Overhaul

  The Fiat negotiations were not going well. Although Chrysler had unveiled the alliance with great fanfare on January 20, we viewed that announcement as a beginning rather than an end. In particular, we remained concerned that Fiat was putting no money into the deal. This was bad business and bad politics. The agreement called for the Italian automaker to get an initial 35 percent ownership stake in return for providing Chrysler with technology and management expertise. I worried about the potential backlash from billions of dollars of U.S. taxpayer money going to an automaker that would be managed and partly owned by a foreign company. Worse, for Fiat the deal was risk-free—if the alliance didn't work, it could walk away with no penalty.

  We struggled to persuade Sergio to put up some cash. But as much as the ambitious CEO wanted Chrysler, that was where he drew the line, at least in part because Fiat was facing its own financial challenges. Eventually, after hard bargaining, Ron succeeded in carving back Fiat's initial ownership stake to 20 percent, requiring the company to meet meaningful milestones before receiving additional shares and limiting its ownership to no more than 49 percent until the entire Treasury investment had been repaid. All in all, I felt it was a fair deal, and nothing that has transpired since then has changed my mind.

  The launch of the $5 billion receivables guarantee program for suppliers on March 19 would be the first pronouncement from the Auto Task Force, so I wanted to be sure that we put our best foot forward. Our team worked hard to be sure we had all the mechanics right; Mara McNeill, a Treasury lawyer, became our unsung hero on these critical issues. We wrote a public fact sheet, rehearsed questions and answers for calls with reporters, and helped Tim's staff craft an announcement that made it seem as if we had our act together. His statement hit all the right notes. "The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period of restructuring that lies ahead," it read. "The program will provide supply companies with much-needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need."

  This unveiling was received better than I would have predicted, even in the heartland. Senator Carl Levin, crusty as he was, called the program "good news." Governor Granholm announced, "Today's action will minimize unnecessary job losses."

  Meanwhile, I was pleasantly surprised to see a quote from David E. Cole, chairman of the Center for Automotive Research, in the next day's New York Times. "I am convinced they have decided that a major bankruptcy in this industry is not going to happen if they can help it," Cole said. Only ten days from the President's March 30 speech, and the industry's closest observers did not know what had, for all practical purposes, already been decided.

  Unfortunately, however, Senator Corker was furious. He called Summers to remind him of a promise that he and Deese and I had all forgotten. Back in January, as part of the horse-trading to get legislative approval for the second half of TARP, Larry had sent a lengthy, painstakingly negotiated letter to congressional leaders that promised, among many other things, that additional TARP funds would flow to the auto industry only "in the context of a comprehensive restructuring." Of course the Supplier Support Program failed that test. Corker didn't stop at a phone call. He issued a statement saying that the program was "a violation of trust and another sleight of hand by this administration." (Ironically, Corker had voted against the second half of TARP because he thought Larry's letter had not been strong enough; he'd wanted a promise that no more TARP money would go to the auto industry—period.)

  It was the first time I'd ever seen Larry shaken. Deese felt terrible too, knowing that responsibility for avoiding such slip-ups generally fell to the person in his role. (Belatedly I realized I also bore some blame. I'd been present at transition headquarters the day the letter went out and knew of the auto industry paragraph. But I'd been so ignorant of the ways of Washington in those early days that I hadn't registered what was going by me.)

  The only positive aspect of the episode was that Larry asked me to follow up with Corker and do my best to mollify him, which led to a strong friendship between us. In the course of a sangria-fueled Mexican dinner one warm spring night, Corker asked me, "You seem like such a sensible fellow, why are you a Democrat?" "Three main reasons," I said, ticking off my views that Republicans had favored the rich at a time of growing income inequality, abandoned fiscal responsibility, and held unfortunate positions on social issues such as a woman's right to choose abortion.

