Overhaul (11 page)

Section 363 allows a bankrupt company to act quickly to transfer intact, valuable business units to a new owner. (The conventional bankruptcy process restructures the corporation as a whole.) Once exotic and obscure, 363 had provided the only bright spot in the cataclysmic implosion of Lehman Brothers. It was used to salvage Lehman's money-management and Asian businesses. Though 363 had never been applied to industrial companies on the scale of Chrysler and GM, I had suggested to Josh back in December that the new team explore the option. It might offer a way to save GM's and Chrysler's best factories and brands while the courts sifted through the other wreckage.

I hated presenting problems without solutions, but we had none ready for prime time when we went to see Tim and Larry on February 11, six days before the Chrysler and GM submissions would confirm the debacle in the offing. Since we had no staff, we had to rely on Todd Snyder's people at Rothschild to prepare the presentation. Even then, the best we would be able to do was to lay out a series of options that gave a clear indication of our thinking.

I wanted to be well prepared. At 10
P.M.
the night before, after the Rothschild team arrived, we convened on a conference call to go over the possible restructuring options. Nearly all involved putting GM and Chrysler into bankruptcy. The only nonbankruptcy solution required reaching out-of-court agreements promptly with the labor unions, creditors, and suppliers, distributors, and dealers. We gave that approach the lowest probability of success. Every one of the options entailed using huge amounts of taxpayer money to sustain the companies through the restructuring period.

Most of the conference call was spent discussing the Section 363 approach, our final and best option. But the time Rothschild said would be needed was long, from six to fifteen months. I thought that would be a disaster.

We ended up having to brief Tim and Larry separately. During our time with Larry, our tough talk about bankruptcy was interrupted by an emotional interjection from Gene Sperling, a counselor to Tim. A devoted public servant and gifted policy wonk, Gene had served during all eight years of the Clinton administration, the last four in Larry's job, heading the NEC. He spoke up here as a Michigan native.

"I don't know what to tell you guys to do," he said, "but if you are not from the Midwest, you cannot appreciate the devastating psychological effect that bankruptcies would have there." Gene would repeat this admonition many times during our deliberations, a helpful reminder of the human consequences of our actions.

That seemed to strike a chord with Larry, whom I could see getting nervous. Although in December he had been one of the voices telling the President-elect that bankruptcy was probably unavoidable, the prospect clearly disturbed him more as it came closer to reality. He was particularly leery about the risk of permanent government involvement. "I hear you, Larry," I said at one point. "But make no mistake about it, you own these companies," by which I meant that the massive amount of federal aid would put the government in the auto business, regardless of who ultimately owned the stock. He ended by asking us to develop the best approach in the event bankruptcy was not available.

We briefed Tim at the Treasury; unlike Larry, he did not push back. He took it as given that we'd identified the right options and that bankruptcy was probably inevitable. To him, the question was how to cushion the shock so that consumers would keep buying cars. "We need to put foam on the runway," he said, an allusion that, as a pilot, I readily understood: airport crews use foam on the runway to mitigate crash landings. It can be effective, but doesn't always prevent fatalities.

Shortly before the viability reports were due, GM previewed for us its updated analysis. The company now forecasted needing an additional $2 billion just to survive until March 31. The Chrysler news was equally bad. The company's draft submission showed dwindling cash balances, a blunt refusal by creditors to reduce secured debt, and a dark analysis of the consequences of failure. In Chrysler's estimate, liquidating the business in an orderly way would yield around $1 billion, assuming that it had run through all the cash on its balance sheet.

Neither company was making much progress on the other requirements of the Bush loans, either. Descendants of Corker's original conditions, these provisions had been designed as key steps toward restructuring—reducing liabilities like debt and legacy health care obligations and lowering operating costs, including labor. By February 17 GM and Chrysler were required to submit signed term sheets from their stakeholders proving that these cuts had been achieved.

Admirable, but surreal. While the companies had begun negotiating earnestly with unions, debt holders, suppliers, and dealers, there was absolutely no chance of success. The unions made it clear that they would not give ground again without shared sacrifice, particularly from lenders. The Chrysler banks, meanwhile, were steadfast in their unwillingness to reduce the $6.9 billion of outstanding debt. GM was going through the motions of trying to win the support of a sufficient number of its public bondholders to reduce its debt on that front. But there was a greater chance of finding oil under the White House.

Bad chemistry with GM added to everybody's stress. Less than a week before the deadline, Ray Young called Deese to ask for a postponement on meeting the restructuring benchmarks—GM wanted two more weeks. Making that call did not show great judgment, but Young's attitude was even worse. He suggested to Deese that if GM missed its benchmarks, the
government
would look bad. To Larry these were fighting words. Had GM somehow forgotten that taxpayers were footing its bills? He called two of GM's Washington advisers the next day and received assurances that Young would not attempt any direct communication with the White House again.

Still, we recognized GM's difficulties; Chrysler had them too. On the eve of the deadline, we said uncle and waived all of the cost-reduction strictures. Had we not, both automakers would have been in default on their federal loans, and therefore bankrupt.

We faced mountains of red tape. Seemingly obvious matters, such as whether to make the reports public, needed to be considered. A procedure had to be created for receiving the plans. Our most important behind-the-scenes preparation was a memo to President Obama on what to expect.
POTUS
memos, as they are called
(POTUS
is government-speak for President of the United States), have their own special protocol. They come from cabinet-level officials (Tim and Larry, in our case) but are, of course, drafted much further down the food chain (in our case, by Deese). A good
POTUS
memo is short, with lots of bullet items and bold type to emphasize decision points.

