Hennessey agreed to see what he could do about the Energy Department loans.
In the weeks leading up to both parties’ national conventions, the newly aligned Detroit Three launched an aggressive grassroots campaign to convince Congress to fund the program as quickly as possible. They had dealers write letters to their representatives and asked suppliers to work their own connections. They hit both conventions hard, passing out literature and talking up delegates. Their message was clear: “The road to the White House goes through midwestern auto states.”
After securing the nomination of his party on August 28, Obama expressed his support for the loan program. He not only called for funding it, but also suggested doubling the amount authorized by the legislation from $25 billion to $50 billion. McCain, who became the Republican nominee on September 4, was less receptive. McCain had developed a deep disdain for the American automobile industry during his years as chairman of the Senate Commerce Committee, and he was not convinced the American taxpayers should be helping an industry that had done so little to help itself.
But after the collapse of Lehman a few days later, the Detroit Three were not the only ones pushing Congress to fund the Energy Department program. Some of the biggest banks on Wall Street began quietly lobbying lawmakers on their behalf. They were heavily exposed, particularly with Ford, and wanted Washington to shore up their investments. The automakers kept up the pressure, too. On September 16, Bill Ford traveled to Washington to meet with the House of Representatives’ automotive caucus. It was a standing-room-only gathering in one of the side chambers off the House floor that including more than twenty members of Congress, along with numerous aides and advisers. Ford explained why his company needed access to the loans and needed it now. Lawmakers from states with Ford factories began pressuring McCain to throw his weight behind the Energy Department program, too. He finally relented.
With the support of both presidential nominees, Congress finally approved funding for the $25 billion loan program on September 29. But it would be nine more months before any of that money was actually allocated to an automaker.
Ever since General Motors netted some $14 billion by selling a majority stake in its finance company to Cerberus Capital Management back in 2006, Ford had been under constant pressure from Wall Street to do the same with its lending arm. But Bill Ford and Alan Mulally were convinced that Ford Credit’s real value lay in its ability to support the sale of the automaker’s cars and trucks. Now, with the global credit markets dried up, Ford’s strategy looked downright prescient. In the wake of Lehman, banks began abandoning the automobile industry. Customers—even those with good credit—could not get loans or leases. Dealers could not get the financing they needed to cover their inventory. This began to have a real impact on Ford’s competitors. But since Ford still owned its own finance company, it could continue to provide credit to dealers and customers alike—as long as it still had money to lend.
But by the end of September, keeping Ford Credit funded was becoming nearly impossible. Mulally appealed to Bernanke and Paulson, asking them to do whatever they could to restore liquidity to the credit markets. Ford also sent Neil Schloss—who had been promoted to treasurer back in 2007—to Washington to see what he could shake loose. Schloss was surprised to find receptive audiences at both the Federal Reserve and the Treasury Department. The nation’s central bank was preparing two important programs designed to provide credit to companies of all types.*
The first, known as the Commercial Paper Funding Facility, allowed businesses to borrow money from the Federal Reserve using secured or unsecured commercial paper as collateral. When it began accepting applications on October 20, Ford Credit was one of the first in line. Ford’s finance company signed up to sell as much as $16 billion worth of asset-backed short-term notes to the Fed.†
The second program, known as the Term Asset-Backed Securities Loan Facility, or TALF, was announced on November 25. It was designed to restore liquidity in the asset-backed securities market. The TALF program did not begin backing investments in securities until March 2009, but once it did, Ford was ready. Over the next twelve months, Ford Credit issued more than $12.5 billion in TALF-eligible bonds. Both foreign and domestic companies were eligible for TALF backing, and most of the Japanese and German automakers also issued TALF-eligible securities.
