Overhaul

  Board meetings changed too. They ran hours shorter, wrapping up by 11:30 A.M. so directors could catch planes home in the early afternoon—very much as Whitacre had described to me over dinner in Washington back in May. He seemed to know what information the board wanted to see, and they seemed to agree with the majority of his decisions. Whitacre also made it clear he wasn't looking for or encouraging much oversight, even from Bonderman and Akerson, who'd been such thorns in Fritz's side. Some directors, recalling the confrontations with Fritz, laughed privately that the board was now almost as deferential to Ed Whitacre as the prebankruptcy board had been to Rick Wagoner. In the minds of the directors, they didn't have much choice: Whitacre was the only man to do the job, and he was only going to do the job on his terms.

  The simplicity mantra didn't always go over well with battle-scarred GM veterans, however. Just before he was named CEO, Whitacre attended a town-hall-style meeting at the Tech Center in Warren. He told the engineers that the job of GM was "to sell more cars and more trucks for more money. Period." This sounded simplistic to the engineers, and they bombarded him with questions on process and protocol, which he batted away. By the time he addressed another gathering of engineers a few months later, he had sharpened his pitch: "If your bosses are asking you to do something that is not about selling more vehicles or fixing quality, question what they are doing." The engineers were pleased; this was the sort of simplicity mandate they could relate to.

  From the perspective of selling cars, Whitacre's timing could hardly have been better. Not only did the recession seem to be ending, but on January 21, four days before his CEO status was made permanent, Toyota found itself in the largest product safety scandal in its seventy-seven-year history. It recalled millions of vehicles and suspended sales and production on more than half its U.S. models, including its best-selling Camry, because of faulty accelerator pedals that could stick, causing uncontrollable acceleration.

  The problems marred the sterling reputation of the world's largest automaker. By February, Toyota executives were facing congressional hearings and grand jury inquiries as consumers came forward with heart-wrenching tales of vehicles accelerating out of control and killing loved ones. All three Detroit carmakers benefited from Toyota's crisis: Ford sales jumped 43 percent in February, and GM's rose 12 percent. Chrysler's also rose, just 0.47 percent, but its first monthly increase since 2007. More importantly, the Detroit automakers continued to pull back on rebates and low-interest offers—narrowing, at least slightly, the incentive gap with Toyota.

  Two problems that had beset his predecessors remained intractable for Whitacre. Opel was still losing money—$500 million in the first quarter of 2010 alone—leaving unanswered the question of whether the board had been right to keep the European operation. Not only was GM obliged to pay back the bridge loan Germany had provided, but also the German government declared it would offer no longer-term support. This meant GM was now on its own to face restructuring costs estimated at 3.3 billion euros. Whitacre believed that the new labor agreement in Germany would cut the losses in half, and if the German government continued to play hardball, production could be moved to places like Poland to further reduce costs.

  Dealers posed a more difficult problem. Their proponents and lobbyists on Capitol Hill had drowned out the automakers' arguments as well as a firm declaration from the White House: "The Administration strongly opposes the language in the bill that attempts to restore prior Chrysler and General Motors franchise agreements," it began. In December, as part of a $1.1 trillion spending bill for 2010, the House and the Senate tucked in a provision guaranteeing to every dealer closed as a result of the bailout the right to seek reinstatement through arbitration—laborious and distracting for the companies. Sergio immediately threatened to sue, though the new law would have a far smaller impact on Chrysler, which had cut off unwanted dealers so quickly and brutally that it would end up having to reinstate only a handful.

  General Motors, however, was paying the price for having been considerate. It had given franchisees eighteen months to wind down, so almost all of the 2,000 dealers slated to be closed were still in business. Whitacre had no choice but to relent. In March, GM said it would retain some 660 dealers it had initially planned to shut down. By August, another 65 had gotten a reprieve.

