Confidence Men: Wall Street, Washington, and the Education of a President

by Ron Suskind

  And control is the key concept: a condition for a private-equity placement tends to be conditional employment or ouster of a company’s “existing management,” to be replaced by handpicked executives who will have the gumption—some would say ruthlessness—to drive a swift return for the new investors. But as the U.S. economy became less and less hospitable to quick investment returns in the past decade, private equity got busy sharpening its model. Charlie Hallac, a top deputy to Larry Fink at BlackRock and head of the firm’s analytical arm, BlackRock Solutions, distilled it down with precision: “Of every twenty deals, the large, aggressive PE firm expects seventeen of the companies to fail under the added debt. Two have to survive and one has to hit big for the firm to have a fairly strong return on its PE fund. So that’s three out of twenty.”

  It’s hard to find any product, save crack cocaine, that causes ruin for 85 percent of its users. Those unfortunate companies—the seventeen out of twenty—lined up at bankruptcy courts that were thoroughly clogged, since the fall of 2008, had been unable to get “exit financing” to emerge from restructuring.

  Just as Geithner’s stress tests were being designed to stand in for Moody’s, by rating which banks were healthy enough for new investors, the U.S. government formed an in-house private-equity division to examine how it might get a reasonable return on controlling “investments”—don’t call them bailouts—in Chrysler or GM, or both, or let imminent bankruptcy take its course. Washington was becoming Wall Street.

  By the third week in March, there was no clear decision on a path for either Chrysler or GM, but several strong options had taken shape. One was for the government to keep Chrysler alive long enough to arrange a sale to Fiat, with various sweeteners provided by the U.S. government. As for GM, the proposal was for a quick bankruptcy, where the manufacturer would be broken into a bad company, with many of the crushing liabilities taken off the current balance sheet, and a good company, which would swiftly emerge from restructuring with a major government investment that it would, it was hoped, someday repay itself.

  In other words, two private-equity plays, with the government as lead investor and the automakers standing in a rough parallel to Bear Stearns and Lehman: the smaller of the two, Chrysler, first on the chopping block, with its potential buyer, Fiat, hoping for federal funds or guarantees; and GM, like Lehman, generally viewed as too big to fail, as the largest U.S. automobile company in an economy where roughly one in ten workers worked for an automaker or a company that supplied them.

  But while the investment banks were clearly at fault for their own demise—having profited handsomely from the very activities that ruined them—the issues of fault were more complex with the two automakers. Yes, both had been mismanaged in various ways over the past two decades—especially Chrysler, which was bought by Daimler, the German automaker, in 1998 for $36 billion. It limped through nine years of haphazard cost-cutting and shifting strategies until it was purchased in May 2007 by Cerberus Capital, a private-equity firm named, fittingly, for the three-headed dog that in Greek and Roman mythology guards the gates of Hades. The next year, as credit tightened, was indeed hell for Cerberus, which was frantically slashing and shoring up its positions, and looking for investors into the winter of 2008.

  GM was a different story. When Rick Wagoner, a GM lifer, took the reins of the company in 2000, it was suffering from the poor performance of too many brands sold by too many dealerships, and a steep “dependency ratio” of a steadily shrinking number of workers, as a result of layoffs and productivity gains, supporting an ever-larger number of retirees and their benefits. Wagoner accelerated the productivity gains, in the next few years cutting the GM workforce of four hundred thousand nearly in half and bringing the productivity-per-worker of GM plants in line with those from Toyota and Honda. As to the “dependency” imbalances, Wagoner was the lead negotiator on behalf of the Big Three, forging a 2007 agreement with the United Auto Workers on those crushing retiree benefits. With lump-sum payments to the UAW amounting to $32 billion over the next decade, GM would transfer its health care benefits burden to the union to manage, which would release it from the often contentious union-versus-management deadlocks on medical costs and dramatically lighten the company’s burdened balance sheet. As for the actual making of cars, the contract allowed new hires for all the Big Three to be paid about half of the $28-an-hour wage that was mandated in the existing contract—creating a lowered unit cost for production of each car. (Wages were about half of overall costs.) This was matched at GM, as at Ford, with a focus on fewer brands and better built models, which were showing steady traction in quality ratings and the wider marketplace.

  The big difference was that Ford had engineered a $23 billion cash infusion in 2007, when the markets were still strong. It was a coin toss. Many said that it wasn’t necessary and that General Motors, by staying lean, looking to earn its way to economic soundness, had made the right choice.

  Neither company, of course, could have predicted the historic Wall Street meltdown stemming from the mortgage mess and sixty-times-capital leverage and the wild extension of credit, loaded up with exotic covenants and traps and hedges. It was a mind-set that long defined private equity and its debt-driven machinations every bit as much as it did repos and CDOs.

