Obama Saving GM Needed Dealmaker Team to Break It in Bankruptcy
By Alison Fitzgerald and Julianna Goldman
June 1 (Bloomberg) -- On the evening of March 26, in a windowless room that once served as Teddy Roosevelt’s White House office, President Barack Obama made decisions that would change the future of the U.S. auto industry.
Five weeks earlier, General Motors Corp. and Chrysler LLC handed over survival plans that the government demanded as a condition for $17.4 billion of loans in December from President George W. Bush.
An Obama auto task force spent three months restructuring the 100-year-old business -- which at one time built half of all cars in America and was the largest private employer in the world. That effort lands today in bankruptcy court.
Obama pushed his team toward that outcome from the start. In the White House meeting, the task force, led by Wall Street dealmaker Steven Rattner, rejected the restructuring plans: Wagoner hadn’t figured out how to eliminate enough expenses or money-losing products. The president agreed, say people who were there. Still, without more help, the companies might tumble into chaos, aggravating the worst recession in more than 50 years by wiping out hundreds of thousands of jobs and billions of dollars in assets at thousands of auto dealers and suppliers.
Chrysler was at the end of the road, White House economist Austan Goolsbee and the Treasury’s Alan Krueger told the president. The Auburn Hills, Michigan-based company was too small and burdened with too much debt. It might be salvaged by teaming up with Italy’s Fiat SpA, argued Rattner and Lawrence Summers, the director of the president’s National Economic Council. Even those advocating a lifeline put the probability of success at no more than 51 percent, according to Robert Gibbs, the president’s press secretary.
Obama’s College Fiat
Obama joked that the Fiat he drove in college wasn’t a great car, according to one of those in the meeting. Then he made the final call, granting Chrysler 30 days to make the deal.
GM, the panel concluded, had more of a chance, though Chief Executive Officer Rick Wagoner, 56, did not. In less than 15 minutes, the participants agreed that he and a majority of the board had to go, according to people at the meeting. The Detroit-based company would have 60 days.
Obama was taking the wheel out of the hands of a GM veteran who spent his 32-year career with the company that sent him to Harvard University for a master’s in business. The Wall Street restructuring experts were in charge. The 56-year-old Rattner, a bespectacled former newsman, had built a fortune of more than $188 million buying, reorganizing and selling companies.
Auto-Industry Lifers
Now Obama’s team would force GM to do what Wagoner’s cadre of Detroit auto-industry lifers couldn’t or wouldn’t do for years: face up to a shrunken place in the U.S. market and shutter more factories, kill more brands and fire more workers. Under the threat of bankruptcy, the task force, along with newly appointed CEO Fritz Henderson, squeezed agreements out of the United Auto Workers to cut labor costs and extracted debt reductions out of creditors.
In bankruptcy, GM, reeling from almost $88 billion in losses since 2004, plans to put most of its assets into a new company, the White House said last night in a statement.
The Treasury will finance the trip through bankruptcy with about $30 billion, on top of the $19.4 billion the company has already borrowed, the White House said. The government will end up with a 72.5 percent stake in the new entity, GM said in a May 29 filing.
This account of the government’s overhaul of the automaker is based on interviews with dozens of company executives, public officials, analysts and auto dealers over two months. Some of those involved declined to be identified because they weren’t authorized to speak to reporters.
Wall Street Allies
It shows how Obama used his principal strategists, Ron Bloom, Harry Wilson and Rattner, to try to repair a company that reported $91 billion in assets and $176.4 billion in liabilities as of Dec. 31. The president, who has criticized Wall Street for its greed and recklessness, was turning to its veterans to restore discipline to the ailing auto industry.
“We were told from the start to impose the same commercial rigor on this restructuring as we would have done in the private sector,” Rattner said in an interview.
What the president “didn’t want to do was get on a kind of life-support system, where we were having to pump money in periodically to keep the thing afloat,” said David Axelrod, Obama’s senior adviser.
The tools Obama was asking the task force leaders to use were honed over their years of dealmaking. A so-called surgical bankruptcy was always viewed as the most likely outcome, people familiar with the situation said.
‘Good at Executing’
“For these kinds of restructurings, it makes perfect sense to bring in the people who know how to execute,” said Steven Kaplan, professor at the University of Chicago Booth School of Business. “The Wall Street guys are very good at executing.”
