Overhaul

  For my part, I hadn't adequately anticipated the extent to which the President's statement, together with our disparate treatment of the various stakeholders, would constitute another frightening message to a Wall Street already shaken by repeated attacks from Washington.

  What particularly upset the financial community was the fact that the senior lenders, who were "secured" and who ranked first in line among Chrysler's creditors, would not get all their money back, while certain unsecured creditors—most controversially, the UAW's VEBA— would be paid in part for their claims. Under the strict rule of priority in bankruptcy, senior creditors are intended to be paid in full before any other stakeholder gets a penny.

  But bankruptcy law also provides that a new investor—which the government was, in effect—can allocate its capital however it chooses. We believed that it was in the taxpayers' interest to give Chrysler equity to Fiat in return for its technology and management. And we believed that giving the VEBA a mix of debt and equity was also good business—as Ron had told Jimmy, you need workers to make cars. And while the $2 billion that Chrysler's banks were getting was far less than the face value of their loans, it represented more than 100 percent of Chrysler's assets, as the company's liquidation value indicated. By that measure, they were getting more than they deserved. In fact, every single creditor of Chrysler received more than it would have in a liquidation.

  What our critics also failed to recognize was that many creditors with the same rank as the VEBA got treated better than the VEBA. For instance, Dodge and Chrysler car owners with warranties were unsecured creditors too. Yet we gave them 100 cents on the dollar, because what consumer would buy another Chrysler if the company didn't honor its warranties? Similarly, most Chrysler suppliers received full payment, because without its suppliers, Chrysler would no longer be able to make cars. The 50 to 60 cents on the dollar we awarded the VEBA hardly seemed overly generous by comparison.

  We would spend many hours during the ensuing months trying to explain that the shape of Chrysler's restructuring had nothing to do with the heavy hand of government and everything to do with the fact that Treasury was the investor of last resort, the only source of capital prepared to finance Chrysler. Even Jimmy understood this: "Treasury was holding four aces and I was holding the two of clubs," he would tell Wall Street colleagues. For our part, we reminded the skeptical of the golden rule of Wall Street: He who has the gold makes the rules. Or as my father used to say to his unruly children: "He who eats my bread sings my song."

  10. HARRY WILSON'S WAR

  DETROIT'S RENAISSANCE CENTER—built in 1977 by Henry Ford II as a headquarters for his grandfather's car company—was supposed to be a symbol of a revitalized Detroit. That didn't pan out. Detroit's decay continued and Ford decamped to suburban Dearborn. The center's seven glass towers still dominate the skyline, but views from the upper floors reveal a lunar landscape of abandoned buildings and deserted streets that, for most, have symbolized this once thriving city for decades.

  Now General Motors headquarters occupies Tower 300 of the RenCen. At 9 A.M. on April 8, Harry Wilson and two Team Auto associates stepped off an elevator there, having fortified themselves with breakfast sandwiches at the McDonald's in the food court below. In the conference room on the thirty-seventh floor, the first cohort of GM executives was waiting, their backs to an expansive view of the Detroit River and the colorful electronic billboards of the modestly more prosperous city of Windsor, Ontario, beyond. Joining our Treasury trio was a clutch of consultants from Boston Consulting Group (BCG), led by Xavier Mosquet, as well as two bankers from Rothschild.

  For the next eleven hours, the task force members watched a parade of GM executives flash tables, charts, and bullet points on the projection screen. Whether any of it meant anything would take time for Harry and his two assistants to figure out. Both were young Wall Streeters who had joined Team Auto just two days before. David Markowitz was a thirty-six-year-old University of Michigan graduate whom Harry had known from Goldman Sachs. As driven as Harry, he was also just as analytical and unaccepting of second-rate work. Yet the two were stylistic opposites: David's quiet personality and almost rabbinical manner complemented Harry's gregariousness. Sadiq Malik, at thirty, was a skinny, intense Pakistani American who had graduated near the top of his class at Dartmouth, taken a Harvard MBA, and worked at the Blackstone Group and other Wall Street firms.

