to do this job, you'd better have some people around you who understand manufacturing."

  My growing impulse—notwithstanding my desire to serve in a time of crisis—was to snuggle back into the comfort of Quadrangle. "I don't mind a challenge but I like to know it
's possible," I e-mailed Larry. Larry can be an indefatigable and relentless salesman and batted back my concerns one by one. Among other things, after weeks of patient inquiries, I still had little idea of how many people I would be allowed or how to get them on the payroll. When I mentioned this to Larry, he asked how large a team I needed. "If we were in the private sector, I'd say fifty people," I told him, "but in a governmental context, maybe fifteen."

  "But the whole NEC is only nineteen professionals!" Larry exclaimed.

  In spite of all this, somehow I left the meeting willing, for the moment at least, to soldier on.

  Larry and Tim and I had agreed that, to dispel the furor surrounding my appointment, the task force needed to be bolstered with someone who could balance my Wall Street credentials with credibility in Detroit. We considered veteran industrial executives, like my friends Henry Schacht, former head of Cummins Engine, and George David, chairman of United Technologies. I was eager to hire Steve Girsky, formerly a top auto equity analyst at Morgan Stanley who had also worked for both General Motors and the UAW. Steve had forgotten more about the industry than I would ever know. But a stint as an unpaid adviser to the UAW during bailout negotiations the previous fall disqualified him under Obama's rules.

  As a potential deputy, many suggested Ron Bloom, whom I knew slightly as we'd overlapped at Lazard before he'd gone on to a totally different career. The son of leftist parents who sent him to a Zionist labor youth camp, Ron had been inspired to help workers. Yet unlike most aspiring labor activists, he went to Harvard Business School and then Wall Street. At Lazard, he and his partner Gene Keilin engineered large, creative restructurings aimed at giving workers both equity ownership and seats on the employers' boards.