Overhaul

by Steven Rattner

  Bit by bit, we whittled down Rothschild's opening bid to a period that we thought the automakers could survive. A week later, Matt was ensconced in a Treasury Department conference room with a whiteboard, working through structure and timing with John Rapisardi and his team of bankruptcy lawyers from Cadwalader, Wickersham & Taft, who was advising us. Feldman pushed them to a critical breakthrough: unlike most 363 sales, which include a marketing period to ascertain whether a better offer might be lurking in the bushes, we would propose no marketing period, thereby dramatically shortening the process. Matt's argument was that everyone in the solar system knew these automakers were effectively for sale. If another buyer existed, it would have come forward by now.

  We discussed none of this with General Motors or Chrysler. Instead we zeroed in on their principal challenges. For GM, management was the issue; for Chrysler, sheer survival.

  Chrysler's creditors had been pressing us for weeks for a chance to make their case. Their anxiety was easy to understand. In May 2007, at the height of the private equity bubble, JPMorgan, Citibank, Bear Stearns, Goldman Sachs, and Morgan Stanley had agreed to lend $10 billion to Cerberus to help fund its purchase of Chrysler and Chrysler Financial. It was one of those Rube Goldberg financings that private equity guys and aggressive lenders dream up when times are flush. For a little under a year, all seemed to go well—Chrysler even paid down about $3 billion of the debt. But as the creditors prepared to sell the remaining debt to other banks and investors, as would have been routine, the credit markets began to fail and the value of the debt fell.

  JPMorgan was in the deepest. In acquiring Bear Stearns when the investment bank collapsed in March 2008, it inherited another hefty chunk of Chrysler debt, bringing its total exposure to $2.7 billion. That was many times more than any bank, even one as gigantic as JPMorgan, would ever want to hold in a single loan, never mind one to a troubled automaker. Worse, JPM was rumored to have much more auto-related exposure on its books. So as industry sales headed south, the Chrysler loans, not surprisingly, commanded the attention of JPM's top operative.

  That was James Bainbridge Lee Jr., known on Wall Street as Jimmy Lee, or just plain Jimmy. Almost exactly my age, Jimmy had had one employer since graduating from Williams College in 1975. He had started as a trainee at Chemical Bank and had survived a series of mergers to end up in the highest echelon of one of the world's megabanks. He looked and acted the part. He was partial to elegantly tailored suits and white-collared shirts. He hated being "caricatured"—as he put it—by the way he dressed, and while profiles of him often mentioned suspenders, he insisted that he hadn't worn them in more than a decade. Jimmy was one of the most effective "clients' men" of our generation, an articulate peddler of advice, money, and service. His office at JPMorgan headquarters, at 270 Park Avenue, was a combination command center and personal shrine, with banks of monitors, tickers, and screens, plus shelves of mementos of his many megadeals. He had long aspired to run a bank, but in recent years had settled into a happy life, proud of his position in the executive suite two doors down from CEO Jamie Dimon and of his ability to deploy billions at a moment's notice. At a celebration of Jimmy's thirtieth anniversary with the bank, Jamie toasted the man "who has lent more money than anyone on Wall Street and"—dramatic pause—"gotten most of it back."

  I had known Jimmy since the mid-1990s and enjoyed watching him work his magic. Not surprisingly, he'd started calling me almost from the first day that my name had surfaced for the auto job. Each time we talked, Jimmy would bring up the proposition he'd been pushing for nearly a year, since JPMorgan had first realized that its huge loan was in trouble: a merger of GM and Chrysler. Many thought the idea made sense because a merger would eliminate redundant product lines, factories, and jobs; Jimmy liked it because he believed it would shore up the fast-eroding value of his loan. Long after Rick Wagoner had vetoed the idea the previous fall, Jimmy was still tirelessly arguing for a merger, like a dog that would not let go of a bone.

