Overhaul (43 page)

But I couldn't figure out why Ghosn had been so eager to meet. So when the second dinner—in a private room at the Four Seasons Hotel, paid for out of my pocket—began with the same fascinating but general business talk, I asked in my direct fashion why he had made a special trip to Washington to see us.

"I would like GM to be part of our alliance," he replied.

Ron (who was part of both dinners) and I asked a lot of questions about how that would work. Unlike Nissan and Renault, which had almost no geographic overlap, GM sold cars in many of the same places as Ghosn's two automakers.

Perhaps I lacked imagination, but I could not see how even extraordinary leadership could overcome the redundancy. I had also concluded that the success of Renault-Nissan was a function of Ghosn's personality and drive; it was not clear that the alliance would survive his eventual retirement. So after discussing it for a while, I politely deflected the idea. Later I would learn that Ghosn's interest reflected his fear that GM would form an alliance with one of his global competitors. He was maneuvering to forestall that.

Because I was in the midst of worrying about the management situation at GM, I did not let the dinner end without putting the question directly to Ghosn: "Would you be interested in becoming CEO of GM?" I knew it was a long shot and was not surprised when he deftly demurred.

Fritz's refusal to move fast on the hiring front was doubly worrisome because I knew capable executives would be hard to recruit. Among other things, money was going to pose a major challenge. Just a few doors down the basement hallway from me, Ken Feinberg, President Obama's newly installed "pay czar," was making it clear that compensation, or, more accurately, overcompensation, was something the administration was closely monitoring. A long-faced, nearly bald sixty-three-year-old mediator from working-class Brockton, Massachusetts, Feinberg had earned national prominence as the "special master" administering the September 11th Victim Compensation Fund. He'd done similar service in Agent Orange and asbestos cases and would go on to handle compensation for the BP Gulf of Mexico oil spill. His mission at this time was to regulate top executives' pay in the companies that had received
TARP
bailouts—in particular seven that the White House deemed to have received "exceptional" help. Four of those seven were General Motors, GMAC, Chrysler, and Chrysler Financial.

In response to public outrage over Wall Street's excesses and the financial panic, Congress and the Obama administration had each instituted rules regarding pay for top executives at companies receiving
TARP
funds. The administration's carefully thought-out approach was designed to regulate pay without hamstringing the firms' ability to attract and reward the best people. It provided for maximum cash salaries of $500,000, but put no limit on total salaries or bonuses, although anything above $500,000 had to be paid in restricted stock or the like.

Congress, meanwhile, could not be deterred from imposing harsher, less practical restrictions. Chris Dodd, the chairman of the Senate Banking Committee, pushed into law a requirement that bonuses could not be more than 50 percent of salary. This limitation, and a related ban on stock options, struck me as silly: bonuses and options are an important way to align the interests of executives with those of the shareholders in the companies they are running. Dodd's logic was that incentive compensation had driven many Wall Street firms to take imprudent risks. I understood his thinking but still disagreed.

The big problem was that the Obama order and the Dodd limit were essentially in conflict. If an executive couldn't receive a salary of more than $500,000 (the Obama rule) or a bonus of more than 50 percent of that (the Dodd rule), then his or her total income couldn't be more than $750,000 a year. While this was high pay compared to the income of a senior public servant, it was woefully short of what employers spend to attract and retain top talent. Enforcing such rules was clearly going to be difficult, divisive, and emotional, so the administration had come up with a clever way to get the monkey off its back: by appointing Ken Feinberg as pay czar.

My first meeting with Ken, in mid-June, went smoothly enough. I was struck by his affability and gregariousness. What brought me to his door was Al de Molina's desire for clarification on pay for himself and his lieutenants at GMAC. Al wasn't shy. He told Feinberg that he had gone without a bonus in 2008 and hoped to be treated "fairly" from now on. He'd brought along a schedule of what he and his team had in mind. It proposed that Al be paid around $12 million a year to run the giant finance company, with his executives scaling down from there.

"This won't be a problem," Feinberg said in his heavy Boston accent. "I've got people looking to be paid $100 million!" (He was referring, we later learned, to Andrew Hall, a hugely successful energy trader at Citigroup. In part because of controversy over Hall's pay, Citi ended up unloading its valuable trading unit at a fire-sale price—not a happy outcome for taxpayers, who would end up owning 34 percent of the bank.)

But in subsequent meetings, as public sentiment toward executive pay became ever uglier, the pay czar began to backpedal. Slowly and steadily, he ratcheted down the amount of "total comp" that he was willing to approve while ratcheting up the percentage of remuneration that could only be paid in stock. By the fall, he would effectively decree that no CEO could earn more than $9.5 million (thereby conspicuously ruling out compensation in eight figures).

I was disappointed that Feinberg was not more resistant to political influence. While I understood the sensitivity about compensation at companies saved by
TARP,
virtually none of these businesses were run by the same executives who had gotten them in trouble, and it was penny wise and pound foolish not to hire the very best. In the auto companies alone, the Treasury had invested more than $80 billion. Why should we jeopardize that? I wished Feinberg had been willing to speak up forcefully about the dangers of succumbing to mob psychology.

