Overhaul

  In 1996, Ron became, in effect, the United Steelworkers' chief restructuring officer. Cheap steel from emerging nations was causing American steelmakers to fail, often resulting in ugly bankruptcies that left workers and pensioners in the cold. Rather than try to prop up doomed companies, Ron showed his genius in helping them consolidate, identifying and saving the jobs that would last and arranging the softest landing possible for steelworkers who were displaced. We convened at the Ritz-Carlton, where he ordered a martini—not exactly a steelworker's drink. But with his long, solemn face and warm eyes, he looked every bit the workingman's advocate. Like many negotiators, he had a ribald sense of humor. He liked to compare his style to that of the patient in a dentist's chair who grabs the dentist by the genitals and says, "Now, let's not hurt each other." His sense of humor extended to himself. "I get it," he said one day early in his tenure, as the team was filling with Wall Street veterans, "I'm affirmative action."

  Like me, Ron was used to running his own show. Yet I liked him and we had a lot in common. We'd both been through many restructurings. Like me, he was soft-spoken and fact-based. We shared a firm capitalist perspective: companies had to be viable, and saving loss-makers was pointless. And we agreed on another key issue that Ron raised. "Just so you know where I'm coming from," he said, "my agenda here is to save as many jobs as possible."

  "So is mine," I replied.

  Finding Ron was a step forward, but my doubts deepened days later, when the White House officially refused to grant Girsky a waiver from the vetting rules.

  At almost exactly the same moment, five senators—including the Michigan Democrats—sent an open letter to Obama that seemed aimed at me. They asked him to "create a group of advisors to oversee the loans and provide the insight needed to steer our domestic automakers through this unprecedented crisis." The senators said the panel should "understand manufacturing."

  I'd had enough. I drafted a long e-mail to Larry listing the reasons for me to withdraw. But I didn't send it. I actually sent a shorter, milder note, offering again to step aside. "I am sorry that we are putting u in this position," Larry responded, not letting me off the hook.

  Meanwhile, with February 17 looming, we tried to get organized. As Deese had done with his desk in the West Wing, Haley Stevens simply commandeered a spacious, airy room at Treasury. She had desks placed around the perimeter facing the yellow walls and put a conference table in the center. Telephone and Internet access was delayed, so we used our cell phones and wireless cards, wondering how past incoming administrations had functioned. The windows of the room looked out on the White House, a constant reminder of the pressure on us.

  Officially I had no office. Not having completed the appointment process, I was not supposed to be in the Treasury building except for meetings, although many rules were bent in this crisis atmosphere. I was given the use of a cavernous office, decorated with an antique typewriter and a framed collection of 1938 currency, a dozen or so doors down from Tim's suite. History seeped from the walls. In this room, President Andrew Johnson had signed the Amnesty Proclamation on May 29, 1865, restoring the rights of those who had joined the Confederacy. A printed copy hung on the wall with his signature, although it turned out to be a facsimile.

  I felt like a kid in a new school, but all the teachers were also new. It was so hard to get through the Secret Service checkpoint that on my second day, I e-mailed Haley, "Is there a cafeteria in this building? I'm afraid to go out—I may never get back in!" Everything was complicated, including communicating with Tim, who I assumed would have e-mail and a BlackBerry. But within ten days of his taking office, e-mails to his address were routed to the "Executive Secretariat," a group whose job was to manage the message flow to Tim, with rules and forms for everything. Every communication needed to adhere to a specific format and clearance process.

  Meanwhile, January auto sales were abysmal—GM was down 49 percent, Ford 40 percent, and Chrysler 55 percent. The companies were burning through their money at an alarming rate. GM's cash position was skirting close to the $11 billion minimum the company said it needed to operate; Chrysler forecast that it would drop below its minimum operating requirement of $2.5 billion before March ended.

