The car czars

I suspect that one day the Obama Administration's handling of the GM and Chrysler bankruptcies will be recognized as an economic policy triumph - a model of good practical policymaking and stunning efficiency. Here's the Car Czar himself, Steven Rattner, giving his perspective. Some highlights (my headers):

What a mess:

And so I closed my eyes and jumped. Among the surprises along the way: We were shocked, even beyond our low expectations, by the poor state of both GM and Chrysler. Looking just at the condition of GM's finances and Chrysler's new-car pipeline, the case for a bailout was weak.

But on the other hand, as we surveyed the interconnected web of finance companies, suppliers, and related businesses, the potential impact of the likely alternative -- liquidation -- stunned us. We imagined that the collapse of the automakers could devastate the Midwest beyond imagination. We were determined not to fail. But as we started down the road, we saw mainly obstacles...

Of course, the Bush Administration was no help:

When the Obama administration took office on Jan. 20, it inherited nothing in the auto area: no staff, no stacks of analyses, no plans of any kind. The Bush administration had decided in late December that GM and Chrysler were not going to go bankrupt on its watch and had shoveled $17.4 billion of TARP money into the companies to keep them afloat, but without any meaningful stab at restructuring them...

Everyone wants a handout:

Moving simultaneously down multiple paths, we began meeting with all the interested parties: labor, lenders, legislators, and suppliers. We naively assumed that stakeholders eager to see a rescue of the two companies would come with a set of "gives"; I was startled that each stakeholder meeting invariably included a set of "asks" from the government.

Case in point: parts supplier Delphi, which hoped for government assistance even though nearly 90% of its workforce was outside the U.S. An important part of our job was going to be to convince the stakeholders that the government wasn't going to be everyone's piggy bank...

GM's "stunningly poor management":

Everyone knew Detroit's reputation for insular, slow-moving cultures. Even by that low standard, I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company.

For example, under the previous administration's loan agreements, Treasury was to approve every GM transaction of more than $100 million that was outside of the normal course. From my first day at Treasury, PowerPoint decks would arrive from GM (we quickly concluded that no decision seemed to be made at GM without one) requesting approvals. We were appalled by the absence of sound analysis provided to justify these expenditures.

The cultural deficiencies were equally stunning. At GM's Renaissance Center headquarters, the top brass were sequestered on the uppermost floor, behind locked and guarded glass doors. Executives housed on that floor had elevator cards that allowed them to descend to their private garage without stopping at any of the intervening floors (no mixing with the drones).

In my relatively few interactions with chairman and CEO Rick Wagoner, I found him to be likable, dedicated, and generally knowledgeable. But Rick set a tone of "friendly arrogance" that seemed to permeate the organization.

Certainly Rick and his team seemed to believe that virtually all of their problems could be laid at the feet of some combination of the financial crisis, oil prices, the yen-dollar exchange rate, and the UAW.

It seemed completely obvious to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue. Equally important, GM's February viability plan was more "business as usual" and not the aggressive new approach that we felt was essential...

Meanwhile, if ever a board of directors needed shuffling, it was GM's, which had been utterly docile in the face of mounting evidence of looming disaster. We decided to recommend to Tim, Larry, and ultimately the President a package that would include replacing Rick with Fritz as interim CEO, changing at least half of the board, and making an outside director chairman (which should be universal)...

Obama's style:

The question for us -- and ultimately, the President -- was whether any restructuring could save Chrysler.

Back and forth the debate went in Larry's small office in the West Wing. Our working team was joined by Diana and other administration economists. Gene Sperling, a Michigan native, argued eloquently and passionately for standing by America's heartland.

Austan Goolsbee, a fearless former University of Chicago economist who had been with Obama since the beginning of his campaign, led the charge against Chrysler, marshaling strong factual arguments. One was that letting Chrysler go would give a needed boost to GM (and also to Ford), since most buyers of Chrysler's strongest products -- trucks, minivans, and Jeeps -- probably would turn instead to the other Detroit automakers.

Harry maintained that a Chrysler liquidation could potentially add billions of dollars a year to GM's operating income in a normal sales environment, vastly increasing the value of the company.

The group was torn (at one point the vote was four to four) and so were Tim, Larry, and I. We intuited that from a theoretical point of view, the correct decision could well be to let Chrysler go. But this was not an academic exercise.

Repeatedly, Larry asked us for probabilities -- what did we think the chances would be of Chrysler making it for two years? For five years? Indefinitely? Pressed by Larry, I came down 51-49 in favor of helping. Comfortable that Chrysler could survive, Larry asked us to recast Austan's analysis into an assessment of the employment effects of a Chrysler liquidation.

