Overhaul (12 page)

The viability reports had not shown any reason for hope. In fact, the situation had gotten worse. GM and Chrysler now said that they needed more money—another $14 billion right away, to be precise. This meeting with Emanuel had come together as Team Auto—the name we had chosen for ourselves to minimize talk of "czars"—continued to face the scary conundrum of bankruptcy. We would almost certainly need that process to achieve fundamental restructurings, but we feared that the medicine was so strong that it might kill the patients we were trying to cure. There was also the question of whether Obama, so publicly supportive of the automakers and sincerely committed to saving the industry, would actually allow a bankruptcy.

The White House chief of staff occupies an unusually elegant office by West Wing standards. (Rahm was known to brag that his first-floor office was eight square feet larger than the Vice President's, and closer to the Oval.) We approached its splendor assuming that Rahm would attack, in his trademark slash-and-burn style, the conclusion on which we were approaching consensus: from a business perspective, it seemed more and more doubtful that Chrysler should be allowed to continue as an independent entity.

It was when we tentatively aired the notion about Chrysler that Rahm turned and uttered his shocker: "Why even save GM?" Seated to his right, David Axelrod, the President's principal political adviser, pulled out polling results and reeled off statistics showing how much the public hated bailouts.

Ron Bloom was the first to shake off his surprise and make a counterargument. He reminded them of the tens of thousands of autoworkers' jobs at stake. But that didn't deter Rahm. "Fuck the UAW," he growled.

From the opposite end of the table, Tim Geithner pushed back, drawing on his experience with the fickle nature of public opinion. I had seen this myself, most starkly with Lehman Brothers. Right up until Lehman declared bankruptcy, public opinion, including opinion on Wall Street, had overwhelmingly favored letting the firm go down. But in the ensuing chaos, the consensus had shifted almost overnight, and the government was believed these days to have made a terrible mistake by acquiescing in Lehman's collapse.

I was sitting with my back to Rahm's door. Suddenly I saw others around the table stiffen. I turned to look behind me. The President had just walked in. Having read somewhere that everyone is supposed to stand when the President enters the room, I leaped to my feet—only to notice that no one else had. "Welcome, Steve," Obama said, shaking my hand. "Sit down." He asked Rahm to step into the hall with him for moment, and with that, my first encounter with Barack Obama as President ended as abruptly as it began. (I later learned that the President likes to roam the first-floor halls when he has a question or request for a senior aide.)

In my limited contacts with Rahm and by osmosis from others, I knew that the chief of staff ruled by a mixture of respect and fear. Policy types didn't rush to him for analytical insights on their latest idea, but no one doubted his political instincts, his toughness, or his work ethic. He ran a tight ship, with no tolerance for the infighting that often characterizes a White House staff. Nor did he accept anything less than perfection from his subordinates. As a result, there was not a lot of love from Rahm. The old Washington saying "If you want a friend, buy a dog" seemed meant for those under his supervision. And Rahm never hesitated to seize command, as he did after Tim's rocky start as Treasury secretary—Rahm had stepped in and effectively started supervising Tim on a daily basis. Such aggressiveness is fine when all is going well, but it breeds resentment that can turn into sniping when the tide recedes, as it did briefly for Rahm in early 2010 when health care re-form bogged down.

He subsided as the conversation resumed, and it struck me that, despite the fireworks, our doubts were being laid to rest. We'd arrived wondering whether the White House would be willing to take a firm stance with the automakers and do the right thing with the taxpayers' investment, however risky or politically painful it might turn out to be. We left feeling newly confident that, at least if Rahm Emanuel had anything to say about it, the President would stand behind our tough approach.

The meeting had one other memorable moment. We had come armed with maps showing Chrysler's major facilities and listing the members of Congress in whose districts they sat. Rahm zoomed in on Kokomo, Indiana, one of Chrysler's most important locations. "Dan Burton is not the congressman from Kokomo, Joe Donnelly is," he declared. The chief of staff's encyclopedic knowledge of congressional districts dazzled all of us except Harry. Sitting on the couch on the far side of the office, just two days into the job, his heart sank at the thought of our having made a mistake. He sent a BlackBerry message to our advisers at Rothschild, who had prepared the chart, to find out how this could have happened. He was relieved by the response: Kokomo turned out to be split between two representatives, and the plants were, in fact, in Dan Burton's district. As the meeting adjourned, Harry sidled up to the chief of staff and corrected him. "That may be," Rahm replied, "but the workers live in Joe Donnelly's district."