  This left the domestic dealer network at 4,500, well north of the 3,600 that GM and Team Auto had concluded, a year earlier, made sense. Officially, Whitacre maintained that a bigger network would be good for business: more dealers should equal more sales, especially in rural and suburban areas. I wasn't so sure. If more dealers were better than fewer, then why weren't the transplants seeking to add more dealerships? I had heard many industry experts emphasize the need to reduce the number of stores. And in our conversations, Fritz had agreed.

  Any criticism of Whitacre's management shakeup or of GM's ongoing problems was muted by the company's better-than-expected performance. It posted its first quarterly profit in almost three years in the first quarter of 2010, exceeding Team Auto's projections handily. Its net income of $865 million wildly outpaced a first-quarter 2009 loss of nearly $6 billion. Revenue jumped 40 percent globally, despite the elimination of the Saturn, Hummer, and Pontiac nameplates.

  Business had turned around so demonstrably that by spring Whitacre was having regular conversations with Ron Bloom about a public offering. The goal of many in the Obama administration, including Larry Summers, had long been for a stock sale in late 2010—not coincidentally around the time of the midterm elections. Now Whitacre embraced the idea. He felt an offering that got the government back some more of its money and reduced its ownership stake would ease animosity among the car-buying public toward "Government Motors." This animosity wasn't just in GM's imagination: Ford had reams of data showing that consumers were considering its Focuses and Explorers because Ford was the sole Detroit automaker that hadn't taken a handout.

  Looking toward a November IPO, the U.S. Treasury issued a public request on May 10 seeking a bank to serve as GM's underwriter. This was a plum opportunity in the wake of the financial crash. Not only did GM have a shot at becoming the largest IPO in history, but in the future it would also need lines of credit, revolving loans, and other services. All the top banks threw their hats in the ring, each dispatching to Washington on May 19 a team of no more than five people and a pitch book of no more than twenty pages, as the Treasury had carefully specified.

  Ordinary sales teams these were not: Bank of America and Morgan Stanley brought their CEOs, Goldman Sachs brought its president, and Citi had its CEO, Vikram Pandit, call in. Each presentation had an unabashedly patriotic tenor, emphasizing what a great advertisement for America it would be to cap a fast, successful government bailout with a triumphant return to the public markets.

  As might have been expected, Jimmy Lee's pitch took the cake. A year earlier, during the Chrysler talks, he had angrily declared that he would steer clear of doing business with the government and that JPMorgan was "making a list" of industries, like autos, that it would avoid in the future because of government interference. But a brightening economy, an uptick in car sales, and an auto industry newly freed of leverage and legacy costs had prompted Jimmy to reconsider. To underscore the importance of the deal to JPMorgan, he'd brought his CEO, Jamie Dimon, down with him on the Acela.

  GM's IPO would be "a historic day for America," Jimmy told the assembled Treasury and GM officials. The bank's pitch book, its cover emblazoned with "The Best Car Wins," included a copy of an old Wall Street Journal article about JPMorgan's funding of a GM deal in 1920. Jimmy also volunteered that the bank would be willing to take its fees in GM equity. And to anyone who was interested, he showed pictures on his BlackBerry of his new $110,000 cobalt blue ZR1, a top-of-the-line Corvette. He'd bought it to demonstrate his commitment to the product.

  Bloom did not miss the opportunity to tease. "Oh, you like us now," he said to Jimmy. Others asked if Jimmy would like to visit the old rooms at Tre
asury where he and I had butted heads.

  In the end, GM picked JPMorgan and Morgan Stanley as co-lead managers. The Treasury drove a hard bargain on fees. On a mega-IPO, the banks would typically keep 2 to 3 percentage points of the "gross spread"—the difference between the public offering price and the price per share paid by the underwriter. But Bloom and his team argued that the chance to be part of this once-in-a-lifetime deal warranted a big discount. The two banks agreed to a 0.75 percent gross spread after another bank, Goldman Sachs, offered to work for that low fee.