  As events unfolded, I became convinced that we had gotten our supplier policy right. In particular, we were correct in resisting the many pleas to bail out failing companies—to invade Laos, as Larry would have put it. Suppliers continued to go bankrupt that spring, but the financial markets reopened just enough to provide debtor-in-possession loans, enabling the normal Chapter 11 restructuring process to work. We also encouraged the automakers to provide DIP loans to their most critical suppliers when the banks refused, and quietly supplied GM and Chrysler with extra funds to enable them to do so. The outcome was far better than we would have achieved with bailouts. Once we drew the line on federal intervention, the supply base was forced to merge, shrink, and otherwise restructure itself to a size that realistically reflected the industry's prospects. And we were faithful to our goal of saving only those jobs for which there was sound economic justification.

  Our payment guarantee program, meanwhile, was scarcely used. To instill market discipline, we had made the money so expensive that suppliers thought twice before signing up, and ended up tapping only $413 million of the $5 billion we had allocated. But it had the desired effect of reassuring both companies and communities; as a bonus, the Treasury made a little money for taxpayers on the fees.

  We were acutely aware of the taxpayer money being sucked every day into Detroit. For Chrysler, each additional month of life support was going to cost $500 million to $1 billion, money that the Treasury would never see again if the company ended up liquidating. GM would cost even more—as much as $2 billion a month. So we wanted the President to impose the tightest possible deadlines for the automakers to come to terms with their stakeholders or seek the protection of the bankruptcy court: thirty days for Chrysler and sixty days for GM. We gave GM an extra month in part because we were quite certain that it would not end up in liquidation (minimizing the risk of a "good money after bad" problem) and in part because the company was so complicated. In a perfect world, Harry would have allotted himself and his team six months to perform due diligence and restructure the business (and in our earlier straw man, we had proposed a total of ninety days for GM). But on March 19, our lawyers at Cadwalader uncovered a sobering fact: the company had a $1 billion bond payment coming due on June 1. If we allowed GM to make that payment, we'd be awarding 100 cents on the dollar to bondholders who were entitled to only pennies. Yet if the company failed to pay, under the law as few as three of its thousands of creditors could force it into a chaotic and potentially fatal uncontrolled bankruptcy. This was an unwelcome extra incentive to work fast.

  I knew that by the end of March we had to formalize our recommendations in a "presidential decision memo" and presumably sit down with Obama as he made up his mind. But I had no idea how all of this would work. As usual, I deferred to Deese, who'd never been party to a presidential decision either, but at least had a desk in the West Wing and seemed to know what he was doing.

  As Deese was getting under way, a surprising notion drifted over from the White House: the powers that be wanted the announcement to be made by Ron and me on March 27—an idea that struck both Deese and me as insane. This was arguably one of the most important actions that the administration was likely to take in its first hundred days, and it seemed unimaginable that it should come from anyone other than the President. Eventually wiser heads prevailed. The President would speak to the nation on March 30, a day before heading off on his first overseas trip. A gaggle of cabinet memb
ers would then fan out across the Midwest to drive home the fact that Washington was coming to the rescue. We never learned the origin of the original rollout plan but assumed it was advisers leery of political fallout from such a controversial set of announcements.

  What little I knew about presidential decisionmaking included an appreciation that a decision memo was intended to give the President all the background, arguments, and data he needed. By now, our views were well honed: we wanted fundamental restructurings on a short timetable, almost surely involving bankruptcy. By now as well, the economic and political risks were seared into our brains. We had also refined our budget for the "caper" to a range of $76 billion to $88.5 billion, startlingly close to the final figure of $82 billion.

  Importantly, after last-minute lobbying by Austan and Christy—who were still unaware that the first memo had gone to the President—the memo included the views of those opposed to saving Chrysler, the sole area of disagreement among the President's advisers. Wherever the President came out on these recommendations, we knew it was going to be a high-stakes game of brinksmanship.