That still left the question of how far the auto industry bailout should go. "We're already in Vietnam," Larry said in a separate meeting, referring to the all but certain decision to provide more aid to the automakers. "I can imagine doing something in Cambodia." By that he meant indirectly helping a few key suppliers, the equivalent of fighting from Vietnam and not sending ground troops across the border. But there he drew the line: "There's no way we're going into Laos." He wasn't about to commit the government to a full-scale invasion that involved bailing out the entire supply chain.

By now I'd learned more about auto suppliers than I'd ever imagined I would, including the central fact that they are mutually dependent on and firmly enmeshed with many other parts of the economy. Tier-one suppliers provide products that can go right into a vehicle, like a wiring harness or a set of disk brakes. Tier-two suppliers generally provide components that comprise such assemblies—say, wires or brake pads. Tier-three suppliers provide raw materials for making the components, like copper or rubber. Except it's more complicated: many suppliers play multiple roles and sell to other industries. A tier-two supplier of wires might also sell to makers of dishwashers, for instance. A company like U.S. Steel might sell steel to both tier-two suppliers for making parts and the automakers themselves, which buy lots of steel directly—for example, to fashion into "top hats," as the outer shell of a car is known.

This vast industrial ecosystem presented a far different challenge from GM and Chrysler. While many suppliers were struggling because of the plunge in auto demand, it was hard to figure out which, if any, to help. We could not deal with each company individually, so we worked instead with their trade group, the Motor and Equipment Manufacturers Association, and an ad hoc coterie of industry experts and participants. We also met with the purchasing executives of the Big Three, who certainly knew more about suppliers than any of us. Midwestern politicians frequently weighed in too, including Michigan Governor Granholm, who e-mailed me in late February to warn about the risk of runaway supplier failures and propose ways that Washington could help. Meanwhile, Todd Snyder and his Rothschild colleagues, who had many clients in the supplier community, regularly fed us horror stories about that part of industrial America.

We had gathered around Larry's government-issue imitation-Chippendale conference table. It was Monday, February 23. Even though for all practical purposes I had been working for six weeks, this was my first official day on the job. I had awakened that morning to a story in the
Detroit News,
reporting that virtually no member of the task force, including Tim and Larry, drove an American car. Happily, the
News
had given me credit for owning a Lincoln Town Car, which I had replaced with a Lexus a year or so earlier. By 8:45
A.M.,
I'd said a teary farewell to my Quadrangle colleagues.

Then I'd spent most of the day in Washington completing the "onboarding" process, including being sworn in. The human resources department had sent word that this needed to occur in a room with an American flag (which nearly every office at Treasury had). I was excited, thinking that Tim himself was going to do the honors. At the appointed time, I presented myself in room 2428 to find two nice ladies from HR, who asked me to face the flag in the corner, raise my right hand, and repeat after them. Nothing is ever quite what you expect. But now, at 5:30
P.M.,
here I was in Larry's office, an official public servant.

Our meetings with Tim and Larry had already fallen into a routine. Larry sat at one end, next to a safe that was apparently meant for classified documents but showed no sign of use. I would take the seat to his right. Brian Deese would sit across from me, with Ron Bloom to his left. The rest of the other attendees would find seats around the room. Tim would sometimes sit opposite Larry at the other head of the table. But if he was late or didn't want to get dragged too deeply into the discussion, he would choose a different chair, or sometimes Larry's couch, which generally served as the bleachers for those who didn't have speaking roles.

I was intrigued by the dynamic between the two men. Tim had been Larry's protégé throughout the Clinton administration and they got along well. They shared a technocratic approach to issues and problem solving, short on ideology and long on analysis. While Larry's IQ was on its own pedestal, Tim was certainly very smart. Both were devoted public servants with extreme work ethics. They had become close friends and tennis partners.