  On August 12, just days before an expected filing of an initial public offering prospectus, GM threw its throng of observers and stakeholders a curve. In the middle of a second-quarter earnings call, whose good news had been thoroughly previewed by Whitacre the previous week, the chief executive suddenly announced that he would be stepping down on September 1 and that director Dan Akerson would replace him. The analysts and reporters were stunned. Wild rumors circulated—had the government pushed out the tall Texan just as it had Rick Wagoner?

  The board had been just as surprised a few days earlier when Whitacre had informed them in the executive session portion of its regular monthly meeting that he was quitting. The only clue the board had received was in the advance agenda: extra time had been allotted for the executive session. The directors were far from thrilled. Whitacre wasn't perfect—he hated detail work and wasn't regarded as a genius—but his decisiveness and emphasis on speed had been just what GM needed. A brief effort was made to talk Ed out of his decision, but Ed was not a man who changed his mind.

  Several directors felt left in the lurch. Just as when they had asked Fritz to leave in late 2009, GM had no internal candidates (this was one of many management problems that remained to be addressed). With the IPO looming, there was no time to organize and conduct a search. Once again, the board would have to look among its members for a chief executive.

  Three potential candidates—Akerson, Russo, and Girsky—were asked to step out of the room while the others deliberated. ("We should ask everyone" if they want to be considered, Kathy Marinello said, in one of her usual half-baked comments, annoying the other directors.) They narrowed the list quickly. Girsky was not seen as a plausible replacement—no real management experience. And while Russo had done well as GM's lead director, her past performances as a chief executive had been rocky. That left Akerson.

  In my view, he was the right choice. Akerson and Whitacre possess the same kind of toughness and decisiveness. Akerson, younger and more energetic, will likely have even less patience for the old GM ways than Whitacre did. Once he became so impatient with doctors who were treating his gallbladder in a German hospital that he removed the tubes from his arm, checked out, and flew back to the U.S. On top of that determination, he brings the private equity sensibility I value highly.

  My former Team Auto colleagues David Markowitz and Sadiq Malik had been Akerson fans since he told them at their first meeting how much he had hated losing a golf game the day before on the eighteenth hole. "He was more passionate about a round of eighteen than most of the employees at GM were about their company," David remarked to Sadiq after the meeting.

  His sole potential disadvantage is age. At sixty-one, Akerson may wish to serve only for a few years, which would necessitate yet another change at the top. Despite this, he might well have gotten the job even if the board had conducted a full-blown outside search. His name, after all, had been floated twice before, when Fritz was fired and again at the beginning of the abortive search to replace Whitacre when he was still interim CEO. On both occasions Akerson had declined to be considered. But by spring, he was kicking himself for letting the opportunity slip. He had come to realize that he'd much preferred his years as a chief executive at General Instrument and other companies to being a private equity guy. A former naval officer, he also saw becoming CEO of General Motors at this crucial point in history as an opportunity for public service.

  Choosing GM over Carlyle entailed a major financial and personal sacrifice for Dan. It meant walking away from a massive amount of Carlyle equity for lonely, grueling workweeks in Detroit, with weekend commutes home to Virginia at his own expense. Though Dan took the job without knowing how much he would be paid, the compensation was sure to be low by CEO standards. Whitacre's compensation had been limited to $9 million a year, mostly in the form of stock, placing him in the bottom 25 percent of comparable CEOs, and the same government strictures on executive pay would apply to Dan.

  As glad as I was to see Akerson step up, I shared the board's disappointment with Whitacre. He had promised to see GM through its initial public offering, which the directors took to mean that he would stay until at least mid-2011. (A company can't market an IPO if it knows of impending management changes, and in any event, the board would want to mount an orderly search for a more permanent chief.) Instead he forced GM to scramble to appoint its fourth CEO in less than eighteen months. If anyone had asked Jack Welch, I'm sure he would have advised against this rapid shuffling of CEOs.

  I was also disappointed when I heard that Akerson would become chairman as well as CEO on December 1. Nothing has occurred to change my view that "best practices" in corporate governance means separating the chairman and chief executive roles. And if ever a company needed to hew firmly to best practices in corporate governance, it is the one that owes its existence to the support and goodwill of the American taxpayer: shiny new General Motors.