  Given these figures and the Bush loan agreements, which set very specific benchmarks for the automakers to achieve by February 17, we could not delay opening a dialogue with both companies. The first call—between Ray Young, of GM, and Brian Deese, Diana Farrell, and Mike Tae, a new arrival at Treasury—revealed that GM was still dreaming. Each company was required to include a pessimistic or "downside" assumption about future auto sales, but GM's idea of a downside was 20 percent market growth. Diana tried to push Ray to think of more appropriate downside cases but couldn't make him understand. "Okay, let me try this one more time," she finally said. "Ray, I'm not sure you're hearing what I'm saying. What I'm saying is that your worst case is our view of the absolute best case, and you need to start thinking about radically different outcomes."

  So concerned were Brian and Diana (I was still operating behind the curtain) that they recommended to Larry that he alert the GM board. He agreed and called Erskine Bowles, his friend who had been one of the directors who had visited Paulson back in October 2008. We also worried that GM had too little contingency planning under way. Thanks to Wagoner's refusal to consider bankruptcy, the company had not even hired restructuring lawyers until mid-December. With Chrysler, the task force did a similar reality check, emphasizing the need for conservative assumptions about demand. Chrysler was already pessimistic in its downside assumptions, though with its sales down 55 percent, the company's planners could hardly have been otherwise.

  Bankruptcy, of course, had always been the elephant in the room. It was scary even to think about. Yet if managed successfully, it could enable GM and Chrysler, under the protection of a court, to stay in business while restructuring debts, renegotiating contracts with unions and suppliers, selling or scrapping obsolete and underused plants, and otherwise positioning themselves for a fresh start.

  From the first moments in December when Josh Steiner had started sharing tidbits about what he and Deese were learning, I had thought bankruptcy was inevitable. Especially at GM, there were too many actors on the stage and too many liabilities that needed to be expunged or dramatically reduced for me to believe that a purely voluntary restructuring could work. Conceivably, the company could renegotiate its labor contracts without court protection. But what about the thousands of individuals and institutions who held GM bonds? How could GM ever corral all these creditors and persuade a large majority to accept pennies on the dollar, something a voluntary restructuring would require? And what about GM's vast, overgrown dealer network—more than six thousand independent businesses across the country, each protected by contracts and state franchise laws?

  Senator Corker had tried to prepare the way for a restructuring without bankruptcy by designing the three conditions that then became embedded in the Bush loans. But they proved nowhere near tough enough to ensure financial viability and impossible to implement outside bankruptcy. GM and Chrysler wasted many hours trying to comply with them, while in the end their principal benefit was to provide a baseline that all the stakeholders would understand and thereby ease the pressure on us to produce conditions of our own.

  At the same time, the risks of bankruptcy were immense. I was far from being an expert, but I'd seen enough in my investment banking career to know that bankruptcy disrupts a business from top to bottom. As the automakers were always quick to remind us, customers dislike dealing with bankrupt companies; suppliers demand cash on delivery. And imagine trying to hire talented people if they know your business is bankrupt. Instead of being able to concentrate on competing in the marketplace, executives must spend much of their time huddling with lawyers and advisers and placating bondholders and banks. The longer the exercise goes on, the more distracting and expensive it becomes. I remembered the head of our restructuring practice at Lazard, a crusty
veteran of scores of deals, telling me again and again that "bankruptcy should never be thought of as the solution of first choice for a troubled company." Todd Snyder, a Rothschild bankruptcy specialist who had advised on the Bush bailout plan, became our indispensable guide. He knew all the tools and techniques for effecting corporate overhauls. I was particularly gratified when he agreed with my amateur's assessment that our salvation might lie in a form of asset sale known as a Section 363, after the part of the bankruptcy code that governs it.

  Section 363 allows a bankrupt company to act quickly to transfer intact, valuable business units to a new owner. (The conventional bankruptcy process restructures the corporation as a whole.) Once exotic and obscure, 363 had provided the only bright spot in the cataclysmic implosion of Lehman Brothers. It was used to salvage Lehman's money-management and Asian businesses. Though 363 had never been applied to industrial companies on the scale of Chrysler and GM, I had suggested to Josh back in December that the new team explore the option. It might offer a way to save GM's and Chrysler's best factories and brands while the courts sifted through the other wreckage.

