Overhaul
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There was tension in the air as we milled around making small talk before getting down to business. The body language of Nardelli and his colleagues told me that they knew they were fighting for their company's existence and were determined to infuse every bit of salesmanship they possessed into their presentation.
At sixty, Nardelli was of medium height, with thinning brown hair and his college ring on his finger. He seemed like an ordinary corporate executive in demeanor and dress—down-to-earth and likable, ready to roll up his sleeves. His earnestness occasionally led him into odd territory, such as his habit of prefacing many of his sentences with our first names, beginning each one "Steve and Ron..." or "Ron and Steve...," as if anxious that our attention not stray. For four hours, he and his executives gave it their best, but beneath the surface we could sense the thinness and even hear the lack of conviction in their voices. After two years of fighting to save their company, they were tired. And they must have known that they were not giving us a business plan that we could back with more government dollars.
The next day's due-diligence session, with General Motors, was disturbing in a different way. Beforehand, Haley had spent half a day finding an available space that could show PowerPoint slides. (The U.S. Treasury is ill equipped to entertain visitors from the outside world, I learned. The few conference rooms are scattered throughout the two-block-long Treasury fortress and are under the control of many different departments.) Finally she'd lined up a room in something called the Treasury Annex, a shabby building across Pennsylvania Avenue. I had walked by this building many times but had no idea it was part of Treasury. The windowless sixth-floor room in which we met was no more inviting than the exterior—cramped, drab, and gray. Inexplicably, it bore the title "Center for Excellence."
The GM folks pretended not to notice any of this. Nor, in the months that followed, did they ever give a sign of how hard it must have been to have a bunch of Wall Street recruits and government bureaucrats sit in judgment of their iconic company. Though they'd started their bailout request at the cabinet level, now that billions of dollars of TARP money had been provided and a task force assigned, they didn't throw their weight around or demand to see Tim Geithner. They seemed to regard us as a necessary hardship, to be endured as a way of securing more cash.
Before leaving our office, I asked Haley what we were going to give them for lunch. "Nothing," she replied, explaining that Treasury had no budget for refreshments at meetings, "not even for bottles of water." It seemed rather harsh to expect our visitors (not to mention ourselves) to go six hours without food or drink, so I gave Haley $100 from my wallet and told her to go to a sandwich shop. That became our regular routine when we had lunchtime visitors.
***
This would be my first meeting with Rick Wagoner, about whom I had so many questions and had heard and read so much. By most accounts, he had been a golden boy at GM. After graduating from Duke University and Harvard Business School, he'd begun as an analyst in 1977 in the GM treasury, where many of the company's leaders got their start. He'd risen through the ranks, including stops as treasurer and then president of GM's important Brazilian operation. In 1992, as GM went through its first near-death experience, losing almost $30 billion in three years, a boardroom coup replaced CEO Robert Stempel with Jack Smith. It was Smith who summoned Rick from Brazil and named him CFO at just thirty-nine years of age. In 2000, at forty-seven, Rick succeeded Smith and became the youngest CEO in GM's history.
Wagoner at first seemed the change agent General Motors needed. He won kudos by bringing in a former Ford executive as CFO and also recruiting automotive marketing and design legend Bob Lutz, a larger-than-life car guy who masterminded hits such as the resurrected Pontiac GTO and the Cadillac CTS, and pushed for the development of the Chevrolet Volt. Wagoner tackled tough housecleaning challenges, like pulling the plug on the moribund Oldsmobile brand. After 9/11 he championed the Keep America Rolling campaign, in which GM lured consumers with zero-percent loans—a smart blend of commerce and patriotism that brought the company much praise.