Having watched GM and Chrysler unveil a succession of overly optimistic forecasts, we were determined from the start to be hardheaded in our assessments. By this time, we believed that the bailout would require at least $50 billion of additional capital, and we had serious doubts as to whether the government would receive a substantial portion of the money back. We also wanted to be sure that the White House understood that without bankruptcy as a tool, we were quite pessimistic about the possibility of effecting fundamental restructurings.

Finally, judging from the worrisome conversations with Rothschild, it seemed possible that bankruptcy, with all the attendant risks, could last at least six months. Throughout our work, we consistently strove to be as realistic as possible when communicating with our superiors and to use probabilities rather than absolutes. We tried to follow two simple rules: no surprises, and no problems without proposed solutions.

February 17 neared, but the automotive team still had not been announced—a growing public-relations headache. As early as February 2, Tim's spokeswoman, Stephanie Cutter, had sent around an e-mail warning that came to me at Quadrangle: "We're about to lose control of this story." The notion of an official task force had been floating in the ether; Deese grabbed hold of it and convinced Larry that a group of senior staffers like Diana Farrell and Gene Sperling would be both productive and politically salable. But when Larry looked at a draft of the plan, he said, "We can't announce a task force with a bunch of people like staff. We can't announce staff meetings as task force meetings."

Much of the administration's disarray was understandable. Larry and many of the domestic-policy staff had been consumed with getting the President's stimulus package through Congress—a $787 billion affair. The solution the White House eventually settled on for autos was something called the Presidential Task Force on the Auto Industry, a cabinet-level committee to be chaired jointly by Larry and Tim and comprised of officials from across the administration. While it sounded impressive, its purpose was to bury once and for all the idea of a car czar, reassure the Midwest that autos were a top priority, establish Larry and Tim as coequals on the matter, and free the actual task force—namely, staffers like Brian and me—to work in peace.

This presidential task force was announced as haphazardly as it had been planned. On February 16 aboard Air Force One, Press Secretary Robert Gibbs told reporters that its formal unveiling "could be" later that day and mentioned that someone named "Richard Bloom" would be joining the staff. As it turned out, the actual unveiling wasn't until four days later. But at least the announcement saved face—and cleared the slate for the automakers' submissions.

When the documents finally arrived on the seventeenth (true to form, GM missed the customary 5
P.M.
cutoff by forty-five minutes), the White House was ready with a concise statement supporting the bailout. It emphasized the need for shared sacrifice: "Going forward, more will be required from everyone involved—creditors, suppliers, dealers, labor and auto executives themselves—to ensure the viability of these companies."

As we worked through the night to prepare a memo for Tim and Larry, the substance of what we had received was clear: GM and Chrysler showed little progress toward meeting the conditions of the loan agreements, and their requests for additional funding—$14 billion—were based on unrealistic assumptions. Neither plan offered any hint that bankruptcy would be necessary or desirable to achieve long-term viability. The gaps we found reflected the two companies' weaknesses and personalities. Lacking a robust selection of new designs and unable to meet tightening fuel economy standards without appealing small cars, Chrysler pinned its hopes on a prospective alliance with the Italian automaker Fiat. GM still relied heavily on an imaginary rebound in demand.

Wall Street also found the GM plan lacking. (Chrysler's received no comment, as the company was privately owned.) Rod Lache of Deutsche Bank, one of the most respected auto industry stock analysts, decried the massive debt that GM proposed to continue to owe. He reiterated his sell recommendation, giving the stock a price target of zero. Within three days, the stock sank 19 percent, to $1.77 a share, cutting GM's market value to a meager $1 billion.

All that remained was for me to officially say yes to the job I had already started. I was still terrified. While Detroit melted, I dithered. This finally prompted Larry to shift into bad-cop mode, calling me to suggest that I was on the verge of "doing a Judd Gregg," a reference to the Republican senator whom Obama had chosen as secretary of commerce. Gregg had made a 180-degree turn, withdrawing his acceptance after it dawned on him that he disagreed with much of the Obama agenda.

If I withdrew at this late date, I realized, I would almost certainly never get another chance to serve in an Obama administration. I e-mailed Larry to apologize for my hesitancy. The e-mail he sent back bucked me up: "Life will work out for you either way though America will be better off if you do this." I was also grateful for an e-mail from Deese: "My opinion is of little consequence to the situation, but for what it is worth I think you are incredibly needed right now, that you will succeed notwithstanding the terrible task in front of us, and I am willing to do whatever I can internally to help make this situation one that you're comfortable taking on."

Finally, on Thursday, February 19, sitting on the couch in Tim's office watching his precious minutes tick by, I understood that the time for indecision was past. Impulsively, I closed my eyes and jumped.

The following Monday, I once again found myself standing in the cold outside a fortresslike office building, this time the Treasury Department. Shivering outside the guard shack on Pennsylvania Avenue as I waited to get in, my clearance adrift in a bureaucratic haze, I could not help but think about all the bailout's delays—and the costs for me, for the industry, and for the country.

Obama's "one President at a time" stance may have been good politics, but if his team had linked arms with the outgoing administration, as President Bush's advisers had proposed, billions of dollars could well have been saved. The incoming administration should have made its personnel decisions much faster, as many commentators had urged. The deliberate pace at which key posts were filled did not comport with the urgency of the circumstances. Tim's and Larry's appointments weren't announced until almost three weeks after the election. Much quicker action, perhaps as soon as the day after the election, would have seemed more appropriate.

Of course, if there had been no presidential election or change of administration, there would have been no costly holdups. So maybe the delays and the billions of dollars in added expense just have to be accepted as costs of democracy.

"W
HY EVEN SAVE GM?
" he demanded provocatively, interrupting the conversation. Other people had asked the question in the past, but it was astonishing coming from Rahm Emanuel. It certainly wasn't the challenge we'd anticipated. We had gone into the meeting expecting the White House to oppose letting even Chrysler go, but Emanuel had put GM in play, at least rhetorically.