  I hated presenting problems without solutions, but we had none ready for prime time when we went to see Tim and Larry on February 11, six days before the Chrysler and GM submissions would confirm the debacle in the offing. Since we had no staff, we had to rely on Todd Snyder's people at Rothschild to prepare the presentation. Even then, the best we would be able to do was to lay out a series of options that gave a clear indication of our thinking.

  I wanted to be well prepared. At 10 P.M. the night before, after the Rothschild team arrived, we convened on a conference call to go over the possible restructuring options. Nearly all involved putting GM and Chrysler into bankruptcy. The only nonbankruptcy solution required reaching out-of-court agreements promptly with the labor unions, creditors, and suppliers, distributors, and dealers. We gave that approach the lowest probability of success. Every one of the options entailed using huge amounts of taxpayer money to sustain the companies through the restructuring period.

  Most of the conference call was spent discussing the Section 363 approach, our final and best option. But the time Rothschild said would be needed was long, from six to fifteen months. I thought that would be a disaster.

  We ended up having to brief Tim and Larry separately. During our time with Larry, our tough talk about bankruptcy was interrupted by an emotional interjection from Gene Sperling, a counselor to Tim. A devoted public servant and gifted policy wonk, Gene had served during all eight years of the Clinton administration, the last four in Larry's job, heading the NEC. He spoke up here as a Michigan native.

  "I don't know what to tell you guys to do," he said, "but if you are not from the Midwest, you cannot appreciate the devastating psychological effect that bankruptcies would have there." Gene would repeat this admonition many times during our deliberations, a helpful reminder of the human consequences of our actions.

  That seemed to strike a chord with Larry, whom I could see getting nervous. Although in December he had been one of the voices telling the President-elect that bankruptcy was probably unavoidable, the prospect clearly disturbed him more as it came closer to reality. He was particularly leery about the risk of permanent government involvement. "I hear you, Larry," I said at one point. "But make no mistake about it, you own these companies," by which I meant that the massive amount of federal aid would put the government in the auto business, regardless of who ultimately owned the stock. He ended by asking us to develop the best approach in the event bankruptcy was not available.

  We briefed Tim at the Treasury; unlike Larry, he did not push back. He took it as given that we'd identified the right options and that bankruptcy was probably inevitable. To him, the question was how to cushion the shock so that consumers would keep buying cars. "We need to put foam on the runway," he said, an allusion that, as a pilot, I readily understood: airport crews use foam on the runway to mitigate crash landings. It can be effective, but doesn't always prevent fatalities.

  Shortly before the viability reports were due, GM previewed for us its updated analysis. The company now forecasted needing an additional $2 billion just to survive until March 31. The Chrysler news was equally bad. The company's draft submission showed dwindling cash balances, a blunt refusal by creditors to reduce secured debt, and a dark analysis of the consequences of failure. In Chrysler's estimate, liquidating the business in an orderly way would yield around $1 billion, assuming that it had run through all the cash on its balance sheet.

  Neither company was making much progress on the other requirements of the Bush loans, either. Descendants of Corker's original conditions, these provisions had been designed as key steps toward restructuring—reducing liabilities like debt and legacy health care obligations and lowering operating costs, including labor. By February 17 GM and Chrysler were required to submit signed term sheets from their stakeholders proving that these cuts had been achieved.

  Admirable, but surreal. While the companies had begun negotiating earnestly with unions, debt holders, suppliers, and dealers, there was absolutely no chance of success. The unions made it clear that they would not give ground again without shared sacrifice, particularly from lenders. The Chrysler banks, meanwhile, were steadfast in their unwillingness to reduce the $6.9 billion of outstanding debt. GM was going through the motions of trying to win the support of a sufficient number of its public bondholders to reduce its debt on that front. But there was a greater chance of finding oil under the White House.

