Overhaul

by Steven Rattner

  Fritz knew he couldn't ask for outright pension cuts; he wanted to freeze pensions as they were and have further benefits come in a plan similar to an IRA. Those changes alone would be worth billions to GM. But we had declined to address union pensions in the Chrysler negotiations, and when Fritz broached the subject to Gettelfinger late in the GM negotiations, the UAW chief turned him down flat: "We aren't going to sit in this room if pensions are on your list."

  "OK, we'll get to that another time," said Fritz, who had been through countless difficult talks with the UAW leader.

  When they heard about this, Ron and Harry discussed calling the UAW back to the bargaining table. But they concluded that attacking the union's sacred cow after virtually every other issue had been resolved could jeopardize the whole agreement. Failing to make meaningful changes in the pension plan became Harry's biggest regret. He felt it especially keenly in an airport bookstore two weeks later, when he noticed Roger Lowenstein's While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis.

  I felt about the GM bondholders the same way I'd felt about Jimmy Lee at Chrysler: they had made a poor loan and deserved to be treated accordingly. In a conventional bankruptcy, the GM bondholders, who were junior creditors, would get little or nothing. Nevertheless, the firms representing them were fighters. They launched a populist PR campaign, pointing out that among the bondholders were not only workers' pension funds but also people of limited means. "GM Bondholders Are People Like You and Me" read the headline of a Wall Street Journal op-ed, ostensibly written by a retired blue-collar worker. There was truth to this: GM had marketed some of its bonds to individuals, selling them in face amounts as low as $25. Thus it had thousands and thousands of small bondholders. Unfortunately, there was neither logic nor a mechanism for treating them differently from the institutional investors, which held some 80 percent of the debt.

  It didn't take Harry and Matt long to discover that we were in a difficult negotiating spot. Back in April, in order not to be accused of foot-dragging on GM's bond exchange plan, we had offered to give bondholders a 10 percent stake in GM in exchange for 90 percent of the bonds. But that was before we decided to invest our new money as equity, which had the effect of making a 10 percent stake hugely more valuable because the new GM would not be up to its axles in debt.

  Why should the bondholders get this windfall? I wanted to adjust the percentage so the dollar value of our offer stayed the same. But Harry and Matt resisted the idea.

  "They're fixed on the 10 percent," said Harry.

  "Ridiculous!" I said. "Ten percent is worth at least twice as much now as it was before. We need to dial it back to less than 5 percent."

  "They're not going to buy it. They'll think they're getting less value, not just a smaller percentage."

  "But this isn't Joe Six-Pack you're talking to," I protested. "They're very sophisticated advisers. I think they'll understand." To my surprise, Harry and Matt disagreed.

  We didn't have to reach a deal with the bondholders, I pointed out. Arguably, they didn't deserve anything, and we could fight it out in bankruptcy court. This prospect made Matt very unhappy. A knockdown dragout fight with the bondholders would mean delays and uncertainty, and possibly billions of dollars more to hold GM together if the bankruptcy process stalled. On the other hand, Matt pointed out, by making a deal with bondholders representing at least 51 percent of the debt, we would eliminate a major risk of delay in bankruptcy court.

  Reluctantly, I saw the logic of their argument and told them to proceed. Naturally the bondholders still wanted to negotiate right down to the wire; in the end Harry became convinced that even 10 percent of the equity would not get us an agreement and pushed me to sweeten the pot with some warrants. Even more reluctantly, I agreed to that too. We valued the package at about 12 to 15 cents on the dollar, more than what they deserved (zero) but considerably less than the 33 cents that Corker and Bush had been prepared to let them have.

  The capital structure of Shiny New GM was finally taking shape. It was radically different from what we'd imagined, as though we'd set out to build an Impala and ended up with a Volt. Rather than a small stake, the Treasury would own 60.8 percent, and the remaining 39.2 percent would be split among the VEBA (17.5), the bondholders (10), and Canada (11.7).