Yet their personal styles were utterly different. Tim was a man of few words, Larry a man of many. Tim was organized and low-key, although given to occasional bursts of profanity and odd fits of giggling. Larry was more chaotic. He seemed oblivious to time or dress. He would happily immerse himself in a meeting until someone—usually his harried assistant, Bryan Jung—pulled him out. Going to see him made me imagine what it must have been like to have him as a professor. I always felt the need to be fully prepared and careful about everything I said, because no half-baked remark got past Larry. But unlike many of the professors I remembered from college, I looked forward to sessions with Larry because his questions were always incisive and his thoughts stimulating. And I appreciated his directness.

In the Obama administration, the status of the two had been partially reversed, with Tim now in the more lofty perch as Treasury secretary. But he had gotten off to an unfortunate start: his first major address, a long-awaited speech in early February, had been a PR disaster. Intended to unveil the administration's program for restoring credit in America's banks—an ambitious, forward-looking $2 trillion plan—the speech was attacked for being too general and short on convincing detail. Far from reassuring the public, it sent the stock market down nearly 5 percent. Critics denounced Tim. At Treasury, everyone felt terrible for him. Yet the scuttlebutt in the wake of the speech was titillating. His chief spokesperson, Stephanie Cutter, mysteriously disappeared. It was at this point that Rahm Emanuel was said to have taken control of Treasury, dictating everything from Tim's public appearances to his staff picks. When Tim's calendar and phone logs from early 2009 were re-leased, it was surprising how many times a day Tim spoke to Rahm or saw him. Many wondered whether Tim would survive.

Particularly in these difficult early days, Larry tended to take the wheel on auto matters. Tim was preoccupied with bank problems, so Larry's leading on autos seemed like a tacit division of labor. Though Larry didn't bring much knowledge of the subject, he recognized that unlike banks, the federal government was devoid of institutional expertise in autos. Most importantly, he brought his vast intellectual curiosity. Perhaps also because of his stronger personality and the fact that the meetings were mostly in his office, Larry would usually run the sessions. He was not the type to sit quietly through a presentation; we quickly learned to put our most important points first, because sometimes we would not get past the opening pages before Larry jumped in. At this particular meeting, the minute we brought up helping the supplier base, he became agitated. When he heard some of the particulars of our ideas, he was even more unhappy.

The root of Larry's response was his distaste for government intervention in the private sector. Though a good Democrat, he firmly believed in capitalism and free markets. He accepted the necessity of bank rescues and of helping GM and Chrysler, but suspected that the liberal wing of our party wanted more intervention and more bailouts. Luminaries like George Soros and Joseph Stiglitz, for example, advocated nationalizing banks. Larry was determined to draw the line between the "too big to fail" interventions and the pressure to do more. He didn't want us crossing into Laos.

Tim didn't voice an opinion, but we went away understanding that we would have to refine our thinking. A few days later, we got an unexpected intervention. As I would later witness firsthand, Barack Obama was remarkably well informed for a new President with so much on his plate. He mentioned to Larry that he had read about the liquidity problems of the suppliers in the
Wall Street Journal.
"It would be a shame if at the end of this, we saved the auto companies but weakened out the supply base and shifted the manufacturers' reliance onto foreign suppliers," Obama told Summers.

As I studied the industry in those early weeks, I learned that the car business had gone through a mini-version of the housing bubble. Auto financing had been abundant in the years leading up to the financial crash of 2008—for a brief period in 2006, buyers could borrow more than 100 percent of the cost of a new car! And because as many as 90 percent of consumers finance their new-car purchases, easy loans kept U.S. sales hovering around seventeen million vehicles a year until gas prices spiked. At the same time, substantial gains in quality and reliability were leading consumers to keep cars longer; all told, the number of cars in America rose by nearly 25 percent in the decade ending in 2007 while the driving-age population grew by less than 15 percent. The ratio of cars to licensed drivers, long greater than one-to-one, continued to increase. In 2008, of course, the wheels had come off. The collapse of the financial markets choked credit; rising unemployment and sinking house prices sapped household budgets; and summer brought $4-a-gallon gasoline, a particular disaster for the Detroit Three, with their anemic offerings in small cars.