Overhaul

by Steven Rattner

  "This won't be a problem," Feinberg said in his heavy Boston accent. "I've got people looking to be paid $100 million!" (He was referring, we later learned, to Andrew Hall, a hugely successful energy trader at Citigroup. In part because of controversy over Hall's pay, Citi ended up unloading its valuable trading unit at a fire-sale price—not a happy outcome for taxpayers, who would end up owning 34 percent of the bank.)

  But in subsequent meetings, as public sentiment toward executive pay became ever uglier, the pay czar began to backpedal. Slowly and steadily, he ratcheted down the amount of "total comp" that he was willing to approve while ratcheting up the percentage of remuneration that could only be paid in stock. By the fall, he would effectively decree that no CEO could earn more than $9.5 million (thereby conspicuously ruling out compensation in eight figures).

  I was disappointed that Feinberg was not more resistant to political influence. While I understood the sensitivity about compensation at companies saved by TARP, virtually none of these businesses were run by the same executives who had gotten them in trouble, and it was penny wise and pound foolish not to hire the very best. In the auto companies alone, the Treasury had invested more than $80 billion. Why should we jeopardize that? I wished Feinberg had been willing to speak up forcefully about the dangers of succumbing to mob psychology.

  As this headache began to develop, GM's head of accounting, Nick Cyprus, won himself a place among the executives who weren't pushing GM forward fast enough. In mid-May, Harry had told Ray Young that we would want the 363 sale to close as soon as the court approved the plan. Based on guidance from Cyprus, Young said that because of the complexity of GM's bookkeeping, there was no way the company could do this other than at the end of a calendar quarter—in this case, September 30.

  Harry went ballistic. "How much revenue do you think you miss every day you're in bankruptcy?" he thundered, knowing that the answer was $100 million. "There isn't a problem in this company that can't be solved by the billion-plus dollars you'll lose if you don't move more quickly!" He demanded a list of all the obstacles to closing on the day of the judge's decision. When he and Matt received it, they worked through them one by one to eliminate them as reasons.

  Meanwhile, Fritz was taking a different approach with Cyprus, trying to walk him back gradually from his fixation on September 30, all the while making him believe it was his idea. Over several days, Fritz persuaded Nick that the deal didn't have to be at a quarter's end—maybe a month's end would do, maybe August 31. Next he persuaded him that it didn't need to be August 31, but maybe July 31. In due course, Nick agreed that with a bit of cooperation from the SEC (which was forthcoming), the July 10 date Harry and Matt had set was achievable. Watching this cajolery, I concluded that Fritz and Harry were both right. Fritz understood GM's culture and the need to approach Cyprus delicately. But Harry was also right that this kind of horse-whispering to get things done shouldn't be needed at a world-class company.

  I made much faster progress with Ed as we teamed up to recast the General Motors board. Back on March 30, our announcements had included the fact that GM would be asked to replace a majority of its directors. I had no magic in picking that formulation; I had cribbed it from an earlier decision to "request" that Citi replace a majority of its board. After providing seats for Ed, the Canadian representative, and the UAW's nominee, we still had four slots to fill.

  Ed and I are both strong-willed, yet we sorted through the candidates in a spirit of collegiality. He mainly wanted ex-CEOs with whom he'd had enough personal experience to be confident of their strengths; I wanted to bring the discipline of private equity to GM and had my favorites from that world. We made a list of candidates and split up the calls. With only one exception, a CEO who had just taken a competing board assignment, all of our targets agreed. It was clear from the conversations that these people, like Ed, viewed accepting a GM board appointment as a form of public service. I became confident that as Team Auto stepped back, the new directors would step up.

  From the corporate world we chose Robert Krebs, the former chairman and CEO of Burlington Northern Santa Fe, a giant railroad on whose board Ed had served. When I met Krebs, he struck me as a lot like Ed: a laconic, no-nonsense clear thinker. Some months later, Warren Buffett bought the company that he had helped build. Also from the corporate world came Patricia Russo. She'd had a rollercoaster tenure as CEO of Alcatel-Lucent, but AT&T had been a major customer and Ed knew her well.