  But while the percentages took shape, the overall capital need remained a moving target. All through May, Team Auto struggled to nail down how much we'd have to inject into GM at its bankruptcy filing. The company's list of needs was vast, and every few days new items would pop up, further evidence of its lack of a real handle on its finances.

  The uncertainty was unnerving for our Canadian allies. They had been standup partners from the start. They'd matched the U.S. government's total $12 billion Chrysler investment with $3 billion of their own, a sum roughly proportional to the percentage of Chrysler production across the border. And while GM mattered less to the Canadians—it had fewer employees there—they were committed to making a comparable investment in this restructuring too, which was where the headaches began.

  On May 12, the first time we met with the Canadians about GM, Ron and Sadiq told their emissary, Paul Boothe, that the GM investment would total $50 billion (counting the $15.4 billion already put in and $34.6 billion of new money to come), and warned that the figure could grow. Then Ron talked with Boothe about how much Canada would contribute. They agreed on $8 billion to $10 billion. It would be the single biggest investment the Canadian government had ever made in a business.

  In exchange, the Canadians wanted GM to sign a "vitality agreement," a guarantee that the new GM wouldn't turn around and cut its Canadian production and workforce. Ironically, we had inserted just such a provision into Chrysler's agreement with Fiat, for fear that Fiat would cut too many American jobs. Boothe made it clear that a vitality agreement was a political necessity for the prime minister. Harry thought signing such an agreement was bad economics and bad for the business. If we were going to truly let GM operate as a private company, we shouldn't be tying its hands, he argued.

  In addition, the UAW had made concessions in its negotiations with GM to allow a small car that was to be built in Korea to be built economically in the United States instead. This was a source of excitement for Rahm Emanuel, who saw the evident political advantage in such a development. (When finally announced, the new plan generated far less public notice than we had hoped. Critics suggested that we had pressured GM to shift production to the States.)

  The decision on the small car meant that the percentage of GM's cars headed for sale in the U.S. that also got assembled in the U.S. was expected to rise to 70 percent from the current 66 percent. Nonetheless, the question became part of another emotional meeting in Larry's office. As had been the case with Chrysler, Ron and Harry took opposite sides. To Ron, what was the point of saving GM if we weren't going to safeguard American jobs? While I sympathized with Harry's view, this ultimately became a practical decision: if the Canadians weren't going to invest without a vitality commitment, then obviously we needed to give them one. And in my mind, giving them one and not taking one for ourselves failed the Washington Post test.

  To the Canadians' dismay, though, the all-in number kept going up. Boothe, an affable, gray-haired, goateed economist whose title was senior associate deputy minister of industry, would come to Washington only to have to fly back to Ottawa to tell his bosses the new number and get clearance. A week later, the number rose to $54 billion. Then, on May 27, it reached $59 billion, with Canada now on the hook for nearly its full $10 billion.

  Harry was partly responsible, unbeknownst to the Canadians. He felt that GM's inadequate financial controls posed large risks for the business and heavily discounted all of the cash projections he received from management. He was convinced that GM needed a margin of safety to offset these poor controls. If we paid in too much, he figured, as 60.8 percent owners American taxpayers would
get back most of any excess and the Canadians would get their share (although the 27.5 percent "leakage" to other shareholders annoyed him no end).

  Our Canadian partners grew grumpy as the funding requirement increased. Both the commonwealth government in Ottawa and the provincial government of Ontario dispatched teams to monitor the bankruptcy preparations. Team Auto didn't have enough staff to tend to them all. One evening during the hectic final week, our young colleagues David and Sadiq found themselves in a conference room at Weil, Gotshal & Manges, Treasury's legal adviser, explaining to a dozen Canadian officials why we'd just added $5 billion to the deal.

  The Canadians were also concerned about GM's management. Sergio had impressed Boothe much more than had Fritz, and the emissary had told colleagues, "These GM guys don't have the same sense of fear that Chrysler does. I would feel better if GM had a Sergio." Fritz was moving too slowly, in Boothe's mind, and seemed like just another GM guy rather than the fresh blood the company needed.