These programs were instrumental in keeping Ford Credit funded and allowed the automaker to continue to support its dealers and customers with loans and leases throughout the crisis. It would give Ford a real edge over General Motors, which no longer owned its own credit company, leaving its dealers and their customers at the mercy of increasingly stingy banks.‡
But these Fed programs were small change compared to the unprecedented bailout of Wall Street that Congress authorized on October 3. Known as the Troubled Asset Relief Program, or TARP, it gave the Treasury Department $700 billion to purchase so-called toxic assets from the nation’s failing financial institutions. It also allowed the federal government to purchase equity in these firms to bolster their finances and protect the financial markets.
Detroit wanted in on it, too.
On October 13, GM CEO Rick Wagoner met with Hank Paulson in Washington and told him that General Motors could collapse as early as November 3—the day before the presidential election—if it did not receive financial aid from the federal government. He asked for $10 billion of the $700 billion Congress had just authorized to save the banking sector. The Treasury secretary said no. He believed GM was trying to blackmail the federal government by threatening to bring down the economy on the eve of the election. However, after the meeting, Paulson ordered his aides to begin putting together a contingency plan to help the automaker just in case Wagoner was telling the truth.
With less drama, Chrysler was making it clear that it, too, was running out of money. Like GM, it wanted a piece of the TARP pie.
Ford now found itself in a difficult position. The automaker had gotten what it most wanted from Washington. Congress had funded the Energy Department loans, and the company was confident it would be able to borrow several billion dollars through that program to help cover the cost of its ambitious retooling plan and other capital expenditures that its product renaissance would require. The Federal Reserve programs would keep Ford Credit funded for the foreseeable future. Ford’s cash position was still precarious, but Mulally believed the company could now make it through the crisis without additional government aid—provided that neither GM nor Chrysler went into an uncontrolled bankruptcy. If that happened, all of Ford’s bets would be off. Ford wanted the government to do whatever it could to keep its competitors afloat, but it was also increasingly wary of any moves by Washington that would leave it at a disadvantage. Ford’s solution was to ask for additional help for the entire industry—direct aid to GM and Chrysler and guarantees that Ford could get the same consideration if it needed it down the road.
Ojakli shared Ford’s concerns with Hennessey and other administration officials. They said the White House was willing to allow the automakers to divvy up the $25 billion Congress had authorized for the Energy Department loan program and use that money for general operating expenses to see them through until January, when the next administration could decide what to do about the industry. Ojakli welcomed this but asked if the president would consider giving the Detroit Three access to the TARP fund as well. Once again the answer was no.
So Ford turned to Congress. Lawmakers were focused on the banking crisis and the election, but Ojakli called in some favors and managed to schedule a meeting with Pelosi and Senate Majority Leader Harry Reid for November 6. General Motors and Chrysler found out about it and asked if they could come, too. Since Ford was asking for aid for the entire industry, Mulally agreed. First he arranged a private meeting with Wagoner, Nardelli, and UAW president Ron Gettelfinger.
“We need to present a united front to the Democratic leadership,” Mulally told them. “Let’s work together.”
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nbsp; The other Detroit CEOs no longer thought of Mulally as a capering bumpkin. He had proven himself to be a worthy competitor—and an important ally in their own fight for survival. Together they drafted a paper explaining the importance of the domestic automobile industry to the United States economy. It presented the footprint of each of the three companies—how many people they employed, how many factories they had in how many different states, how many suppliers depended on them. It also showed how interdependent the industry was, with the vast majority of each company’s suppliers also providing parts for at least one of the other two U.S. automakers. The aim was to demonstrate how important the industry was to America, and how devastating the failure of even one of the Detroit Three would be for the nation. The three CEOs agreed that they would support the administration’s idea of using the Energy Department loans as a source of short-term liquidity. However, they wanted to double the amount of money available through the program to ensure that they did not lose the retooling money in the process. GM and Chrysler would reiterate their request for TARP funds, and all three automakers would seek authorization to borrow additional money from the Federal Reserve at the same low rate it offered banks. In addition, Gettelfinger suggested that they ask Congress for yet another $25 billion in loans to cover the companies’ initial contributions to the three VEBA trust funds that were assuming responsibility for hourly-retiree health care as part of the 2007 UAW contract. Finally, all three companies agreed that they would split whatever money they got from Washington according to their relative share of the U.S. market.
