Overhaul (19 page)

I knew Rick and Fritz were planning to return to D.C. in mid-March. I called Rick and asked to see them together and then to meet with them separately. I had no specific agenda for the three-way meeting; it was mainly a pretext to get time alone with each, and it came and went without incident. But when Rick came back at 4:30 that afternoon, he still had Fritz in tow. Somehow our signals had gotten crossed. We had an awkward moment until Fritz excused himself and retreated to the local Starbucks, where he sat thinking that management changes surely must be in the works.

Rick and I faced each other uneasily at my conference table. He was impassive; I was nervous. While I had interacted with many CEOs in my Wall Street career, I'd never, in effect, conducted a job interview with the head of one of America's largest corporations. I asked him to describe his management team, the individuals' strengths and weaknesses, and how he saw it evolving over time. He said that Fritz was being groomed to succeed him, although after only twelve months as president, he would benefit from more experience. I was looking for an opportunity to gently shift the conversation around to Rick, but couldn't find one. So I just asked, "And what about your plans going forward?" Rick seemed to be expecting the question. "I'm not planning to stay until I'm sixty-five," he said (he'd just turned fifty-six), "but I think I've got at least a few years left in me." He paused and added, "I told the last administration that if my leaving would help save General Motors, I'm prepared to do it." My sense was that he left the meeting thinking he'd persuaded me of his importance to GM's turnaround, in part because of the lack of a qualified replacement.

Fritz came by the following morning. Balding, mustachioed, slightly stocky, he seemed an unprepossessing fifty-year-old corporate guy. But when he spoke, there was knowledge and intelligence in his voice. We ate lunch at my conference table—chicken caesar salads from the Treasury mess (paid for by me, of course). I kept the conversation general, just trying to get to know him and gain a sense of whether he was up to the job of replacing Rick. Fritz put his cards on the table. "Last summer I turned down a very attractive CEO job because I felt I had a responsibility to see GM through its problems," he said. He was equally direct about compensation; his salary had been cut by 30 percent and he hadn't received a bonus since 2005. "I understand the situation," he said, "but at some point, I need to focus on my family's financial security."

Fritz represented a conundrum. He was not only a GM lifer but also the son of a GM lifer. Born and raised in the Detroit area, he had attended the University of Michigan and, while he had moved around the world during his career at GM, he was a Detroit auto guy through and through—not exactly fresh blood for a company that needed sweeping change. Yet there was much about him to like. (I enjoyed razzing Harry about the fact that unlike him, Fritz had been a Baker Scholar at Harvard Business School, an honor based solely on grades and restricted to the top 5 percent of each class.) And I was intimated by the prospect of trying to recruit an A+ player from outside, not to mention the time and disruption that an intensive search would entail. We needed to be ready by March 31 to tell the world who would be the new CEO of General Motors.

T
IM AND LARRY TRIED
valiantly to help us parse what seemed like an endless thicket of decisions. But with the economy in deep trouble and financial markets hitting new lows, we were inevitably left to our own devices more than they, or we, would have liked. Larry jokingly called Team Auto a "social experiment"—we were like a petri dish left out on a laboratory counter to see what would grow.

Tim's time was in particularly short supply. He was locked in endless meetings—including a seven-hour session on a Sunday with all the economic team, as well as, for a substantial part of it, the President—trying to figure out whether to start nationalizing banks, and if not, what more should be done to prop them up. In the month of March alone, he testified before Congress six times, announced two massive new liquidity programs, unveiled a regulatory reform plan, and made a day trip to Medellin, Colombia, for the annual meeting of the board of governors of the Inter-American Development Bank. I couldn't begin to imagine how he coped with the stress.

Later, after our auto effort proved successful, many commentators would ask why the administration couldn't have taken a similar approach to the banks. This question flared most emotionally around AIG, the rogue insurance giant to which the Treasury and the Fed ended up committing $182 billion to stave off chaos and make creditors and counterparties whole. Even sophisticated critics almost always missed the crucial point: for banks, unlike automakers, bankruptcy was not a useful tool for reorganization, as the Lehman Brothers disaster had so vividly demonstrated. And as we quickly learned in autos, without bankruptcy as a tool for reorganization, it was nearly impossible to achieve shared sacrifice among the stakeholders.