  We recruited Dan Akerson, a managing director of the Carlyle Group, one of the biggest private equity shops. Dan had attended Annapolis and was still Navy-tough. Ed and I had each gotten to know him a bit because he had alternated stints in private equity with work as a top executive in the telecommunications industry. Dan was also direct and honest. Rounding out the foursome was David Bonderman, a friend of mine for more than twenty years. A lawyer turned investor, David had helped manage the fortune of Texas oil scion Robert Bass before cofounding TPG, now one of the world's largest and most successful private equity firms. He was razor-smart and one of the best investors in the world. Neither he nor Akerson suffered fools lightly—a big plus, I thought, for incoming directors of GM.

  I knew nothing about Canada's choice, a business school dean named Carol Stephenson, but was delighted when the autoworkers chose Steve Girsky. This was a nice consolation for my having been unable to enlist him for Team Auto. Steve had lived and breathed the car industry for decades and was ecstatic to be asked to serve. When Gettelfinger put Steve on the board, his instructions to him were clear: "You are to worry about the stock price," on which a large proportion of the autoworkers' future health benefits would now depend. Our efforts to align the workers' interests with the company's by having the VEBA hold common stock had paid off.

  The federal bankruptcy court in Manhattan was strictly off-limits to us while the case was pending. Under the law, anyone who showed up was eligible to be called to the witness stand. To make our case, we sent flocks of Treasury Department, General Motors, and outside lawyers, and just two witnesses: Harry and Fritz. The rest of us were relegated to tracking the proceedings via phone calls during breaks and terse text messages from the lawyers.

  Not surprisingly for such an enormous case, opposition to GM's bankruptcy plan was legion. It included a handful of renegade bondholders protesting the sale of assets to Shiny New GM, product liability and asbestos claimants whose suits were being relegated to Motors Liquidation Company, disenfranchised dealers, splinter unions, and scores of other parties who thought themselves aggrieved. About two dozen law firms came out of the woodwork to file some 850 objections.

  The case had fallen to Judge Robert Gerber, who had built a formidable reputation in the small, intense world of the bankruptcy bar. He was been chosen by lot for this assignment, as was the custom, and yet he seemed born to handle GM. Judge Gerber thrived on big cases and tight deadlines, and was known for his willingness to run important hearings late into the night to make sure all sides had their say, and then to deliver a balanced, well-written opinion the very next day.

  Fritz and Harry prepped intensively for their testimony, but that didn't cramp Harry's style. A cardinal rule in giving a pretrial deposition is never to get into a debate with the opposition lawyer; the risk of stumbling or saying something wrong is too high. Harry, being Harry, not only violated that principle but even turned the tables, questioning the questioner. A Cadwalader lawyer on hand couldn't believe what he was hearing. "Harry is scary," he texted us.

  Harry's court appearance, on July 1, was only slightly more restrained. The e-mails from the courtroom came fast and furious:

  9:48 A.M.: "Harry is the toughest witness I've ever seen. It's scary. I would not want to cross him."

  9:49 A.M.: "Harry is an animal on the stand."

  10:08 A.M.: "He's continuing to do well. The judge seems to like him and is listening attentively."

  10:59 A.M.: "First tort guys are done. They didn't lay a glove on Harry."

&nb
sp; 12:12 P.M.: "Splinters are done ... we're really rolling."

  12:28 P.M.: "Harry has been one of the most phenomenal witnesses I've ever seen. I feel very comfortable about the overall sale."

  True to his reputation, Judge Gerber wrapped up the hearing before July 4. Hoping for a positive outcome, we prepared to close. But hiccups occurred, some typical of complex transactions and others emanating from GM's lack of rigor. For example, GM projected that it would need $1.5 billion to make up for lost sources of dealer financing outside the United States. To arrive at that figure, GM simply assumed it would lose a certain percentage of its funding sources in those locations. The company had made no effort to check its assumptions, had not so much as called its offices in those countries. Our finance company guru Brian Stern checked with various financing sources and concluded that only $200 million of funding would be lost.