  On Thursday morning, Larry summoned Ron and me to his office in the West Wing. We were talking about various loose ends when Larry abruptly put on his suit jacket and said, "Let's go downstairs." The next thing I knew, I was in the Oval Office for the second time in my life (the first had been during the Clinton years, as a "friend of Bill," to show it to my kids). The room was yellower and brighter than I remembered, almost like a movie set. But this was no movie. President Obama and a clutch of key advisers were there waiting, and the sole topic of the morning's Daily Brief was to be autos. In the hectic pace of life in the West Wing, no one had told me!

  The room was packed and the seating protocol intrigued me. Of course the President sat in his wing chair in front of the fireplace. Vice President Biden was not in attendance; his matching chair remained empty. Those who had significant roles in the meeting filled two facing sofas. Another five or six aides—some very senior, including Rahm Emanuel—occupied a row of straight-backed chairs facing the President. Still another clutch of aides, including Deese, stood around the periphery.

  Larry began formally, "Mr. President, we're here today to review the decisions that you need to make regarding the auto industry," and then started to tick off the main issues. After just a few moments, the President said, "Larry, I've read the memo." (Indeed he had, as I recognized when he started citing figures from the final page.) The conversation quickly turned to the only major area of disagreement, Chrysler, about which the President had also been informed in our shorter, separate memo a week earlier.

  The group was still in the early stages of reprising the arguments that we'd been having for days in Larry's office when the President asked about our conclusion. "Is this unanimous?" he said.

  "Well, no, the CEA doesn't agree," he was told. Christy explained that Austan had pushed to have the opposing view presented.

  "Where's Goolsbee?" the President asked, realizing that the most vocal spokesman for the opposition wasn't in the room. Christy had asked Larry for permission to bring Austan along, but Larry had refused, citing a decision by Rahm at the outset of the administration that Christy would represent the Council of Economic Advisers. Austan was in his office in the Eisenhower building, across West Executive Drive. A summons went out from the President's assistant Katie Johnson, and after a few minutes Austan strode in. The Oval Office was so full that Austan tried to become the fourth person on a three-person sofa. After a few minutes, the President waved him into Joe Biden's empty chair. That put him awkwardly between the President and Larry. "I understand you don't agree with this recommendation," Obama said.

  "Yes, that's true," Austan replied.

  "What's your best argument?"

  Austan seized on a hometown metaphor: "If you try to land at O'Hare, you've got runways going both ways. We're trying to land planes at the same time. If you try to keep Chrysler in production, that's going to seriously damage our efforts. It's going to make doing GM substantially more costly. You might even threaten Ford."

  The President asked Christy to review the net job loss from a Chrysler shutdown, but just then Katie came in with a note. The Daily Briefs are intended to last only about twenty minutes, and she was signaling Obama to move on to his next meeting. "This is too important to decide in a rush," the President told us. "We need to get together again later."

  We reconvened early that evening, in the windowless Roosevelt Room, the only real conference room in the West Wing available for general use. Obama took a seat in the middle of the long table, with Larry directly across, me to Larry's left, Diana to my left, and Ron to Larry's right. Tim chose the end of the table in front of the fireplace, with its painting of Teddy Roosevelt on horseback above the mantel. Flags lined the wall behind Obama, giving him a particularly presidential air. Other senior aides filled the remaining seats: Rahm, Axelrod, Robert Gibbs, Romer, Peter Orszag, Valerie Jarrett, and others.

  By protocol, unless they had speaking roles, less senior aides took the couch and upholstered chairs behind where I sat; tonight Brian and Harry and others were there. (For meetings where all the seats were taken, people would stand near the couch—no one wanted to be out of the President's line of sight.) There was a no-BlackBerry rule—attendees were supposed to deposit the devices in a small basket outside the door, with a yellow Post-it to identify the owner. A few regulars, like Peter Orszag, chose to ignore the rule. (Like many of us, Orszag carried both a government BlackBerry and a personal one. His were strapped to his belt like a pair of six-shooters.)