Rattner founded Quadrangle Group LLC, a New York private equity firm specializing in media companies, in 2000, 18 years after he quit as a New York Times reporter to pursue a career on Wall Street. He disclosed the range of his net worth in a 47- page filing he signed Feb. 20.
Bloom, 46, an alumnus of Lazard, helped the steelworkers union negotiate an agreement in 2003 that saved Goodyear Tire & Rubber Co. at least $1.15 billion. That deal touched on the heart of the GM restructuring -- medical expenses. Bloom reported a salary of $130,000 and assets of at least $600,000 in a U.S. filing dated Feb. 11.
Cold E-Mail
Wilson, 37, worked for Silver Point Capital LP, a hedge fund in Greenwich, Connecticut. He got the task force job after sending an e-mail out of the blue to Rattner, who didn’t know him, according to an individual with knowledge of the communication. Wilson wasn’t required to make a financial disclosure.
The auto-industry bailout group -- consisting of Rattner, Bloom, Wilson and about 12 others -- reported to Summers and Treasury Secretary Timothy Geithner.
Rattner’s team, which knew little about building cars, focused on the figures.
What did GM have to do to make to make money if total U.S. auto sales didn’t bounce back from last year’s low of 13.2 million vehicles? The advisers decided the company should be structured to generate positive cash flow even with industrywide sales at 12.5 million, 22 percent below the 16 million in most years of the past decade, according to people familiar with the plan. The group later decided to aim for profitability at 10 million vehicles, after sales in the first four months of this year ran below that rate.
McAlinden’s Advice
Room 2428 in the Treasury building in Washington was strewn with flip charts, water bottles and deli sandwiches on Feb. 25 when Sean McAlinden arrived to help with the cram course on GM. The White House was visible through a window, just yards away. McAlinden, an economist from Michigan, found the room oppressively hot from so many people working long hours.
Robert Nardelli, Chrysler’s CEO, had just left, McAlinden said. A few days earlier, Wagoner and other GM executives had spent six hours defending their cost-cutting plan, which included eliminating or selling three brands -- Saturn, Saab and Hummer -- and closing 14 factories.
‘Almost Where?’
Rattner moved about in suspenders, while Bloom wore an open collar, button-down shirt and khaki pants. A secretary sat in the corner working three mobile phones. McAlinden, with the nonprofit Center for Automotive Research in Ann Arbor, Michigan, used a PowerPoint presentation called “Almost There” to illustrate the deficiencies he saw in the carmaker’s restructuring plan.
“They all laughed, and asked, ‘Almost where?’” McAlinden said in an interview.
Bloom asked about short-term cash flow and long-term sales trends. He was interested in ensuring that the cost cuts required “shared sacrifice,” McAlinden said. Rattner concentrated on the bottom line.
White House and Treasury economists had already dismissed the GM plan’s assumptions for U.S. economic growth and auto sales as overly optimistic. The company projected its future market share would decline at less than half the annual rate of the past 30 years, the auto team said in an assessment released March 30. GM estimated industrywide U.S. demand would reach 16 million again by 2012.
In 2008, GM lost its position as the world’s largest automaker to Japan’s Toyota Motor Corp.
Malibu Versus Camry
One member of the task force said he was surprised to learn that Japanese manufacturers can charge more than GM for a similar car because of their superior brand image. A top-of-the- line 2008 Chevrolet Malibu, named Motor Trend Car of the Year, carried a sticker price of $26,995, while the Toyota Camry, the best-selling car in the U.S., was listed at $28,780.
Even if GM obtained the same labor concessions from the UAW as Ford Motor Co. had, it wouldn’t be able to match Toyota’s staffing expenses at its costliest factory, in Georgetown, Kentucky, McAlinden says he told Bloom and Rattner.
“It was a tough-love message,” McAlinden said of the two- hour meeting. “We didn’t want to look like we’d drunk the GM Kool-Aid.”
One reason GM cars sell for less than Toyotas is that there are too many dealers, the task force concluded in its report. Multiple outlets for a given brand can erode prices because they compete with each other, rather than against other model lines, dealers say. American automakers say they haven’t reduced the number of franchise holders because state laws and contracts make it expensive to buy them out.
Bankruptcy Option
Those costs could be contained by a bankruptcy filing, Rattner’s group learned in a meeting with GM executives.