  A more important example of the lack of financial rigor surrounded the decision of how much financing to provide GM as it exited bankruptcy. On Sunday, June 28, Brian Osias (who had joined the GM team to help with the burdensome workload) and Sadiq Malik met with their counterparts in New York to try to resolve how much capital GM would need. A month earlier, before the bankruptcy petition was filed, GM had estimated that its total peak capital need would be $59 billion. However, over the ensuing four weeks, GM's cash flows had been better than expected, in part because again, as with Chrysler, consumers showed more loyalty than we had budgeted. Nonetheless, GM kept its need at $59 billion by assuming that whatever outperformance it had achieved over the previous few weeks would be offset by underperformance later in 2009.

  Harry was unyielding. Over the July Fourth weekend, lawyers for Treasury and GM got into a tussle over a small but important aspect of how the new loan agreement would be structured. To an e-mail list of sixty-four participants, most of them lawyers, Soo-Jin Shim, a Weil Gotshal attorney representing GM, said that the closing would have to be delayed while the issue was resolved. Harry didn't hold back. "Soo-Jin, I am stunned that you would so offhandedly threaten the closing for which we are all working so hard," he wrote at 8:24 P.M. on July 4, while most Americans were concentrating on barbeques and fireworks. "To be clear, this will not delay [the] closing. Nor will anything else." He went on in the same vein for several paragraphs, also pointing out that he had been trying to reach "GM people" all afternoon to discuss the matter, with no success. To Harry, it was indicative of GM's problems: he and hundreds of others were working around the clock to save the company, yet most of the management team had turned off their cell phones at a critical juncture in the deal.

  Judge Gerber not only worked on his opinion over the weekend, he delivered his ruling on July 5—a Sunday. It gave us a complete victory, clearing the way for Shiny New GM to emerge from the carcass of Motors Liquidation Company by July 10, the seemingly impossible deadline we'd set.

  That forty-day limit set by Harry and Matt turned out to have been a deciding factor, the judge's two written opinions in the matter made clear. The primary objection from the bondholders had been that the sale of GM's best-performing assets to a new entity gave them a raw deal. They wanted GM to go through a conventional Chapter 11 restructuring under the supervision of the court, which they thought offered creditors a fuller, fairer recovery and could be completed almost as quickly as a 363 sale. With powerful eloquence, Judge Gerber rejected this argument and reminded the creditors that they were only bit players in a game of enormous stakes:

  This case involves not just the ability of GM creditors to recover on their claims ... it involves the interests of 225,000 employees (91,000 in the U.S. alone); an estimated 500,000 retirees; 6,000 dealers and 11,500 suppliers. If GM were to have to liquidate, the injury to the public would be staggering. This case likewise raises the specter of systemic failure throughout the North American auto industry, and grievous damage to all of the communities in which GM operates. If GM goes under, the number of supplier bankruptcies which we already have ... is likely to multiply exponentially. If employees lose their paychecks or their healthcare benefits, they will suffer great hardship. And states and municipalities would lose the tax revenues they get from GM and the people employed by GM, and the Government would be paying out more in unemployment insurance and other hardship benefits. Under these circumstances, I find it hardly surprising that the U.S., Canadian, and Ontario governments would not stand idly by and allow those consequences to happen.

  Addressing the urgency of the case, the judge agreed with Harry and the Treasury legal team:

  Anyone with a knowledge of Chapter 11 cases ... can well understand why none of Harry Wilson's advisors thought that GM could survive a normal plan confirmation process ... The court fully understands the unwillingness of the Government to keep funding GM indefinitely—especially to await the resolution of disputes among creditors trying to maximize their recoveries ... The problem is that if the 363 Transaction got off track ... customer confidence would plummet; and that the U.S. Treasury would have to keep funding GM while bondholders (and, then, perhaps others) jousted to maximize their individual incremental recoveries. The Court fully takes Harry Wilson at his word.

  July 5 was my birthday, as it happened, but Harry and Matt certainly had reason to celebrate too.