  The trio had arrived armed with a five-page, day-by-day outline of everything they intended to accomplish with GM over the next four weeks. Harry's objective was to tear General Motors apart and reassemble it as a profitable business. Everyone involved agreed that a total overhaul was necessary. The "viability plan" delivered by GM in February had proven management incapable of dispassionately and analytically creating an achievable business plan. While Ron and I contended with Sergio, the creditors, and the swarm of Chrysler-related problems, Harry's mandate was to design what we had taken to calling "Shiny New GM."

  It was obviously a monster challenge. GM's was an antique, closed corporate culture. Old-fashioned notions of hierarchy definitely applied here. Above the floor where Harry's team set up shop were two floors of executive suites that could easily have been in a different tower—or a different city. The company's twenty or so top brass drove each morning into a private parking garage, where their cars would be fueled and cleaned. The half-dozen most senior executives used a special card to ascend in an elevator that would not stop at any other floor (no mixing with hoi polloi) before reaching thirty-nine, where they reigned in splendid isolation. Below, on thirty-eight, were no offices, only the boardroom, the executive dining room, conference rooms, and a guard, who sat behind an imposing round console receiving visitors.

  The Obama administration had never seriously considered just letting GM liquidate. America's second-largest industrial company (after General Electric) was deeply woven into the very fabric of America, with its generations of workers, its networks of suppliers and dealers, its historical resonance and symbolism. GM embodied the intimate connection between the free capital markets and the social and political contract on which they depend. It could not be allowed simply to disappear. Beyond that, our early work had led us to believe that the company's problems were, to a considerable degree, of its own making—and fixable. It was the job of Harry and his team to verify this hypothesis while ensuring that we had a sensible plan to end GM's decades-long pattern of careening from crisis to crisis.

  Something approaching hope was not out of the question. Despite its disarray, GM was still the source of more than 12 percent of all the new cars and trucks on earth. Its 243,000 employees were spread across 140 countries; GM and its partners actually built cars in 34 of them. In the United States, the company operated from 207 locations in 35 states—not counting dealerships, which were, of course, all over. Everything about GM was supersized; in the course of our work we would learn that the company was party to more than a half million contracts.

  Harry knew what he was up against. His first official act with the task force had been to ask for GM's financial model, a kind of mega-spreadsheet that companies use to monitor and forecast revenues, expenses, profits, and other important business metrics. GM took days to respond. When it did, the model was useless. Unlike a normal model in which a user can change an assumption and see how the effects ripple across the business, GM's spreadsheet was "value pasted"—the numbers had been entered manually and no underlying formulas tied them together. "Why can't they send us something where the links work?" Harry complained to our Rothschild advisers. "We should ask them to stop playing games."

  Harry's first visit to GM, on March 11, had given him a jarring sense of the weakness at the top. At a meeting of high-level executives, he asked CFO Ray Young how much cash the company needed to operate day-to-day. "Eleven billion," Young replied.

  "That seems astronomically high," Harry said. "How did you get to that number?" Being Harry, he'd already calculated that for an automaker of G
M's size, a cash requirement proportionate to those of Ford and Chrysler would be in the $6 billion to $7 billion range.

  Young explained that GM was using a formula based on sales volume, and started walking Harry through the calculation. But as he cited the figures, it was plain that they didn't add up to anywhere near $11 billion.

  "You realize that's six to seven billion dollars," Harry pointed out.

  Young seemed genuinely puzzled. After a long and very awkward pause, he stammered, "I'll have to get back to you." Harry was dumbfounded.