“The effect of bankruptcy is to pretty much nullify the dealers’ contract rights,” said Lynn LoPucki, a law professor at the University of California, Los Angeles, in a House Judiciary Committee hearing on May 21.
This backed the task force’s view that bankruptcy was the best option. Wagoner continued to fight the idea. The GM chief argued that no one would buy a car from a bankrupt company.
On March 9, Wagoner rolled out a favorite weapon in GM’s arsenal of persuasion, deployed every year for gatherings of dealers, stockholders and journalists: the future product review. He brought Rattner, Bloom and several of their colleagues to GM’s technical center in Warren, Michigan, 17 miles (27 kilometers) north of the Detroit headquarters.
Wagoner and his top aides walked the visitors through the aluminum-clad design dome on the 52-year-old campus, according to individuals who were there. The guests met designers working on future Cadillacs and Chevys and technicians building clay models of vehicles in development.
Product Preview
Over a 30-minute lunch in a glass-walled conference room, the executives explained GM’s advanced technologies, including hydrogen fuel cells, batteries for the Chevrolet Volt electric car and plans for meeting new fuel-economy standards with the latest engines and transmissions. The curtains were drawn to block photographers aboard circling news helicopters.
Diana Farrell, deputy to Summers, grilled the executives on whether GM’s gas-electric hybrid system was designed to improve mileage or simply to boost horsepower, according to a person familiar with the event.
$11 a Head
After lunch, the guests from Washington, abiding by government ethics rules barring the acceptance of gifts from corporations, each handed $11 to a GM secretary, who gave them receipts for their boxed lunches, said a person in the meeting. Then they got a chance to drive the Volt and a fuel cell-powered car on a 1-mile road route.
Highlighting the Volt, a compact car that GM Vice Chairman Robert Lutz said would cost about $40,000, may have backfired.
“While the Chevy Volt holds promise, it will likely be too expensive to be commercially successful in the short term,” the task force said in its report rejecting GM’s viability plan.
The March 26 gathering at the White House, when Obama, his aides and the task force debated the future of the companies, was a reckoning for Chrysler and GM. Under the terms of Bush’s loans in December, Obama had to decide by March 31 whether to demand repayment, which could have led to the companies’ collapse, or commit billions more to keeping them afloat.
A USA Today/Gallup poll taken March 27-29 showed that 59 percent of Americans opposed government support for GM and Chrysler. The revelation that American International Group Inc. paid out millions of dollars in bonuses to executives after receiving $182.5 billion in government aid had set off an uproar.
‘Half an Hour’
On the morning of March 26, in his daily meeting with economic advisers in the Oval Office, Obama picked up on a line in a briefing paper suggesting that one of his aides opposed the idea of giving Chrysler more money, according to participants. The president summoned the adviser to the meeting and began asking questions, only to be interrupted by other obligations. He appeared irritated that he didn’t have adequate time to discuss Chrysler’s options, the people said.
“‘Half an hour to decide the fate of the auto industry?’” one person recalled the president saying. “‘We need more time than this. We’re going to have to get together later today.’”
Obama wanted dissenters in the discussion. They reconvened at 6 p.m., sitting in brown leather chairs in the Roosevelt Room.
‘Pivotal’ Meetings
The two meetings that day were “pivotal,” Axelrod said. “He thought the first meeting was inadequate, and he had a series of questions he wanted answered. He wanted to have a richer discussion about it.”
Obama asked about the health of Fiat, recalling the mechanical problems that plagued his old car. Brian Deese, a Summers aide and a member of the task force, answered by saying Fiat had committed to building a 40-mile-per-hour vehicle in the U.S. The room erupted in laughter. He had meant 40 miles a gallon.
Goolsbee cautioned Obama against allowing Chrysler to become another AIG, and the president vowed that wouldn’t happen, according to people familiar with the meeting.
Obama decided to accept Rattner’s recommendations and give Chrysler 30 days and $6 billion to make a deal with Fiat. GM would have 60 days and a commitment for “adequate working capital.”
Foregone Conclusion
Firing Wagoner and replacing GM directors was barely discussed, people at the meeting said. Their fate was a foregone conclusion.
The next day, Rattner took Wagoner aside on the ground floor of the Treasury and told him the president wanted him to go. He then ushered Wagoner into a conference room, where the task force and company officials pulled apart the failed plan and started looking at what GM should do in coming days. Wagoner declined to be interviewed for this story.