  The ink on Judge Gerber's signature had barely dried when Congress started undercutting the deal. On July 7, the House Appropriations Committee passed a spending bill that included an amendment by Ohio Republican Steve LaTourette that would reinstate dealer franchises canceled during the GM and Chrysler bankruptcies. Brian Deese and the legislative affairs people at Treasury believed the bill was headed inexorably toward passage into law.

  Deese's summer had been remarkably successful up to that point. While the rest of Team Auto had been consumed with GM and Chrysler, he'd virtually single-handedly taken on Cash for Clunkers, the sales incentive program that we'd added to our charter almost accidentally in March. He faced a difficult set of negotiations, navigating among environmentalists who wanted the program to favor small cars, Detroit boosters who wanted the Big Three to be the principal beneficiaries, and the executive branch, which wanted to be sure that no international trade rules were violated by having legislation that blatantly favored Detroit.

  By mid-May, Brian had succeeded in getting the House and Senate to add $1 billion for the program, now officially known as the Car Allowance Rebate System, onto a supplemental appropriations bill for the Iraq and Afghanistan wars. A month later, the President signed it into law. In the end, Deese had maneuvered the new law to emphasize the scrapping of SUVs and trucks, a win for Detroit, because most were American brands, likely to be replaced with American brands, and a win for environmentalists, because SUVs and trucks had the highest emissions.

  He next pushed the Department of Transportation to develop the necessary implementation policies and procedures. What, for example, would be the steps for making sure the clunkers were truly junked? Using the Team Auto approach of daily early-morning conference calls, in just over three weeks—a nanosecond by bureaucratic standards—Cash for Clunkers was up and running. It was an extraordinary success, far beyond anything we had imagined. The first $1 billion was exhausted in less than a week, and the White House scrambled to persuade Congress to appropriate more. Cash for Clunkers became an all too rare example of what can happen when a smart and energetic staffer develops a good idea and runs with it.

  In the midst of pushing through the historic GM bankruptcy, Matt and Harry remained attentive to Delphi—including midnight phone updates during which Harry would occasionally fall asleep—and managed to put the parts company onto a glide path toward successful resolution. On the same day that GM filed for bankruptcy, Delphi announced an agreement with GM under which the automaker would buy four key factories from Delphi, along with Delphi's global steering business. This would give GM access to the critical parts that had allowed Delphi essentially to extort billions of dollars of financing from GM over the years. The rest of
Delphi would be bought by a private equity firm, Platinum Equity, that had made a specialty of troubled investments.

  Under bankruptcy rules, the agreement among GM, Platinum, and Delphi was subject to higher bids from others, including the existing debtor-in-possession lenders, who had been negotiating toward a separate, but ultimately unsuccessful, agreement in May. In late July, the existing lenders decided to trump the agreement by credit bidding—basically, turning in their claims for the equity in Delphi. While the DIP lenders tried to portray this as a victory over GM and the government, in truth we didn't care who got Delphi as long as GM could extricate itself from the continual drain on its finances and assure itself of a reliable supply of parts; we had actually proposed a very similar deal to the lenders way back in April. The successful bid by the DIP lenders allowed GM to accomplish these objectives. And the transaction ended up being profitable for all the buyers, including GM. For an investment of $2.3 billion in the new Delphi, it had—as of May 2010—a stake with a value estimated by JPMorgan at $4 billion.

  Still, there was no way for Deese, or anybody else, to contain the politicians' anger over dealer closings. It simmered all summer, erupting periodically like a geyser fed by a vast underground reservoir of superheated water. Hapless members of Team Auto would be summoned to Capitol Hill at such times to get browbeaten by legislators or their staffs. In early July, it was House Majority Leader Steny Hoyer's moment to vent. A tall, jowly, gravel-voiced Democrat who represented an area of Maryland just south of D.C., Hoyer had been among the most persistent critics of the dealer-reduction plans. Among his constituents were two particularly visible and unhappy dealers who each operated both GM and Chrysler stores, Tammy Darvish and Jack Fitzgerald. When we asked GM and Chrysler to fill us in, we learned that the franchises more than deserved to be closed. Fitzgerald, for example, had sold only around three new Chryslers in 2008.