That was the nub of what was angering the public and weighing on Tim: the absence of shared sacrifice. The hundreds of billions of dollars that the government was committing through
TARP
was protecting the financial system, but collaterally also rewarding the creditors and counterparties. In a perfect world, instead of having their risk essentially eliminated, these creditors and counterparties should have suffered along with everyone else touched by the crisis.

The Obama administration also opted not to change the management teams at the banks and financial companies. As I went about my business, I overheard fragments of the internal debate on this subject in the hallways of Treasury and the White House, but I stayed out of it. Based on sound advice from former Treasury Secretary Robert Rubin, I had gone to Washington resolved to stay focused on my assignment and not poke my nose into other business. Had I been asked, though, I'd have reiterated my belief that, with rare exceptions, a CEO who leads a company into a state in which its only recourse is a government bailout shouldn't be in his job.

So while Tim tried valiantly to make time for us, we ended up working much more closely with Larry. I was pleasantly surprised by his fascination with autos. But a lot about Larry intrigued me.

Of all the people who I encountered during my stay in Washington, he was among the most colorful and the most interesting. Though we were longtime friends and I had always felt that I had his respect, I was well aware of his reputation for bumptiousness and approached my role as one of his charges with a bit of trepidation. But working for him turned out to be stimulating, enjoyable, and harmonious. Like me—with more justification in his case—Larry didn't suffer fools. He was attentive to the opinions of people he respected, particularly those who offered well-reasoned analyses in matters outside his expertise. Titles and résumés meant little to him; he listened to what was said and decided whether the speaker seemed worthy of attention. Thus he regarded Deese's views on certain matters to be far more valuable than those of higher-ranking colleagues. Harry, too, quickly came to burn brightly on Larry's radar screen. Smart young colleagues adored him, and I could see why Larry had been popular among Harvard students while warring with some members of the faculty.

In our discussions, I tried to keep to my home turf of finance and business. It was hard to challenge him on economics, certainly for me but also for bona fide economists like Christy Romer, the chair of the Council of Economic Advisers. Alan Krueger, the affable chief economist at Treasury, was perhaps the Washington economist whom Larry respected most. He'd been a student of Larry's at Harvard and had received an A+.

I tried to decide whether Larry had always been great to work for or whether the searing experience of being pushed out as president of Harvard had changed him. In part based on what I heard from a few of his former colleagues from the Clinton-era Treasury Department, I concluded that some of his rough edges must have been sanded down. Also, he had arrived in Washington this time with a chief of staff, Marne Levine, who had both Larry's respect and very sound judgment. When he returned from a meeting in the West Wing, fuming about stupid ideas that had been put forward, Marne could calm him and keep him from flying off the handle. Larry visibly worked hard to control himself. At one meeting I attended, a junior colleague in the bleachers (the couch on the other side of his office) offered an unsolicited comment. "That's one of the silliest...," Larry began, but then caught himself and said, half under his breath, "That's the old Larry. The new Larry says, 'Have you thought about it this way?'"

Having been a star debater at MIT, he loved to argue. In many instances, of course, he used argument to express his views and try to win others over. But in other cases, he seemed to take a contrary position just to be sure all the pros and cons were hashed out. At still other times, he appeared to argue because he wasn't sure himself what he thought. For instance, I heard him take both sides—sometimes in the same conversation—on the efficient-markets hypothesis. This principle holds that because markets are always processing all available information, it's futile for an investor to try to "beat the market." In the aftermath of the 1987 stock market crash, Larry had drafted a paper against the theory; the analysis began: "There are idiots. Look around." Yet when Harry produced a set of projections for GM showing high potential returns for a prospective stockholder, Larry invoked efficient-markets theory to push back, arguing that if Harry's projections were accurate, we would already have a line of investors waiting outside our door.