  As the bankruptcy filing neared, Boothe expressed these concerns to Feldman and Markowitz. "We know you are driving the bus here, but we are uncomfortable with him," he said and added, "We don't have anyone else who could do it, but we don't think it is him."

  My month was spent juggling pieces of everything. Senators and representatives peppered me with calls, lobbying to keep open GM facilities in their states or districts. Often these calls sounded pro forma, as if the legislator were checking a series of boxes so he or she could attest that everything had been tried. Other calls were aggressive, occasionally hostile. I knew better than to antagonize congressmen so I always listened politely. Sometimes the monologue droned on so long that I could get a number of e-mails answered.

  I was also obliged to take courtesy meetings with ambassadors from countries where GM operated, as well as meetings for the sake of bureaucratic ritual, such as the procedure for finalizing TARP investments. Still other meetings were favors to people important to the administration, like my session with a group from Utah who had no money but a great idea to manufacture an electric Hummer. If nothing else, such visits were a constant reminder of the scope of the auto crisis. One day, an old friend who had become CEO of Avis Budget came by and explained how the collapse of the auto finance market threatened his company's ability to pay for the cars it needed for its business.

  GMAC hung over me as a huge piece of unfinished business that could torpedo everything else we were accomplishing. I spent days with Brian Stern and Rob Fraser figuring out how to structure and value the capital infusion that GMAC was going to need. Even more frustrating was continuing to do battle with the FDIC. As a way to keep the pressure on, we had proposed that GMAC take on the Chrysler financing business for only two weeks, seemingly plenty of time to tie up loose ends with the FDIC.

  But the FDIC kept retrading and piling on new asks. Sheila Bair's designated negotiator was Chris Spoth, the rather meek career FDIC official whom we had previously encountered. He seemed to have no authority whatsoever. More than once, we would come to an understanding on a point that we would confirm by e-mail, only to receive an e-mail back the next morning denying that an understanding had been reached. At another juncture, the FDIC asked for a letter saying that Treasury would stand behind GMAC no matter what, and then kept changing the language. Tim thought the new language would make the FDIC look weak and tried, unsuccessfully, to reach Bair. "I'll write whatever you guys want, but I really think this is counter to your objective," he told Spoth. Of course Spoth needed to check with Bair. "You're right, let's go back to the other language," he responded a few minutes later. (Bair would duck even Tim when she wanted to; once her office said she was on a plane when in fact she wasn't.) Bair also wanted a letter from Tim thanking her for assisting our effort; we took to calling this the "great American letter."

  Most frustrating was that after agreeing to provide the help we were seeking, the FDIC came back and increased the amount of capital that it wanted GMAC's bank (Ally) to maintain to far beyond that required of any other bank. The excessive capital requirement would have many negative repercussions. It would reduce GMAC's liquidity at the holding company and therefore its financial flexibility. Perhaps more importantly, it lowered the bank's lending capacity, the opposite of what we were trying to achieve. And it reduced GMAC's profitability and therefore the value of the $13.1 billion of new TARP money that we were preparing to invest. So the FDIC's unreasonable requirement would cost U.S. taxpayers significant money. Whose side was the FDIC on, I wondered. We whittled back the duration of the higher capital requirement a bit but ultimately had to swallow and agree. We had no alternative.

  The political pressure on Team Auto steadily increased. The impacts of Chrysler's restructuring were beginning to be noticed and objected to. For instance, Chrysler had decided to leave behind workers' compensation claims in its Old Carco, which effectively left the state of Michigan holding the bag for more than $100 million in obligations, prompting angry calls from the governor. Another commotion was triggered by a botched announcement by Chrysler about closing eight U.S. plants: it mistakenly gave the impression that an engine factory was being shut in order to move production to Mexico.