  It hadn't always been like this. GM's treasury department had a reputation for brilliance dating back to Alfred P. Sloan. It was Sloan who had pioneered the notion of using tight financial controls to keep track of its far-flung and disparate divisions. Based in New York, in the vaulting white marble GM building across from the Plaza Hotel, the General Motors treasury was also known as the cradle of CEOs. Rick Wagoner and Fritz Henderson started their careers there, as had others. In my early days on Wall Street, I heard much about GM's treasury staff, which was viewed as cutting edge and among the best anywhere. But GM's sagging fortunes thinned the talent in the ranks. Many good people had retired or quit, and others who might have once been recruited had opted for more lucrative, glamorous jobs on Wall Street.

  From the beginning, Harry and his team encountered financial systems as decrepit as Detroit itself. As GM's financial position weakened, it had cut back on funding for its finance group. When it bought Ross Perot's Electronic Data Systems, it turned responsibility for running information technology over to EDS. In 1996, it spun out EDS but left it to manage GM's information technology, which resulted in GM not controlling its own central nervous system. Complications arising from that decision meant that the company needed weeks, not days, to figure out its cash. To assemble the corporate balance sheet, executives had to e-mail around the world and then stitch together a patchwork of reports. Not surprisingly, different countries had different systems.

  GM's Latin American operations had a better handle on cash and cash forecasts than did other parts of the empire. But even in Latin America, it was unclear where the money actually was deposited. "No one had a list of all of the GM bank accounts worldwide," a GM adviser told us. By their own estimate, treasury executives spent 80 percent of their time gathering data and only 20 percent analyzing it. (Harry never did get the financial model he'd asked for, because it did not exist. Rothschild ended up jury-rigging one to serve the task force's needs.)

  GM faced analogous problems with its accounting operations. The company often had to restate its earnings and was the subject of repeated inquiries from the SEC. In March 2006, for example, GM announced that it needed to revise its profit figures for the previous six years, as a result of having used questionable accounting techniques. As recently as January 22, 2009—as I was in the midst of deciding whether to take the auto job—GM agreed to settle SEC civil charges relating to its accounting. That a global company could have so shoddy a bookkeeping system was mind-boggling. Such problems led to poor decisionmaking.

  GM was continually driving without headlights and kept behaving as though cash were not an issue. The summer that gas prices soared and all-important SUV and pickup-truck sales slid, it belatedly suspended its $1 per share dividend. But it invested in Michigan real estate, laying out $626 million to buy the RenCen, and $200 million more for office buildings in Pontiac. Depressed by Rust Belt malaise and the growing credit crunch, the prices must have seemed like bargains.

  It didn't take long for Harry and Fritz Henderson to collide. The day after President Obama told the nation that GM would be on a sixty-day deadline to reinvent itself, the new CEO called to assure Harry that GM was reworking its turnaround plan and would have something for him by the end of the weekend—five days hence.

  "Wait a second," the thirty-seven-year-old Harry said to the CEO of the world's second largest automaker. "We're talking about a wholesale revision." He didn't want the GM team to burn precious days producing yet another mediocre plan. This time, nothing short of perfection was acceptable. There was no time to waste on another mediocre plan. Fritz deputized Troy Clarke, the head of GM North America, to deal with Harry and to enlist other top executives to help.

  Harry gave Clarke and Gary Cowger, the company's worldwide manufacturing chief, pep talks by phone the following day. "We have a once-in-a-lifetime opportunity to re-create this company," he said. "You've got to not be constrained by historical habits and practices. You have to think about it and say, 'If we were to start this from scratch, what makes sense for this business?'" Harry came away enthusiastic that the GM chieftains understood both his mission and his desire to approach the task as a colleague rather than an adversary. But in truth, the thirty- and forty-year veterans he was talking to were wary at best.

  In Harry's mind, rebuilding GM from the ground up meant starting with the "badges" and "nameplates," automobile-speak for individual brands (of which GM had eight in the U.S.) and models (forty-five). He felt GM's mission was pretty straightforward—it needed to sell quality cars at a competitive price, a simple objective that had eluded the Big Three for decades. So he wanted to know how well positioned each vehicle was—its price, profitability, capital requirements, next-generation design, and so on. He imagined each model as having its own business plan; it could be evaluated to see how strong the product was, and if you totaled up all forty-five, you would see how good GM was as a whole.