  In our phone calls he also relentlessly reminded me that creditors deserve to be paid. "When you lend somebody $6.9 billion," he would say, "you expect to get $6.9 billion back. And not a penny less." I listened knowing that Jimmy's position was patently ridiculous. Chrysler debt was trading at around 15 cents on the dollar (admittedly, infrequently), and according to Chrysler's own analysis, the liquidation value of the company was perhaps as low as $1 billion. Clearly, Jimmy didn't believe that the Obama administration would be willing to push back and let the banks take over Chrysler rather than cave in to their demands.

  Jimmy was eager to get together and talk. When, after several phone calls, he realized that I was too busy to come to New York, he made arrangements to visit the Treasury. Normally he'd have made the trip by corporate jet, but in the era of TARP—JPMorgan had received $25 billion of government aid—Jimmy felt obliged to go commercial. He chose the Acela express train for himself and his associates, and arrived at the Treasury around noon on March 13, muttering about the breakfast burrito that he had consumed en route. I loved the idea of Jimmy slumming on the Acela, forced to make do with a breakfast burrito.

  We received our guests in the Diplomatic Reception Room, an odd, ornate space meant for Treasury secretaries hosting high foreign officials, and the only vaguely suitable room that Haley could find for us that day. Couches and comfortable chairs surrounded a fireplace at one end of the room and a nineteenth-century glass-topped mahogany meeting table occupied the other. All this was the furthest thing imaginable from a sleek, state-of-the-art financial conference room. When the JPMorgan delegation arrived, a Treasury technician was doggedly trying to hook up a Polycom speaker phone so Matt could listen in. (We had by now discovered that the Treasury mess would provide food and refreshments for meetings as long I paid for them myself.)

  Jimmy and his team had brought a flip-chart book extolling the virtues of a GM-Chrysler combination. I realized that as a staunch Republican who, like many businessmen, distrusted Washington, Jimmy was worried that the Obama administration would side with the UAW and reject any merger that involved eliminating jobs. He seemed particularly suspicious of Ron Bloom, with his union cred, and he and his associates addressed most of the presentation to me and Harry, as potentially more sympathetic ears.

  We listened politely, knowing that given the management problems at GM, a merger simply wasn't in the cards. As Matt struggled to follow the conversation via the balky Polycom, he was wondering, "Are these guys like on planet Pluto? How could they possibly think that someone could effectively put these companies together? GM and Chrysler can't even run their own businesses." I shared that view, but just three weeks into my job and sitting across the narrow table from Jimmy, I wanted to seem open-minded. So I said as mildly as I could, "This may be an option, but we've talked to GM, and GM does not want to buy Chrysler. As the government, we can't just say 'You have to.' " Harry and I also pointed out how difficult executing such a complex combination might be on a short deadline, especially over management's objections. Well, Jimmy said, if we liked the idea, JPMorgan had a lot of people who were very familiar with the auto sector and would gladly help.

  Jimmy and his colleagues left feeling better than they'd expected. "Steve and his team kind of understand this stuff and maybe we've got a shot at doing this merger," he thought, riding back to New York on the Acela. For my part, I'd heard nothing to change my view that whatever the theoretical merits of merging Chrysler into GM, GM's current management wanted no part of it—and any new leaders we put in would have their hands full even without a merger. (If we had supported a deal, I don't know whether the UAW would have been able to use its political muscle to block it. I do know—as underscored by Rahm's expletive about the UAW—that no one in the Obama administration ever asked us to favor labor for political reasons.)

  The following Monday, I shifted my focus from the emotive characters surrounding Chrysler to their stoical counterparts at GM. The issues there were utterly different. We never co
ntemplated letting GM fail, and because of the company's enormous size, no merger or alliance could save it. We had to address GM's dysfunction head-on, and a key to that was upgrading the leadership.

  For starters, I knew we would need a new chairman. I had long been of the view that the roles of chairman and chief executive officer should be separate, as European companies have historically done. Without such a separation, I believed that there would be insufficient checks on the CEO and the management team. A lack of good governance was certainly part of GM's problem.