  Having spent most of my professional career trying to avoid unnecessary meetings, I was unprepared for the Washington game of jockeying to attend as many as possible, especially with the President. I would watch regular White House meetings grow larger and larger, until Rahm would issue an edict like "principals plus one"—meaning that each cabinet-level attendee could bring one aide but no more. The rule would last for a meeting or two and then attendance would slowly creep up, beginning the cycle anew.

  Larry had alerted me that he was going to start this session by asking me to describe what would happen if the administration stopped funding Chrysler. While Larry favored a rescue, he wanted to establish a baseline, a clear understanding of the consequences of inaction. The previous December, Vice President Cheney and his lieutenants had been confused on this critical point, in thinking that without government funding there could be an orderly wind-down or a traditional Chapter 11 bankruptcy reorganization. "Chrysler would run out of cash in a matter of days," I explained matter-of-factly. "It would have to close its doors, cease paying suppliers and employees, and immediately liquidate. Thirty thousand workers will be out of work on day one, and it will cascade from there."

  The President and his aides took the information calmly, and the conversation began, retracing in considerably more detail the broad points that had been made that morning in the Oval. Besides Tim and Larry, we hadn't had much contact with Obama's senior lieutenants, and I was curious to see what thoughts and opinions they would offer. With them now at the table, the discussion took on a more far-reaching and political cast. David Axelrod reviewed the latest polling data, repeating points he'd made earlier in the month about public opposition to bailouts, though less emphatically, and balancing that with data about the likely political fallout of a meltdown in Detroit. Press Secretary Gibbs had apparently been somewhat unsettled by what he'd heard in the Oval Office that morning. He had e-mailed Deese in the course of the day to ask for data on the unemployment rate in a handful of key metropolitan areas. Now, in this meeting, he referred us to a map that was part of our handouts. "We talk about a great depression being 25 percent unemployment," he began. He pointed to places on the map. "There's 18 percent unemployment here. There's 24 percent unemployment here. For these guys, it already is a depression." Rahm was quiet, intervening only to repeat his memory trick of identifying the legislators in whose districts large Chrys
ler facilities were located. Tim remained totally silent, as was his custom when he was comfortable with where a meeting was going. I knew Harry was itching to chime in from his perch, but Diana had warned him that he wasn't allowed to speak.

  The President was mostly listening, although at one point he observed that being tough with Chrysler would be a lot easier if the government hadn't just bailed out the banks, particularly Citigroup.

  After perhaps forty-five minutes, the key points had been made. Larry turned and asked me to give the President my assessment of whether the Chrysler-Fiat alliance could be completed successfully. This was another question he had flagged for me beforehand; my caveats about the uncertainties of dealmaking had registered and he wanted Obama to hear them. "I would put the probability at 50 percent, Mr. President," I said, "but in my experience, deals generally get worse, not better."

  That seemed to put a damper on the group and there was a pause. The President looked around the room and said, "Does anyone else have anything to say?" No one did. The President rested his chin on his hands for a few seconds. Then he looked up and said, "I've made my decision. I'm prepared to give Chrysler thirty days to see if we can get the Fiat alliance done on terms that make sense to us." He turned to me and Ron and added, "I want you to be tough and I want you to be commercial." We took that to mean that we should insist that all of our conditions be met in a way that was prudent from the taxpayer's standpoint.

  Not wanting the Chrysler discussion to end on such a down note, Deese—who is anything but shy—piped up from the couch. "I think it is worth recognizing that there are positive attributes associated with the Chrysler deal if it gets done," he said. "It's not all negative, including the fact that while Fiat hasn't committed money, they have committed themselves with their technology, including a commitment to build a forty-mile-per-hour car in the United States." People began to laugh, and it took a couple of beats for Deese to realize what he'd said and start laughing along. Building a forty-mile-per-gallon car would indeed be significant—but a forty-mile-per-hour car probably wouldn't improve Chrysler's prospects very much.