White House aides then began the frenzy of work leading up to the president’s announcement the following Monday. In sessions in the Treasury conference room fueled by Diet Coke and coffee, the group prepared briefing papers, fact sheets and talking points, people familiar with the events said.
On Sunday, March 29, White House officials including Summers made calls to members of Congress, mayors and governors, including Michigan’s Jennifer Granholm, to tell them what would be announced the following day.
Call to Gettelfinger
Obama personally called UAW President Ron Gettelfinger and Michigan Democratic Senators Carl Levin and Debbie Stabenow and Representative John Dingell.
While the Michigan lawmakers pleaded with Obama not to refer to bankruptcy in his speech, the president insisted it was important to disclose the possibility, according to a person familiar with the conversations. There was a belief in the administration that if bankrupt airlines could still attract passengers, a bankrupt GM ought to be able to find customers, people familiar with the situation said.
Obama paused in his televised speech from the White House, looked directly into the camera, and warned that such a filing might be necessary.
“I know that when people hear the word bankruptcy, it can be unsettling,” he said, describing a quick, surgical reorganization under court supervision with government financial backing.
GM’s fourth attempt at a viability plan became known as VP4. Wilson spent much of April in Detroit bringing it to life in three adjoining conference rooms on the 37th floor of GM’s Renaissance Center headquarters complex.
Fate of Brands
Wilson huddled with GM executives, consultants and his four-person team from the Treasury. They analyzed factories, brands, sales and dealerships, deciding what would be discarded.
The fate of GM’s eight brands became a thorny issue, said a person who dealt with Wilson and his advisers, Boston Consulting Group’s Xavier Mosquet and Todd Snyder of Rothschild Inc.
Chevrolet and Cadillac, the best-known brands, would be the core of the lineup, according to people familiar with the negotiations. The company had already said it would drop or sell the Saturn, Saab and Hummer models. Wilson and Mosquet wondered why Buick, GMC and Pontiac shouldn’t be eliminated as well, one participant said.
This wasn’t easy for GM officials to hear, a person in the meeting said. All three brands had been part of the company for at least eight decades. GMC and Buick were still profitable, Henderson said. Buick was popular in China, and killing it in the U.S. could damage sales in the growing Asian market.
Preserving Buick, GMC
Company executives argued that they couldn’t get rid of Buick and Pontiac without risking GMC, because the three brands were often sold in the same showrooms. A dealer with a standalone GMC outlet wouldn’t have enough sales to survive.
Wilson usually stayed at the Marriott hotel in the RenCen, often eating boxed lunches in the conference room or grabbing a bite in the food court in the basement. He became a familiar face and voice on the phone, sending e-mails or making calls in the middle of the night, according to people at the other end of the line.
End of Pontiac
On April 27, when GM released VP4 to the public, all the brands survived except one. Pontiac, which spawned the muscle- car era in 1964 when it stuffed a 389-cubic-inch V8 engine into a Tempest and called it the GTO, would disappear.
Obama announced the Chrysler bankruptcy three days later, saying it would give the company “a new lease on life.”
He praised workers, dealers and suppliers for making sacrifices. Then he singled out “a small group of speculators” among its creditors who “decided to hold out for the prospect of an unjustified taxpayer-funded bailout.”
Dealing With Creditors
Obama’s team had offered secured Chrysler creditors $2.25 billion for $6.9 billion in loans. Some held out for more, “demanding twice the return that other lenders were getting,” the president said.
Rattner made it clear that GM’s creditors wouldn’t get much sympathy either.
“They are looking to the government to help them solve their problems, and the government cannot solve everyone’s problems,” he said in a Bloomberg Television interview in March. “We need for the bondholders to become a part of this in a constructive way.”
GM Bondholders
An ad hoc committee of GM bondholders, including Capital Research & Management Co. of Los Angeles and New York-based hedge fund manager Elliott Management Corp., had complained to reporters that they were excluded from restructuring talks with the auto task force and were being treated worse than the UAW.
VP4 offered them 10 percent of a reorganized GM in exchange for the $27 billion the company owes them. The union’s retiree medical fund was offered $10 billion in cash and a 39 percent share for its $20 billion in claims.