His metaphors were vivid and so was his manner of speech. Once Diana Farrell began to offer an opinion, but before she passed the midpoint of expressing her thought, Larry interrupted to say (not harshly), "I've already considered that idea and rejected it." This so amused our younger colleagues that for weeks afterward they would say to one another, as they debated one proposal or another, "I've already considered that idea and
rejected
it."

Larry was an economist, however, not a businessman. Occasionally I thought he didn't have the best perspective on financial markets or business. I wasn't sure that he wanted to be told bluntly that he was wrong, especially by a subordinate. So I would gingerly try to correct his minor mistakes (Chrysler had
lenders,
not bondholders) and to nudge him ever so gently toward my views on business and finance. Our discussions were the high point of my Washington experience; I would leave convinced that there could be no happier future circumstance than the chance to work for him again.

Every few days, often in late afternoon when Larry's schedule was lighter, a delegation from Team Auto would troop over to the White House to squeeze ourselves around the cramped conference table in his office.

That was where we first presented our bill—a mid-March back-of-the-envelope estimate of how much the auto bailout was going to cost. I wanted to have a "budget" at the earliest practicable opportunity, with the notion that we would update it as our thoughts were refined by additional work. Coincidentally, the overseers of
TARP
had asked to see our numbers. They were getting ready to receive the results of the bank stress tests and were evidently feeling the same dread that Hank Paulson had experienced five months earlier, that
TARP
might not have enough money to cover all needs. Rahm began intimating that the auto bailout might have to seek new funding from Congress, probably a nonstarter under any circumstance (as the Bush administration had found) but surely impractical on our timetable. After a few anxious days, the issue receded as early signals from the stress tests came in.

Our first, rough estimate for the "auto caper," as Ron Bloom liked to call it, was $100 billion—$75 billion on top of the $25 billion the government had already put in. Within that total, we'd earmarked $50 billion for GM and Chrysler, $40 billion for their affiliated finance companies and for "consumer support programs" to cover warranties and encourage buyers not to abandon Detroit, and $10 billion for suppliers.

What I found offensive about these numbers was that less than three months earlier, the CEOs of GM and Chrysler had sat before Congress insisting that less than $20 billion would solve all their problems. Economist Mark Zandi's dramatic calculation of $75 billion to $125 billion, so startling at the December 2008 hearing, had proved far more prescient than those of men who should have known their business far better than any economist or government bureaucrat.

Larry barely batted an eye—we had just begun our work, so neither he nor we were in a position to put much certainty behind any estimate. And there was no immediate need to whittle down the numbers. The existence of
TARP
allowed us to contemplate committing tens of billions of dollars freely, a surreal contrast to the normal process of prying money loose.

The toughest issue on the table was what to do about Chrysler. Could it be saved? Should it be saved? The questions were debated at nearly every meeting. Finally, on March 13, the matter came to a head. Shortly after 4:30 on that chilly afternoon (though the cherry blossoms were ready to bloom), we gathered around Larry's table and took our regular seats, I at his right and Deese at his left. Filling out the table were Ron, Harry, Diana, Gene Sperling, Alan Krueger, and Austan Goolsbee. Austan, a forty-year-old economics professor from the University of Chicago, had been an adviser to Obama from the beginning of the long march to the White House. In appreciation for his steadfast support, the President had named him to one of three slots on the Council of Economic Advisers. Perhaps in part because of his special relationship with Obama, Austan never shrank from speaking his mind clearly, directly, and forcefully. He liked to go by the numbers, using the rigorous analytical approach for which the Chicago economics department was known.

Regarding Chrysler, there was no doubt as to what Austan (and CEA chief Christy Romer) believed. He began by recapitulating the dismal state of the auto industry that we had been living with for the previous ten weeks. He went on to address the impacts on employment of a potential Chrysler liquidation. Of course the loss of Chrysler would not mean that fewer cars would be sold in America; Chrysler's lost production would be taken up by other automakers. The question was, which ones would benefit?