Yet, after a few years, the job seemed to wear Wagoner down. Killing Oldsmobile proved a harrowing ordeal that cost GM well more than a billion dollars, alienated many of its dealers, and discouraged further efforts at brand elimination. A 2003 effort to hold the line on GM's dwindling North American market share at 29 percent (GM executives sported "29" lapel pins) fizzled quickly. A Wagoner-backed deal to acquire 20 percent of Fiat, mostly for engine technology, became such a burden that in 2005 GM paid Fiat $2 billion to cancel it. (At our first meeting, Sergio would brag that he had taken GM to the cleaners.) That same year Wagoner tried jawboning the UAW into accepting cuts in health benefits, only to back down when the workers threatened to strike.
Born and bred as an insider, Wagoner never displayed any fortitude for remaking GM's hidebound corporate culture. He operated as an incrementalist, and a slow-moving one at that. His guiding star appeared to be an unshakable faith that GM was not like any other company; it was General Motors. Whatever happened to other companies couldn't possibly happen to GM.
Consequently, he fought efforts by GM investor Kirk Kerkorian to pare down or sell brands like Pontiac and Hummer—moves that, like an alliance with Nissan, could have left the company much better off. When GM stock topped $40 a share during the financial bubble in 2007, he also turned down proposals by investment banks to raise billions in new capital.
Not knowing Wagoner, I imagined that his talents included the kind of determination and work ethic that could withstand the grinding punishment of being the CEO of a company like GM. I had seen this in other CEOs and understood the value of those skills. At the same time, I couldn't help but suspect that his real genius had been in keeping the board of directors on his side as losses mounted again to the tens of billions of dollars, market share continued its grim slide, and the price of GM shares fell to single digits. Regardless, now the company was in crisis, and leadership had to be judged on results.
Wagoner greeted us with a firm handshake and a steady gaze. He looked and carried himself like a CEO—he was tall and solidly built, wore a nicely tailored suit and had a full head of brown hair. He left simultaneous impressions of amiability and remoteness. Unlike Nardelli the previous day, who had led the Chrysler presentation and shown a clear willingness to engage, Wagoner gave listeners very little to grab on to. He made a few opening comments and then turned over the floor to his lieutenants, occasionally interjecting a remark here and there but mostly presiding. While I respected the collegiality this implied, it left nearly everyone with the impression that he held himself aloof. If Rick had taken a more central role it would probably not have affected our assessment of the company, but might have affected our judgment of him. (Tellingly, not once on that day did Rick utter the word "bankruptcy," almost as if he were incapable of saying it.)
Unlike our meeting with Chrysler, this six-hour session was devoid of tension. The GM team seemed placidly to take for granted that somehow, some way, the government would agree to its requests.
As a business, we were happy to discover, the company seemed to have much more going for it than Chrysler. It had been free of the ownership changes that Chrysler had experienced. It remained the largest car manufacturer in the United States. While its vehicles were far from ideal, they were on average considerably more appealing and popular than Chrysler's. The company had global operations—some troubled, like Opel in Europe, but some highly promising and successful, particularly its fast-growing joint venture in China. (To GM's delight, Chinese consumers perceived Buick as the classiest car a person can drive to advertise success.)
Yet GM's survival plan reminded me of the old joke about the economist marooned on a desert island with a can of food but no way to open it. How does the economist solve the problem? He assumes a can opener. From Wagoner on down, GM seemed to be living in a fantasy that, despite the evidence of decades of decline, it was still the greatest carmaker on earth, in a c
lass by itself. Chrysler at least had recognized the gravity of its situation, it seemed to us, and had tried to find answers. GM, after cruising to the brink of collapse and begging for government help, now seemed mostly to be marking time in expectation of an economic recovery and a rebound in sales. Its February 17 submission consisted of the same proposals the company had offered the Bush administration back in December, modestly speeded up. The same cutbacks in brands, factories, subsidiaries, blue-collar workers, and salaried employees were now compressed into a period of one to four years.