  * * *

  EPILOGUE

  SHINY NEW GM celebrated its first birthday on July 10, 2010, a month after the first anniversary of the reconstituted Chrysler. As hard-nosed realists, all of us on Team Auto have been, for the most part, reassured and relieved by the generally good news from Detroit since those important anniversaries. General Motors and Chrysler continue to pay their workers and are gradually adding shifts as they sell more cars. The unemployment rates in Michigan, Indiana, and Ohio, while still painfully high, have begun to edge down. We remain proud of the work that got us to this point, a mission that was not designed to further a particular economic theory, serve anyone's ideology or political party, or make anyone a buck (beyond the companies and their workers). So devastating were the possible consequences of this crisis that we were impelled to push ourselves, to question and requestion, to look at each decision from every possible angle and perspective. We were scared enough to stay focused on one and only one objective: getting it right.

  To be able, on August 18, 2010, to pick up General Motors's newly filed 734-page IPO prospectus was for me an emotional moment. This thick legal document symbolized, like no other development thus far, the transformation of so-called Government Motors back into General Motors. Page after page of figures told the story of a remarkable turnaround. The decision to move forward with this public offering was the strongest and most telling indication that the U.S. Treasury will recover most if not all of the $82 billion the American taxpayer staked on overhauling Detroit.

  Let's pause to run the numbers. Here's where the $82 billion went:

  Reason Company/Program Amount Invested (billions)

  Emergency funding before restructuring GM $19.4

  Funding at behest of Team Auto for reorganization under bankruptcy GM $30.1

  Emergency funding before restructuring Chrysler $4.0

  Funding at behest of Team Auto for reorganization under bankruptcy Chrysler $8.1

  Emergency funding in January 2009 to allow Chrysler to continue making auto loans Chrysler Financial $1.5

  Emergency funding in December 2008 GMAC $5.91

  Funding at behest of Team Auto to recapitalize the bank GMAC $11.82

  To maintain consumer confidence as GM and Chrysler reorganized under bankruptcy Warranty Program $0.6

  To strengthen supply chain as GM and Chrysler reorganized under bankruptcy Supplier Support Program $0.43

  TOTAL $81.8

  1. Includes $0.9 billion loan to GM for GMAC rights off ering on January 16, 2009.


  2. Includes $0.5 billion loan to Chrysler for GMAC loss share agreement.

  3. Actual size of the Supplier Support Program was $5 billion. Given the general success of the program, a much lower amount was needed to stabilize the supplier base.

  Assessing what the taxpayer has gotten in return is more complicated. GM's value won't become clear until after the IPO, when the stock will be publicly traded and the market sets the price. As of August 2010, the best proxy is the trading level of old GM bonds, to which we grudgingly allocated 10 percent of the equity of Shiny New GM (along with some warrants). By that measure, the value of Treasury's 60.8 percent ownership of GM is approximately $31 billion. Adding to that the $6.7 billion of debt that GM has already repaid, and $2.1 billion of GM preferred stock, brings the total to nearly $40 billion.

  This is $10 billion more than the $30 billion the United States injected into GM at the time of its bankruptcy fi ling as a result of Team Auto's work. But it's roughly $10 billion short if you also count the emergency $19.4 billion spent by the Bush and Obama administrations to prop up GM before Team Auto came on the scene. I view that $19.4 billion as lost money—a cost of the delays due to the presidential election, the transition, and the doctrine of "one President at a time."

  Question marks remain regarding the smaller but still significant commitments of taxpayer dollars to Chrysler and GMAC. I've described the heated debates in the West Wing and at Treasury about Chrysler; Team Auto always knew that asking the Treasury to infuse another $8 billion into this hollowed-out, North-America-only player was a risky call. I was delighted when Chrysler notched two successive quarterly operating profits in the first half of 2010. But until we see sales results from new products due to appear in dealers' showrooms in late 2010 and beyond, we cannot know whether our surgery saved the patient.