  On that April morning on the thirty-seventh floor of the Renaissance Center, where the new GM began, the trio from Team Auto watched as slides began to flash onto the screen at the far end of the room. Immediately they realized that the presentations were as interesting for what they didn't show as for what they did. Charts of vehicle sales included no historical data, only projections—which consisted, almost without exception, of upward-sloping lines.

  Charts of selling prices showed no comparative data, as if there were no such thing as Ford, Honda or Toyota. This was a puzzle. Why would GM present the data in such a useless manner? Whom were they trying to fool? Or did they just not think about historical numbers and comparative data in a systematic way? It seemed incredible that no board members or senior executives had ever demanded such basic rigor to inform their decisionmaking. We never knew for sure, but concluded that it was just another expression of GM's "get along, go along" culture. (To the GMers' credit, when Harry insisted that all analyses include historical and comparative data, they readily complied.)

  We knew before setting foot in Detroit that GM had a badge and nameplate problem. It had too many of each without enough clear differentiation in consumers' minds. Sloan's original vision—"a car for every purse and purpose"—had mushroomed into confusion. Sloan had organized an array of five brands that did not compete with one another but rather offered customers alternatives at different price points. As a family moved up the economic ladder, the "ladder of success," it could also ascend through GM's product line, remaining loyal customers at every step.

  The first rung was Chevrolet, and so it has remained. GM's massmarket volume leader accounts for more than 70 percent of GM's total sales in the U.S. Pontiac, Oldsmobile, and Buick occupied the next rungs up. The top rung was Cadillac, which Sloan made into a synonym for affluence. The ladder worked brilliantly in the company's heyday, but as GM's dominance eroded and it began to cut costs, it could no longer keep the brands sharply distinct. Instead of complementing one another, they began to jostle and overlap, competing for resources within the company and cannibalizing one another's customers. The addition of specialty brands like Saturn, Hummer, Saab, and GMC complicated the management challenge.

  Meanwhile, Toyota was pursuing a different strategy. While it had twenty-nine nameplates (compared to GM's forty-five), it had only two brands. As a result, Toyota could effectively spread its marketing costs over a large number of nameplates within one brand. By offering more nameplates, Toyota was essentially offering more product choices within
each brand. This drew more customers into Toyota showrooms and was a key reason why Toyota dealers were much more productive than GM's.

  The problem of too few nameplates per brand was exacerbated by GM's financial woes. Each nameplate requires a certain amount of capital to develop, test, produce, and market to customers. To conserve cash, GM started to slow its product replacement cycle. While agile competitors would come out with new versions—called "refreshes" in the industry—every couple of years, GM was taking longer to renew its products. GM brands started looking "empty" and its showrooms stale. Sloan's strategy of "a car for every purse and purpose" had become GM's weakness.

  To his credit, Rick Wagoner had recognized that he had too many brands to feed. After becoming CEO in 2000, he eliminated Oldsmobile. And GM had also analyzed eliminating Pontiac, Saturn, and Saab. The proposal made it all the way to Wagoner, Henderson, and marketing chief Bob Lutz, but all set it aside. According to Fritz, killing Oldsmobile had cost more than $2 billion; there would be smaller, but still sizable hits if Pontiac, Saturn, or other struggling brands were jettisoned. In essence, GM didn't have enough money to fully fund these brands or to put them out of their misery—a brutal financial Catch-22.

  But when the economic tsunami hit in 2008, selling or killing brands—Saab, Saturn, and Hummer this time, and sharply scaling back Pontiac—became part of GM's viability plan. Harry's question was whether still more should go. GM had blocked out less than an hour for each presenter, but with Harry's grilling, sessions ran as long as two hours. For each brand, he wanted to take nothing for granted but rather to build a business case from the ground up. What was its position in the market? What was its selling proposition? How did it compete? And on and on, as only Harry could do.