On November 4, Barack Obama was elected president of the United States. The Democrats also maintained control of both houses of Congress. When the three CEOs and Gettelfinger met with Pelosi and Reid two days later, they were meeting with the people who held the nation’s purse strings. And the two Democratic leaders were surprisingly receptive.
The delegation from Detroit sat on one side of a large rectangular table. Reid and Pelosi and their aides sat across from them and asked what they could do to help. The automakers laid out their proposals. It was a lot to ask. As they drilled down into the details of each request, Mulally could tell the lawmakers were becoming frustrated. The automakers were asking for too many different things. He could tell they were losing their audience.
Mulally reached into his folder and pulled out a piece of paper that charted the dramatic decline in car and truck sales in the United States from January 2006 through October 2008. During that time, the seasonally adjusted annualized selling rate had fallen from 18 million units to less than 10 million. He slid it across the table to Pelosi.
“Madame Speaker, we have a really serious problem in the United States,” he said, pointing to the graph. “This could take down the industry.”
Pelosi’s eyebrows arched as she studied the chart.
“Can I keep this?” she asked.
Mulally nodded.
As if to underscore Mulally’s point, General Motors announced a third-quarter loss of $2.5 billion the next day and admitted that it was running out of money. The same day, Ford posted a third-quarter loss of $129 million. That was nothing in the new math of the Great Recession, but Ford’s financial results were much worse than that number suggested. During the quarter, the automaker received a one-time gain as result of the VEBA. Without that, Ford would have lost $2.7 billion. Analysts were concerned about Ford’s mounting losses. They were even more concerned about the company’s cash burn rate, which was far higher than any of them had predicted. Ford was going through more money each month than General Motors, which was a much larger company. Much of this represented the cost of taking out all that excess capacity and matching production to the actual demand, no matter how far it fell. None of Mulally’s predecessors had really been able to do that, because they could not stomach the losses required. They held the blade in trembling hands and tried to make the incision, but they could not bring themselves to cut deep enough. Yet Mulally knew that this was the only way to extricate Ford from the vicious cycle of overproduction and deep discounting that had undermined its profitability for decades.
“In these challenging times, our plan is more important than ever: aggressively restructure the business, accelerate the development of vehicles people want and need, finance our plan and improve our balance sheet, and work together as one team, leveraging our global assets,” Mulally said during a conference call with analysts and reporters that morning. “We remain absolutely convinced that we have the right plan and are taking the right actions to weather this difficult period and emerge as a lean, globally integrated company poised for long-term, profitable growth.”
Ford was now engaged in a delicate balancing act, trying to convince consumers and investors that it was in better shape than its crosstown competitors while at the same time trying to persuade Washington that it was just as deserving of help. When Mulally was asked why Ford needed taxpayer assistance if it was not in dire financial straits, he said Ford would need help if either GM or Chrysler failed.
“It’s just prudent to be prepared together. There’s a lot of issues that we’re all dealing with,” he said. “We are very interdependent, and we’re all dependent on the U.S. economy. If any one of us gets in trouble in a big way, then that’s going to have major ramifications for the entire value stream—for the suppliers, for the (automakers), for the dealers.”
Later that day, President-elect Obama addressed the industry’s woes in his first press conference since winning the election.
“The news coming out of the auto industry this week reminds us of the hardship it faces—hardship that goes far beyond individual auto companies to the countless suppliers, small businesses, and communities throughout our nation who depend on a vibrant American auto industry. The auto industry is the backbone of American manufacturing and a critical part of our attempt to reduce our dependence on foreign oil. I would like to see the administration do everything it can to accelerate the retooling assistance that Congress has already enacted. In addition, I have made it a high priority for my transition team to work on additional policy options to help the auto industry adjust, weather the financial crisis, and succeed in producing fuel-efficient cars here in the United States of America,” Obama declared. “I have asked my team to explore what we can do under current law and whether additional legislation will be needed for this purpose.”