The bondholder committee called the offer “neither reasonable nor adequate.” The group demanded 58 percent of GM in exchange for their bonds in a meeting with Rattner and Bloom at Treasury, according to people familiar with the incident. Rattner and Bloom said such an offer wasn’t likely, the people said.
UAW president Gettelfinger worked closely with the task force and with less friction than the bondholders, according to a person familiar with the dealings. The union chief declined to be interviewed for this article.
He tried to negotiate a deal that would protect retiree pay and jobs by keeping the company operating. Among concessions, the union ended programs that paid workers indefinitely when a factory was idled and accepted cuts in GM’s contribution to the pension fund and retiree health benefits.
Job, Cost Cuts
The company said April 27 that it expects to trim U.S. hourly employment to 40,000 workers in 2010 from about 61,000 last year. About 7,000 people left this year under an earlier buyout.
GM said it would lower hourly labor costs by 34 percent under VP4, close 16 factories and eliminate 2,600 dealers in 18 months, 42 percent of the total.
All during May, GM suppliers and dealers, and even small bondholders, lobbied to protect their jobs, businesses and investments. Many carried the fight to Congress.
On May 4, Senator Charles Schumer, a New York Democrat, went to Rochester, New York, to urge GM to buy back four parts plants, including two that accounted for 3,300 jobs in his state. In a talk with Rattner, Schumer “secured his support of the plan,” the senator said in a press release.
Lawmaker Lobbying
A few weeks later, Senator Tom Carper, a Delaware Democrat, met with Rattner to seek help for keeping GM’s Wilmington, Delaware, factory open.
“What we tell him, we tell everybody: We tell him of the terrific plant we have,” Carper said in an interview.
Accompanied by Michigan Senators Levin and Stabenow, representatives of Detroit radio station WCSX unfurled a 100- foot-long banner on Capitol Hill called “Faces Not Numbers,” showing photos of families whose members worked for auto companies and dealers.
About 150 dealers descended on Congress May 13, meeting with their House and Senate members to argue they were being treated unfairly and needed more time to wind down their businesses.
“My family’s been at this for 50 years,” said Alan Starling, who sells Chevrolets and Cadillacs in the Orlando suburbs. Starling said he visited his congressional delegation, explaining that he has 135 employees whose futures are at risk.
“I told them, ‘Don’t kill the patient with the medicine,’” he said. “They don’t need to do this. The president may be getting some bad advice.”
Auto Dealers
The same day, the National Auto Dealers Association took out full-page newspaper ads saying that 150,000 workers would lose their jobs under the Chrysler and GM plans to close showrooms. Four of the trade group’s leaders met with Rattner and Bloom the next day.
By the end of that week, GM had sent notices to 1,100 dealers that their contracts wouldn’t be renewed after 2010. Among them was R.L. Reising Sales Inc., in Beecher, Illinois, which has sold GM cars since 1929.
“It’s like someone rips your guts out,” said Joseph Reising, the dealership’s vice president. The business was founded by his grandfather and employs 15 full-time workers.
As today’s deadline approached, the pace of decision-making accelerated.
UAW local 1853 in Spring Hill, Tennessee, gave up weekend pay premiums and restrictions on what jobs workers can perform to try to keep its factory open. The employees had made Saturns there for 17 years before the plant was retooled to make the Chevrolet Traverse last year.
UAW Agreement
Wilson moved his efforts to New York, where GM’s treasurer is located, to help prepare for the bankruptcy filing.
On May 21, GM and the task force completed an agreement with the UAW that cut its share of the reorganized company by more than half to 17.5 percent, plus $6.5 billion in preferred stock and a $2.5 billion note.
The next day, one congressman questioned the motives of Rattner’s group at a press conference.
“Who is this auto task force, and who do they represent?” asked Representative Dennis Kucinich, an Ohio Democrat. “They represent various Wall Street interests who have long looked at exporting jobs out of this country.”
Gettelfinger said on May 29 that GM’s UAW workers had ratified an agreement that would enable a quick exit from Chapter 11. Yesterday, a spokesman for bondholders announced that a majority of them accepted the company’s offer to settle their claims.
With the cost-cutting plan, financing, and agreements with the union and bondholders in hand, Obama’s task force had prepared GM for the unthinkable: bankruptcy.
To contact the reporters on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.nets; Julianna Goldman in Washington at jgoldman6@bloomberg.net.
Last Updated: June 1, 2009 00:01 EDT |