  The politics around GM, with its greater size and complexity, not to mention its iconic status, promised to be even more intense. Our long to-do list was full of pitfalls. One day Fritz called me to propose moving GM headquarters from the Renaissance Center to GM's Tech Center in suburban Warren, where we had driven the Volt back in March. The move would cut costs, he said, as well as symbolize the leadership's determination to become more down-to-earth and hands-on. I thought the idea was great, just the kind of action I was hoping to see from Fritz. But when I described it to Deese, he went nuts. "Are you out of your mind?" he said. "Think what it would do to Detroit!"

  Though small in financial implications for the company—the headquarters was worth perhaps $165 million, compared to the $626 million that GM had paid for it just a year earlier—GM's departure would be a major blow to Detroit. In a one-year period, the once proud city that was already suffering with one of the worst unemployment rates in the country, and among the worst murder rates, would see two of its biggest employers go bankrupt, its flamboyant ex-mayor Kwame Kilpatrick convicted of perjury, and its NFL franchise, the Detroit Lions, become the first in football history to go 0–16.

  Deese had some people analyze what a mostly vacant RenCen would mean to Detroit real estate. The estimate: a double-digit hit on already deflated real estate prices. Fritz proposed donating the RenCen to the city—though who would actually use it was unknown.

  Leaving the RenCen made strategic sense, however, and was supported by Harry and David. The Tech Center had lots of empty space and much larger floors, so more departments and people could sit near each other, improving teamwork and communication in a culture that desperately needed more of both.

  The debate, not surprisingly, soon moved beyond Team Auto. Gene Sperling was one of many to fight the move. "It's over for Detroit if you do this," he yelled in a meeting at Treasury. "Don't do this to Dave Bing"—the city's new mayor, a former NBA star and successful auto-supplier entrepreneur. "He's a good man trying to do a good thing." The city relied on GM for $20 million a year in tax revenue, Gene pointed out, and the blowback would be fierce. Deese checked with Larry, who in turn spoke to Rahm, and word came down that the move would be a bridge too far. Fortunately, this unique intervention into a specific GM matter was never leaked to the press, saving us from having to explain how it comported with our policy of letting GM and Chrysler manage their own affairs.

  We'd so far been able to avoid the scalding controversy over executive compensation, but no more. The issue found us as we worked through a $7.9 billion assortment of GM obligations called "other pension and employment benefits." Lumped under this innocuous-sounding label was a dizzying hodgepodge of programs, including pension plans for thirteen "splinter" unions, most of which no longer had any active workers at GM. This
last item alone was costing GM more than $300 million a year.

  But also on the list were pension obligations for senior executives—including $22.1 million owed to Rick Wagoner. Like many big companies, GM provided a so-called supplemental pension for highly paid executives. While GM's basic pension plan for all employees was backed by nearly $100 billion of investments, this "SERP" was not backed by anything except the company's promise to pay. Of course no one—not the company, not the executives, not the high-level retirees—ever imagined that GM could go bankrupt, because in bankruptcy these retirees had the same lowly status as bondholders. In other words, retired GM executives could see this hefty benefit wiped out. We knew we could try to prevent that by making the same argument we'd used to justify funding the VEBA: just as you need workers to make cars, you need executives to run the company, and wiping out the pensions of retired executives would demoralize active ones. But the atmosphere around executive compensation was way too charged for us to take that position.

  This was an issue above my pay grade, so I put it on the agenda for one of our late-afternoon updates with Larry. He pounced on it as if the future of the Obama administration rested on our response. Large reductions would be required, he said; that much was clear. To maintain the fiction that such decisions were being made by GM and not by us, Larry set forth four principles for GM to follow in cutting the $7.9 billion obligation. Perhaps we shouldn't have been surprised when GM came back with a proposal that was blatantly tilted in favor of the executives at the expense of the splinter unions. It took many days and several rounds of discussions to arrive at changes that fit within Larry's dictates. The executive pensions would be cut by two-thirds.