We were all shocked to realize that when the collateral damage of a Chrysler shutdown was factored in (like lost jobs at dealers and suppliers), the short-term effect of a Chrysler shutdown could be 300,000 more unemployed, similar to what was lost across the entire economy in the month of July. And with the memory of Lehman's collapse still fresh, we imagined the potential for other systemic risk. That cemented matters for Larry and me...

In our meeting in the Oval Office on March 26, Larry began to lay out the issues, only to be interrupted after a few minutes by the President, who said "Larry, I've read the memo," signaling that he wanted to dive into the decision items. Quickly, the question of whether to save Chrysler dominated the discussion.

As we went back and forth over Chrysler, the President himself seemed as torn as Larry and I had been. Suddenly, he realized that Austan Goolsbee, unofficial spokesman for the opposition, was not in the room. "Where's Goolsbee?" the President asked. A few minutes later, Austan joined the conversation. But the President had only about 20 minutes available before his assistant, Katie Johnson, came in with a note urging him to move on to his next appointment. "This is too important to try to decide in a rush," the President told us. "We need to get together again later."

For that early-evening session, we convened in the windowless Roosevelt Room, the only real conference room in the West Wing. Larry asked me to begin by summarizing the consequences of refusing aid to Chrysler, and from there the conversation took off. The group was sobered by my assessment that given the early stage of the Fiat discussions, there was only a fifty-fifty chance of reaching an acceptable agreement.

The President's political advisers were as torn as his task force: Polls universally showed the public strongly opposed to the auto bailouts. At the same time, the advisers recognized the severe economic and political consequences of a Chrysler shutdown across broad swaths of the industrial Midwest. We were dazzled that chief of staff Rahm Emanuel -- a former congressional leader -- could identify from memory the representatives in whose districts the large Chrysler facilities lay.

After about an hour, the President asked for any final comments and then said, "I've decided. I'm prepared to support Chrysler if we can get the Fiat alliance done on terms that make sense to us." And we were thrilled when the President said, "I want you to be tough, and I want you to be commercial."

With that, the meeting dispersed. The recommendation to ask GM's Rick Wagoner to step aside had received barely a mention. New to business meetings with Presidents, I found Obama's style consistent with his "No drama Obama" image and on a par with the best CEOs I had spent time with. He was cordial without being effusive and decisive when his advisers were divided...

Obama plays hardball:

The President's announcement that he was prepared for bankruptcy dramatically changed the nature of the discussions we were having with the stakeholders, none so much as those with Chrysler's 45 senior lenders.

Led by Jimmy Lee, J.P. Morgan's top banker and a long-standing business friend of mine, the banks had been insisting that, as secured lenders, they were entitled to repayment of their entire $6.9 billion. "And not a penny less," Jimmy said to me on more than one occasion.

From the outset that had struck us as ridiculous. The debt was trading at about 15¢ on the dollar, and according to Chrysler's analysis, the liquidation value of the company was around $1 billion. Clearly the banks didn't believe that the government would push back and let the lenders take over the company, if necessary. Until they heard the President speak on Monday morning. Almost immediately afterward, Jimmy called with a new message: "We need to talk."...

Hmm, I'd thought this was intentional:

We had not anticipated one benefit of putting Chrysler on a faster track than GM. The successful completion of Chrysler's restructuring established a clear precedent and signaled to GM's stakeholders that we had leverage. That was helpful because, with hindsight, some form of GM bankruptcy was inevitable from the start. Unlike Chrysler, with its 45 lenders, GM had thousands and thousands of bondholders, many of them individuals. There was no way that we were ever going to corral enough of them to avoid at least a quick-rinse bankruptcy...

Damn Congressmen:

Because we were operating under TARP, we encountered relatively little congressional intrusion -- until the two automakers virtually simultaneously announced their dealer-reduction plans. Our dentistry had finally struck a nationwide nerve.

Every congressional district had dealers, many of whom were leading figures in their communities. We were inundated with an avalanche of calls, letters, and demands. We patiently worked through each grievance and explained hundreds of times that the companies -- not the government -- made the decisions about which dealers to close.

But the episode left an indelible impression on me: If we hadn't had TARP money available and had had to seek congressional approval, I am convinced that one or both of our two automakers would have been forced to liquidate...

The prognosis:

Like any patient that undergoes major surgery, a successful recovery is far from assured. For Chrysler, the biggest challenges are its need to regenerate its product line and manage a significantly leveraged balance sheet. In the case of GM, the overarching question is whether, without an infusion of new blood, its management team can implement the massive cultural change that is essential. But by dramatically lowering the break-even point for both companies, we believed we were creating a healthy margin for error.