There was still no real urgency. GM did not think this necessary, as its troubles, as Wagoner had told Congress, were mostly due to market conditions. The only mention of bankruptcy was to present it in all its ugliness, an option that no sane person would pursue. The overall concept seemed to be to trim only what was easily achieved and absolutely necessary, and use taxpayer dollars to ride out the recession. Incredibly, GM now assumed an even higher rebound in car sales in 2012 than it had back in December. The company seemed oblivious to the fact that its original request, in November 2008, for $10 billion to $12 billion in aid had grown steadily and was now at $22.5 billion to $30 billion. All told, the presentation, delivered with one of the largest PowerPoint decks I had ever seen, made it apparent to me that Wagoner and company had not come to grips with that stubborn tin can.
Every industry has its own drivers and idiosyncrasies; if our sessions with Chrysler and GM did little else, they helped me learn more about automaking. I was astonished, for example, to learn how the Detroit Three accounted for labor costs. Broadly speaking, the operating costs of any business can be divided into two buckets: variable and fixed. Variable costs are those that change with the level of production: if you make more vehicles, you need more parts and steel.
Fixed costs are those that tend to remain constant regardless of how many units you produce: items like interest and rent payments and the salaries of permanent staff. Most businesses account for wage workers as a variable cost because the companies hire and lay off workers based on production. But at GM, Ford, and Chrysler, it wasn't that way. They accounted for labor as a fixed cost—under the UAW contract, autoworkers got paid nearly the same whether they built cars or not. (The companies actually maintained "rubber rooms" where idled workers could job-hunt, watch TV, and work crossword puzzles while they collected pay.)
The evident absurdity of this state of affairs sapped morale and had a perverse effect on how the U.S. automakers did business. With fixed costs so high, they had an incentive to build as many cars as possible so as to reduce the average cost per car. Similarly, with variable costs relatively low, additional cars could be made without much additional expense. These factors played a major role in Detroit's addiction to discounts and incentives. The end result was what no businessperson would want—a low-profit-margin business that is vulnerable to any slackening in consumer demand.
I also learned how the automakers' size and power had helped mask their weakening position. At one end of the pipeline, these giants commanded favorable terms from their suppliers—they could wait to pay their bills. On the other end, they used their clout to force dealers to pay for cars before they even reached the dealers' lots. All this provided a massive cash flow benefit, as well as a powerful incentive for the automakers to stuff dealerships with as many vehicles as possible.
The list of only-in-automaking business practices went on and on. In addition, I had to race to master a whole new vocabulary—words like "homologation" (conforming a car to U.S. safety and environmental standards) and "subvention" (reimbursing the finance companies to offer low or zero-percent financing on cars). Yet I felt that being a newcomer to the industry wasn't such a terrible thing. I could look at Detroit's practices with fresh eyes and compare them with those of more profitable industries, such as information, entertainment, and communications, where I had spent much of my business life.
Now that the task force was officially open for business, there also began a parade of visits from auto industry stakeholders. Surprisingly, everyone from auto executives to union chiefs to suppliers came to us believing that the government should solve their problems. Some of our visitors were testy; all left disappointed that the government wasn't going to be everybody's piggy bank. The GM bondholders were typical of this. As part of the TARP loan agreement, GM was expected to slash its $27 billion of unsecured public debt by two-thirds. This meant getting investors to exchange at least $18 billion in bonds for much riskier GM stock. There was no way for GM to force them to do so: under the usual bond indentures, a lender's entitlement to interest and principal cannot be abridged without its consent. That meant GM needed volunteers.
But this raised a classic "free rider" problem, as economists call it. Why would any bondholder agree to have its investment dramatically reduced when, if other investors accepted the offer, it could keep its full entitlement? No company had ever achieved such a sizable debt reduction involving so many bond issues and thousands of bondholders outside of bankruptcy. GM had been talking to representatives of its biggest bondholders for weeks, without any progress, seriously jeopardizing its chances of being found viable on March 31.
Now these advisers appeared at our door, armed with a proposal. I almost fell off my chair when I saw that their solution to this dilemma was for the Treasury to guarantee some of the new debt. I held myself to a few polite questions, but I was seething. Yet another stakeholder asking for a handout.