  My search for a chairman was not going well, however. I'd been quietly gathering names—mostly from private equity firms and investors who had achieved success by backing results-oriented management teams. At Larry's urging, I also sought help from perhaps the most admired former CEO in America: Jack Welch. I didn't know Jack all that well and was gratified when he agreed to take my calls. I was intent on landing a world-class former CEO who could serve for five years—which meant no older than sixty-seven, since GM's mandatory retirement age for directors was seventy-two. Jack knew almost every big-time retired CEO and played golf with many of them. I discovered I could turn to him the way I might have turned to an extremely wise headhunter. I'd call with a candidate's name, and Jack would quickly say "Great guy," or "Lightweight," or "Dope"—in most cases reinforcing my own, much more tentative impression.

  A big problem was that public resentment toward top executives was just then at full boil. For example, on March 19 a congressional panel interrogated Ed Liddy—the stalwart ex-CEO of Allstate who was a dollar-a-year volunteer running the wrecked insurer AIG—as if he were a common criminal. One of my top prospects for the GM chairmanship was scheduled to visit me in Washington a few days later; after he saw what happened to Liddy, he canceled. I called him and, grudgingly, he agreed to let me come see him at his home in the Midwest. I flew there the following Monday—but he wouldn't change his mind. (Later I learned that his golf buddies had kidded him, "What on earth would you go to GM for? Do you want to end up like Ed Liddy?") It was clear that lining up a chairman before our March 31 deadline would be exceptionally challenging.

  There was even less room to maneuver in replacing Rick Wagoner as CEO. In a perfect world, we'd have liked to look outside the company or outside the industry, as Ford had done in recruiting Alan Mulally from Boeing. Yet following through on such a search would take months and be very risky. GM didn't have that kind of time. Meanwhile, the obvious internal candidate was Fritz Henderson, whom I'd met when GM had made the presentation to us in the dingy Treasury Annex. He'd impressed me as smart, energetic, down-to-earth, and more open to change than Rick. His knowledge of the business seemed encyclopedic. Yet something he'd said to Harry on March 11, during Harry's first trip to Detroit, stuck in my mind. Harry had asked at one point, "How would you characterize the culture of General Motors?" Fritz had meandered for a bit, talking about the company's good people, then paused. "You know, it's the only firm I've ever worked for," he said. "It's the only culture I know."

  I knew Rick and Fritz were planning to return to D.C. in mid-March. I called Rick and asked to see them together and then to meet with them separately. I had no specific agenda for the three-way meeting; it was mainly a pretext to get time alone with each, and it came and went without incident. But when Rick came back at 4:30 that afternoon, he still had Fritz in tow. Somehow our signals had gotten crossed. We had an awkward moment until Fritz excused himself and retreated to the local Starbucks, where he sat thinking that management changes surely must be in the works.

  Rick and I faced each other uneasily at my conference table. He was impassive; I was nervous. While I had interacted with many CEOs in my Wall Street career, I'd never, in effect, conducted a job interview with the head of one of America's largest corporations. I asked him to describe his management team, the individuals' strengths and weaknesses, and how he saw it evolving over time. He said that Fritz was being groomed to succeed him, although after only twelve months as president, he would benefit from more experience. I was looking for an opportunity to gently shift the conversation around to Rick, but couldn't find one. So I just asked, "And what about your plans going forward?" Rick seemed to be expecting the question. "I'm not planning to stay until I'm sixty-five," he said (he'd just turned fifty-six), "but I think I've got at least a few years left in me." He paused and added, "I told the last administration that if my leaving would help save General Motors, I'm prepared to do it." My sense was that he left the meeting thinking he'd persuaded me of his importance to GM's turnaround, in part because of the lack of a qualified replacement.

  Fritz came by the following morning. Balding, mustachioed, slightly stocky, he seemed an unprepossessing fifty-year-old corporate guy. But when he spoke, there was knowledge and intelligence in his voice. We ate lunch at my conference table—chicken caesar salads from the Treasury mess (paid for by me, of course). I kept the conversation general, just trying to get to know him and gain a sense of whether he was up to the job of replacing Rick. Fritz put his cards on the table. "Last summer I turned down a very attractive CEO job because I felt I had a responsibility to see GM through its problems," he said. He was equally direct about compensation; his salary had been cut by 30 percent and he hadn't received a bonus since 2005. "I understand the situation," he said, "but at some point, I need to focus on my family's financial security."