  But the position of Obama’s private-equity officials was, not surprisingly, that Wagoner and GM management were inbred and feckless—the traditional stance of operators in private equity about “existing management” in virtually every industry for three decades. The Auto Task Force’s Wall Streeters were the first and last word on the history, status, and culpability of the troubled automakers. As the internal debate crested toward the Oval Office, the dominant view inside the administration was that the car companies were significantly at fault for their own demise, and that the glories of financial engineering provided the only solutions.

  Just before the scheduled meeting with the president, eight members of the economic team and the Auto Task Force met in Summers’s office to hash out whether Chrysler should be saved or allowed to fail. After a few hours of discussion, Summers asked for a vote. The group was deadlocked. The strong case for liquidation came, surprisingly, from Austan Goolsbee, Obama’s longest-standing economic adviser, who made the case that the death of Chrysler would nourish both GM and Ford with new customers and that both companies, pumping up production to meet heightened demand, would hire many of the ousted Chrysler workers. This could save GM. That analysis, with reams of underlying data, would normally have been sufficient to close a private-equity deal. But, suddenly, without a personal profit motive, Rattner and his Wall Streeters balked at the ouster of as many as three hundred thousand workers, the combined employment of Chrysler and its dependent suppliers.

  Without a definitive recommendation, this group entered a wider circle, as more than a dozen advisers gathered with the president in the Oval Office on the afternoon of March 26.

  Summers, as usual, led with a framing of the issues, until the president cut him off—“I read the memo, Larry”—and the discussion leapt forward to a central question raised in the briefing materials Summers had prepared: If Chrysler were to fail, would GM and Ford in fact profit from feeding off the corpse? Obama was intrigued by this. It was the kind of integrated solution that often caught his eye, where large, dysfunctional systems connect in such a way that one’s adversity can be turned to the other’s advantage. That stance, clever but ultimately of limited scope, avoids trying to alter the forces of rapid change—many of which, in this case, had resulted in a steady and disastrous drift for the country—in favor of looking for opportunities within those trends. Or, in Wall Street parlance, don’t stand in the way of change, but rather use it. When it became clear that Goolsbee was the architect of this proposal, Obama began to look around the room. “Where’s Austan?” Of course, Summers, the master of this debating society, had excluded his old rival from the meeting, prompting a frenzied few moments where staffers raced off to find Gool
sbee and drag him, panting, into the meeting.

  Goolsbee presented his case; Krueger was with him. The analysis was sound. As the two men spoke, Rattner’s co-chairman of the Auto Task Force shook his head. Because the proceedings across two months had been about mostly financial engineering, Rattner’s singular métier, Ron Bloom had been largely outmaneuvered in his leadership of the task force.

  Bloom had precisely the portfolio that was conspicuously absent from the upper reaches of the administration: experience beyond the traditional borders of the professional class. His passport was a collector’s item stamped both by Wall Street, from his decade doing deals for Lazard Frères, and by organized labor, where he’d spent another decade as a senior adviser to the United Steelworkers of America, as a key agent of the restructuring of the U.S. steel industry. While he could be brutally frank about the foibles and delusions of the U.S. labor movement, his view of Wall Street’s financial engineers was merciless. What’s more, he saw a causal relationship between Wall Street’s contemporary practices and the woes of the wider economy, in that the draw of highly remunerative financial engineering—rather than invention, innovation, job creation, and the building of sound products sold at a good price—had fundamentally reshaped the country. When he arrived a few months before, he had expected that Obama would do something to reverse that shift. Now he wasn’t so sure.

  When Goolsbee talked about how Chrysler workers would be “absorbed,” Bloom stepped into the fray.

  “Mr. President, these are the reasons we can’t kill this company. The damage to these communities and people will never be undone,” Bloom said, drawing attention to the chasm between economic modeling and on-the-ground realities.

  Rattner, having said almost nothing up to that point, mentioned that it had been a close call inside the task force—“it’s fifty-one to forty-nine for liquidation” of Chrysler. Obama’s secretary, Katie Johnson, then walked into the Oval Office with a note, indicating that the meeting was over. “I can’t decide the future of the auto industry in twenty minutes,” Obama said, exasperated, and it was agreed that the group would reconvene at 5:30 in the Roosevelt Room.

  Now, in that new venue, more people came, including some of the political and communications teams, adding new voices to the debates on economic theory and practice. After a few minutes, Summers, despite his belief that Goolsbee’s economic modeling was sound, sensed the tenor of the room and moved immediately—ahead of the president—to break the deadlock. “Mr. President,” he said. “It’s a close call, but I think we ought to save them.”

  But it wasn’t Summers’s decision to make. The economists continued to argue, as Obama looked on silently. Goolsbee continued to stress his position. “We need to do this for GM and Ford,” he said. “These people”—meaning Chrysler’s fired employees—“will have job substitution.”

  Bloom, who later commented, “There wasn’t one guy in that room who’d spent any serious time having beers with real workers,” was furious. “It just doesn’t work that way,” he said to the group, his voice rising. “Many of these people are nearing fifty and have been working in the auto business for twenty-five years. They get laid off, they won’t get rehired—by anyone.”