A day later, on November 8, Reid and Pelosi called on the outgoing Bush administration to give Ford, General Motors, and Chrysler access to the $700 billion. They sent a letter to Treasury secretary Paulson reminding him that, in authorizing the TARP fund, they had given him broad discretion to use it in whatever way was necessary to stabilize the financial markets.
“A healthy automobile manufacturing sector is essential to the restoration of financial market security,” they said.
Paulson disagreed. He and other Bush advisers maintained that letting the three Detroit automakers tap that money would set a dangerous precedent. Soon a host of other industries would be lining up for their share, each one insisting that they were vital to the health of the broader economy. Paulson continued to push for wider use of the Energy Department loans to see the companies through until January, when Obama could decide how best to deal with their problems. Pelosi and Reid began drafting legislation that would give the Detroit Three another $25 billion from the TARP fund, whether Paulson wanted to or not.
However, before Congress would vote on that, it wanted assurances from the automakers that the money would be well spent. On November 17, Mulally, Wagoner, Nardelli, and Gettelfinger received letters from Senator Christopher Dodd and Congressman Barney Frank asking them to come to Washington the next day to testify before the Senate Banking, Housing, and Urban Affairs Committee and the House Financial Services Committee. When Mulally finished reading his letter, he breathed a deep sigh of relief. They had finally gotten Washington’s attention.
On November 18, as Mulally headed for the nation’s capit
al, Ford demonstrated just how dire the situation in Detroit had become, announcing that it was selling most of its stake in Mazda for $538 million. For that price, it hardly seemed worth it. But Ford was desperate.
Mulally had always thought Ford was using the Japanese automaker as a crutch. He had wanted to get rid of it from the start, but Derrick Kuzak had talked him out of it. Ford’s product development chief believed the two companies complemented each other. Ford’s new small cars would be based on platforms jointly developed by both automakers, and they had already begun working on even more advanced architectures. Kuzak argued that Mazda gave Ford a valuable window into the world of Japanese manufacturing and automotive engineering—one that Ford shut at its own peril. Mazda alums like Mark Fields and Lewis Booth had also made powerful arguments for maintaining Ford’s controlling stake in the Hiroshima company. But Don Leclair had lobbied hard for selling Mazda before he left Ford, contending that Ford’s need for cash trumped all of these concerns. Almost all of Ford’s other assets had been pledged as collateral. Ford could sell them, but there were restrictions on how it could use the proceeds. Mazda was one of the few assets that could still be turned into cash. And Ford now needed all the cash it could get.
As usual, Mulally did not force the issue. He allowed a consensus to develop organically. The team agreed on a compromise: instead of selling all of its shares, Ford would retain 13 percent of Mazda.* Both companies hoped that would be enough to guarantee future collaboration. With characteristic pluck, Mazda chose to view Ford’s decision as an endorsement of the progress it had made since Mulally-san’s first visit to Hiroshima back in 2007. But Japanese analysts were skeptical of its ability to stand on its own.
Later that afternoon, Mulally and his entourage arrived at the Dirksen Senate Office Building, an imposing 1950s edifice across the street from the U.S. Capitol. Ojakli was confident his boss was about to deliver another great performance. He and other members of Ford’s government affairs team had spent days preparing Mulally for his testimony before the two congressional committees. They had worked their sources on Capitol Hill to find out what sort of information the legislators were looking for, then spent hours closeted with Mulally inside Ford’s Washington office going over the various personalities on each committee and putting him through a regular murder board until he could manage the toughest questions with ease. They role-played every conceivable scenario and threw out tough questions, trying to trip him up. But Mulally handled everything they threw at him with characteristic aplomb.
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