  Fritz represented a conundrum. He was not only a GM lifer but also the son of a GM lifer. Born and raised in the Detroit area, he had attended the University of Michigan and, while he had moved around the world during his career at GM, he was a Detroit auto guy through and through—not exactly fresh blood for a company that needed sweeping change. Yet there was much about him to like. (I enjoyed razzing Harry about the fact that unlike him, Fritz had been a Baker Scholar at Harvard Business School, an honor based solely on grades and restricted to the top 5 percent of each class.) And I was intimated by the prospect of trying to recruit an A+ player from outside, not to mention the time and disruption that an intensive search would entail. We needed to be ready by March 31 to tell the world who would be the new CEO of General Motors.

  7. "IS THIS UNANIMOUS?"

  TIM AND LARRY TRIED valiantly to help us parse what seemed like an endless thicket of decisions. But with the economy in deep trouble and financial markets hitting new lows, we were inevitably left to our own devices more than they, or we, would have liked. Larry jokingly called Team Auto a "social experiment"—we were like a petri dish left out on a laboratory counter to see what would grow.

  Tim's time was in particularly short supply. He was locked in endless meetings—including a seven-hour session on a Sunday with all the economic team, as well as, for a substantial part of it, the President—trying to figure out whether to start nationalizing banks, and if not, what more should be done to prop them up. In the month of March alone, he testified before Congress six times, announced two massive new liquidity programs, unveiled a regulatory reform plan, and made a day trip to Medellin, Colombia, for the annual meeting of the board of governors of the Inter-American Development Bank. I couldn't begin to imagine how he coped with the stress.

  Later, after our auto effort proved successful, many commentators would ask why the administration couldn't have taken a similar approach to the banks. This question flared most emotionally around AIG, the rogue insurance giant to which the Treasury and the Fed ended up committing $182 billion to stave off chaos and make creditors and counterparties whole. Even sophisticated critics almost always missed the crucial point: for banks, unlike automakers, bankruptcy was not a useful tool for reorganization, as the Lehman Brothers disaster had so vividly demonstrated. And as we quickly learned in autos, without bankruptcy as a tool for reorganization, it was nearly impossible to achieve shared sacrifice among the stakeholders.

  That was the nub of what was angering the public and weighing on Tim: the absence of shared sacrifice. The hundreds of billions of dollars that the government was co
mmitting through TARP was protecting the financial system, but collaterally also rewarding the creditors and counterparties. In a perfect world, instead of having their risk essentially eliminated, these creditors and counterparties should have suffered along with everyone else touched by the crisis.

  The Obama administration also opted not to change the management teams at the banks and financial companies. As I went about my business, I overheard fragments of the internal debate on this subject in the hallways of Treasury and the White House, but I stayed out of it. Based on sound advice from former Treasury Secretary Robert Rubin, I had gone to Washington resolved to stay focused on my assignment and not poke my nose into other business. Had I been asked, though, I'd have reiterated my belief that, with rare exceptions, a CEO who leads a company into a state in which its only recourse is a government bailout shouldn't be in his job.

  So while Tim tried valiantly to make time for us, we ended up working much more closely with Larry. I was pleasantly surprised by his fascination with autos. But a lot about Larry intrigued me.

  Of all the people who I encountered during my stay in Washington, he was among the most colorful and the most interesting. Though we were longtime friends and I had always felt that I had his respect, I was well aware of his reputation for bumptiousness and approached my role as one of his charges with a bit of trepidation. But working for him turned out to be stimulating, enjoyable, and harmonious. Like me—with more justification in his case—Larry didn't suffer fools. He was attentive to the opinions of people he respected, particularly those who offered well-reasoned analyses in matters outside his expertise. Titles and résumés meant little to him; he listened to what was said and decided whether the speaker seemed worthy of attention. Thus he regarded Deese's views on certain matters to be far more valuable than those of higher-ranking colleagues. Harry, too, quickly came to burn brightly on Larry's radar screen. Smart young colleagues adored him, and I could see why Larry had been popular among Harvard students while warring with some members of the faculty.