  The discussion now broke beyond the bloodless norm of economic colloquy, of speculative predictions about corporate and consumer behavior with countless livelihoods at stake. While polls showed that the public strongly opposed the bailout of the auto companies, Emanuel said a Chrysler shutdown and economic fallout would have political consequences across the Midwest, and he began reeling off the names of congressmen who had Chrysler plants in their districts. Others, like Axelrod, offered comments about what the president’s actions meant to people in trouble and equally to those watching from the sidelines.

  “The president wasn’t elected to be competent and pragmatic in managing policy debates with economists, who won’t ever admit what they’re doing is often guesswork, with a data sheet attached,” Bloom later said, reflecting on the meeting. “He was elected to act decisively in a way that makes Americans—especially the American worker, who’s been left behind for decades—feel something they haven’t felt in a while, which is hope . . . Hope, because someone, finally, is fighting for them.”

  Bloom felt that this position was finally being heard in the aptly named Roosevelt Room, from someone who had little currency in the Larry Summers Debating Society.

  “Mr. President, I don’t think it’s a close call,” said Press Secretary Robert Gibbs, somewhat tentatively. While clearly not claiming expertise on the forces propelling the economy in recent years, Gibbs, along with Axelrod, was one of the few people present who understood the forces that had propelled Obama to the Oval Office. “What are we going to do when a guy walks out of the plant after we’ve shut it down, and he’s holding a sign that says, ‘I Guess I Wasn’t Too Big to Fail.’ ”

  With that one line, Gibbs had stumbled on a larger set of questions than prospective corporate behavior or gaming the financial system. Whose failure posed a greater threat to the nation: a Wall Street bank or the American worker? And when given a choice, shouldn’t the government side with the powerless?

  Obama had heard enough. “I’ve decided. I’m prepared to support Chrysler if we can get the Fiat alliance done on terms that make sense to us.” Then, nodding to the Wall Streeters and market-oriented economists in the room, he added, “I want you to be tough, and I want you to be commercial.”

  The next day, Rick Wagoner arrived in Washington to work with the Auto Task Force through the “good company, bad company” design for GM’s restructuring. Creditors of GM would be getting a “haircut”; their contracts would have been alterable under a bankruptcy proceeding anyway. Shareholders in the old GM would have to swap their shares for shares in the “good GM,” in the hopes that it would someday succeed. Tens of billions in federal funds would cover the shortfall between assets and liabilities, and give the government effective ownership of the new GM that emerged.

  The GM restructuring plan was discussed only briefly at the auto meeting the previous evening, with just a passing mention of a key feature of the plan: that Wagoner, fifty-six, would be let go. The prevailing, market-centric view in the room—that, to paraphrase Summers, in the U.S. economy “people get what they deserve”—was so unanimous that no one raised an objection. That included the president. He had approved Wagoner’s firing a few days before, on Rattner’s recommendation.

  Of course, what was in store for GM was similar to what the president had expressed interest in two weeks before for Citigroup. He might well have thought Wagoner’s exit offered the appearance of balance, of evenhandedness. Citigroup CEO Vikram Pandit—and the chiefs of other banks that the president hoped would, sooner rather than later, be closed and restructured—would likely be on the street soon as well.

  In a conversation Wagoner had with Rattner two weeks before, the GM chief graciously said, “I’m not planning to stay until I’m sixty-five, but I think I’ve got at least a few years left in me . . . But I told the last administration that if my leaving would be helpful in saving General Motors, I’m prepared to do it.”

  Considering that GM was in the final stages of a massive, eight-year restructuring, clearing away many of the company’s longest-standing problems, Wagoner never expected anyone to take him up on the offer.

  Which is why he was stunned on the morning of March 27 as Rattner, sitting across from him at a table inside Treasury, slowly unsheathed the knife: “In our last meeting, you very graciously offered to step aside if it would be helpful, and unfortunately, our conclusion is that it would be best if you did that.”

  For a moment, Rick Wagoner was speechless.

  He had just become the first CEO in U.S. history to be fired by a president.

  At the same time that Rattner was firing Wagoner, a hundred yards due west, thirteen impeccably dressed men were gathering in the reception room for appointments in the West Wing.

  They w
ere the CEOs of the thirteen largest banking institutions in the United States.

  And they were nervous in ways that these men are never nervous. Many would have had to reach back to their college days, or even grade school, to remember a moment when they felt this sort of lump-in-the-throat tension.

  As some of the most successful men in the country, they weren’t used to being pariahs. They weren’t sure how to act, either, especially in the presence of someone who had power over them, and may well decide to exercise it.

  After all, they were indeed pariahs. The populist backlash against the financial sector—building steadily since September—was finally beginning to cause grave discomfort on Wall Street. As unemployment ballooned and credit tightened, the country began to look inward, toward the origins of the panic and its disastrous outcomes.