  Bad chemistry with GM added to everybody's stress. Less than a week before the deadline, Ray Young called Deese to ask for a postponement on meeting the restructuring benchmarks—GM wanted two more weeks. Making that call did not show great judgment, but Young's attitude was even worse. He suggested to Deese that if GM missed its benchmarks, the government would look bad. To Larry these were fighting words. Had GM somehow forgotten that taxpayers were footing its bills? He called two of GM's Washington advisers the next day and received assurances that Young would not attempt any direct communication with the White House again.

  Still, we recognized GM's difficulties; Chrysler had them too. On the eve of the deadline, we said uncle and waived all of the cost-reduction strictures. Had we not, both automakers would have been in default on their federal loans, and therefore bankrupt.

  We faced mountains of red tape. Seemingly obvious matters, such as whether to make the reports public, needed to be considered. A procedure had to be created for receiving the plans. Our most important behind-the-scenes preparation was a memo to President Obama on what to expect. POTUS memos, as they are called (POTUS is government-speak for President of the United States), have their own special protocol. They come from cabinet-level officials (Tim and Larry, in our case) but are, of course, drafted much further down the food chain (in our case, by Deese). A good POTUS memo is short, with lots of bullet items and bold type to emphasize decision points.

  Having watched GM and Chrysler unveil a succession of overly optimistic forecasts, we were determined from the start to be hardheaded in our assessments. By this time, we believed that the bailout would require at least $50 billion of additional capital, and we had serious doubts as to whether the government would receive a substantial portion of the money back. We also wanted to be sure that the White House understood that without bankruptcy as a tool, we were quite pessimistic about the possibility of effecting fundamental restructurings.

  Finally, judging from the worrisome conversations with Rothschild, it seemed possible that bankruptcy, with all the attendant risks, could last at least six months. Throughout our work, we consistently strove to be as realistic as possible when communicating with our superiors and to use probabilities rather than absolutes. We tried to follow two simple rules: no surprises, and no problems without proposed solutions.

  February 17 neared, but the automotive team still had not been announced—a growing public-relations headache. As early as February 2, Tim's sp
okeswoman, Stephanie Cutter, had sent around an e-mail warning that came to me at Quadrangle: "We're about to lose control of this story." The notion of an official task force had been floating in the ether; Deese grabbed hold of it and convinced Larry that a group of senior staffers like Diana Farrell and Gene Sperling would be both productive and politically salable. But when Larry looked at a draft of the plan, he said, "We can't announce a task force with a bunch of people like staff. We can't announce staff meetings as task force meetings."

  Much of the administration's disarray was understandable. Larry and many of the domestic-policy staff had been consumed with getting the President's stimulus package through Congress—a $787 billion affair. The solution the White House eventually settled on for autos was something called the Presidential Task Force on the Auto Industry, a cabinet-level committee to be chaired jointly by Larry and Tim and comprised of officials from across the administration. While it sounded impressive, its purpose was to bury once and for all the idea of a car czar, reassure the Midwest that autos were a top priority, establish Larry and Tim as coequals on the matter, and free the actual task force—namely, staffers like Brian and me—to work in peace.

  This presidential task force was announced as haphazardly as it had been planned. On February 16 aboard Air Force One, Press Secretary Robert Gibbs told reporters that its formal unveiling "could be" later that day and mentioned that someone named "Richard Bloom" would be joining the staff. As it turned out, the actual unveiling wasn't until four days later. But at least the announcement saved face—and cleared the slate for the automakers' submissions.

  When the documents finally arrived on the seventeenth (true to form, GM missed the customary 5 P.M. cutoff by forty-five minutes), the White House was ready with a concise statement supporting the bailout. It emphasized the need for shared sacrifice: "Going forward, more will be required from everyone involved—creditors, suppliers, dealers, labor and auto executives themselves—to ensure the viability of these companies."