Such sessions underscored the need to expand our team—quickly. I took a giant step in that direction by hiring somebody I found via e-mail: Harry Wilson, a fiercely driven young expert in corporate restructurings. His was one of the many unsolicited résumés I'd received when word of my possible appointment began to leak. Harry had grown up in a Greek immigrant family in a river town in upstate New York, where he'd seen his mother get laid off three times from textile mills as they'd closed one after the other. Harry had been the first in his family to earn a college degree, from Harvard, and he'd gone on to earn an MBA at Harvard Business School. He had done private equity deals and industrial restructurings at four distinguished Wall Street firms. And he was a registered Republican! His e-mail touched me, especially these lines: "Steve, I will end on a personal note. There is only one reason I am sending you this email: I have a very deep interest in public service, particularly given the good fortune I have enjoyed in my own life, and ... I think my skills and personal characteristics are an ideal match for those needs. In short, I can't think of a better way for me to serve my country in the near term than this role, and I think our country needs all the talented people it can get (regardless of political affiliation)."
Harry's employer references were glowing. But just because he had put his hand up for a job didn't make him easy to convince. The burly thirty-seven-year old, who looked like a fairer, younger version of Al Gore, had a whole list of questions and concerns that reflected the diligence and care that we would later see in his work. Was the task force free to attack the auto industry problem without regard to politics? he wanted to know. Was its goal with GM and Chrysler the fundamental restructuring that both companies sorely needed? I told Harry candidly that while I believed that the President, Tim Geithner, and Larry Summers were committed to doing the right thing, only time would tell if the administration would withstand the political pressure to pull punches, particularly from strong supporters like the UAW. There were risks, I admitted, but the opportunity to work on such an important matter far outweighed them.
After thinking it over, Harry agreed to join the team. Now all we had to do was get him hired. As he began the same vetting ordeal that Ron and I had gone through, one of the TARP chiefs made a transformative observation. If the task force was going to continue to oversee the deployment of TARP money, he said, then the staff should be on the payroll of TARP, which had its own streamlined hiring process. Even better, TARP had more money for hiring than did the Treasury, whose budget had been strained to the bre
aking point by the financial crisis. So we were able to bring Harry on board in ten days—overnight, by D.C. standards. Importantly, his addition cemented the principle that our hiring would be done without regard to political views and ensured that Team Auto would be something of a team of rivals.
The flow of ideas and suggestions from outside the task force continued to climb. Some served as useful affirmations of, or correctives for, our thinking. Others were bizarre. A friend passed along an e-mail from an architect suggesting that GM and Chrysler get out of autos and manufacture housing instead. An otherwise sensible acquaintance forwarded an e-mail from an investment group purporting to want to put "$50 billion to $150 billion" into the auto industry. "This seems important enough to pass on," he wrote.
We labored to find an acceptable solution to the supplier crisis in time for our next meeting with Larry, set for Monday, March 2. "Given Larry's concern about Laos, I'm particularly worried about going to him with a structure that he will have an easy time poking holes in," I said to Deese from home on Saturday night. The issue ate up most of the next thirty-six hours. By the time we appeared in Larry's office late Monday afternoon, we had boiled down our supplier ideas to two. The more modest idea—if you can call a $5 billion to $10 billion proposal modest—was a kind of insurance fund that would guarantee payment to GM's and Chrysler's suppliers. Suppliers would have to pay a hefty fee to participate, but we believed such a program would relieve them of a major worry.
Our second idea, far more ambitious, would be a kind of mini-TARP—a fund to provide so-called debtor-in-possession, or DIP, financing for suppliers that declared bankruptcy. (DIP financing enables a bankrupt company to keep the lights on and pay other essential bills while it reorganizes.) We had qualms about the scope and workability of this idea. Which suppliers would qualify? Where would we draw the line? How would we screen dozens or hundreds of applicants? "I ran a fund and it is a big undertaking," I said to Todd Snyder, who was pushing the idea.