As this headache began to develop, GM's head of accounting, Nick Cyprus, won himself a place among the executives who weren't pushing GM forward fast enough. In mid-May, Harry had told Ray Young that we would want the 363 sale to close as soon as the court approved the plan. Based on guidance from Cyprus, Young said that because of the complexity of GM's bookkeeping, there was no way the company could do this other than at the end of a calendar quarter—in this case, September 30.

Harry went ballistic. "How much revenue do you think you miss every day you're in bankruptcy?" he thundered, knowing that the answer was $100 million. "There isn't a problem in this company that can't be solved by the billion-plus dollars you'll lose if you don't move more quickly!" He demanded a list of all the obstacles to closing on the day of the judge's decision. When he and Matt received it, they worked through them one by one to eliminate them as reasons.

Meanwhile, Fritz was taking a different approach with Cyprus, trying to walk him back gradually from his fixation on September 30, all the while making him believe it was his idea. Over several days, Fritz persuaded Nick that the deal didn't have to be at a quarter's end—maybe a month's end would do, maybe August 31. Next he persuaded him that it didn't need to be August 31, but maybe July 31. In due course, Nick agreed that with a bit of cooperation from the SEC (which was forthcoming), the July 10 date Harry and Matt had set was achievable. Watching this cajolery, I concluded that Fritz and Harry were both right. Fritz understood GM's culture and the need to approach Cyprus delicately. But Harry was also right that this kind of horse-whispering to get things done shouldn't be needed at a world-class company.

I made much faster progress with Ed as we teamed up to recast the General Motors board. Back on March 30, our announcements had included the fact that GM would be asked to replace a majority of its directors. I had no magic in picking that formulation; I had cribbed it from an earlier decision to "request" that Citi replace a majority of its board. After providing seats for Ed, the Canadian representative, and the UAW's nominee, we still had four slots to fill.

Ed and I are both strong-willed, yet we sorted through the candidates in a spirit of collegiality. He mainly wanted ex-CEOs with whom he'd had enough personal experience to be confident of their strengths; I wanted to bring the discipline of private equity to GM and had my favorites from that world. We made a list of candidates and split up the calls. With only one exception, a CEO who had just taken a competing board assignment, all of our targets agreed. It was clear from the conversations that these people, like Ed, viewed accepting a GM board appointment as a form of public service. I became confident that as Team Auto stepped back, the new directors would step up.

From the corporate world we chose Robert Krebs, the former chairman and CEO of Burlington Northern Santa Fe, a giant railroad on whose board Ed had served. When I met Krebs, he struck me as a lot like Ed: a laconic, no-nonsense clear thinker. Some months later, Warren Buffett bought the company that he had helped build. Also from the corporate world came Patricia Russo. She'd had a rollercoaster tenure as CEO of Alcatel-Lucent, but AT&T had been a major customer and Ed knew her well.

We recruited Dan Akerson, a managing director of the Carlyle Group, one of the biggest private equity shops. Dan had attended Annapolis and was still Navy-tough. Ed and I had each gotten to know him a bit because he had alternated stints in private equity with work as a top executive in the telecommunications industry. Dan was also direct and honest. Rounding out the foursome was David Bonderman, a friend of mine for more than twenty years. A lawyer turned investor, David had helped manage the fortune of Texas oil scion Robert Bass before cofounding TPG, now one of the world's largest and most successful private equity firms. He was razor-smart and one of the best investors in the world. Neither he nor Akerson suffered fools lightly—a big plus, I thought, for incoming directors of GM.

I knew nothing about Canada's choice, a business school dean named Carol Stephenson, but was delighted when the autoworkers chose Steve Girsky. This was a nice consolation for my having been unable to enlist him for Team Auto. Steve had lived and breathed the car industry for decades and was ecstatic to be asked to serve. When Gettelfinger put Steve on the board, his instructions to him were clear: "You are to worry about the stock price," on which a large proportion of the autoworkers' future health benefits would now depend. Our efforts to align the workers' interests with the company's by having the
VEBA
hold common stock had paid off.

The federal bankruptcy court in Manhattan was strictly off-limits to us while the case was pending. Under the law, anyone who showed up was eligible to be called to the witness stand. To make our case, we sent flocks of Treasury Department, General Motors, and outside lawyers, and just two witnesses: Harry and Fritz. The rest of us were relegated to tracking the proceedings via phone calls during breaks and terse text messages from the lawyers.

Not surprisingly for such an enormous case, opposition to GM's bankruptcy plan was legion. It included a handful of renegade bondholders protesting the sale of assets to Shiny New GM, product liability and asbestos claimants whose suits were being relegated to Motors Liquidation Company, disenfranchised dealers, splinter unions, and scores of other parties who thought themselves aggrieved. About two dozen law firms came out of the woodwork to file some 850 objections.

The case had fallen to Judge Robert Gerber, who had built a formidable reputation in the small, intense world of the bankruptcy bar. He was been chosen by lot for this assignment, as was the custom, and yet he seemed born to handle GM. Judge Gerber thrived on big cases and tight deadlines, and was known for his willingness to run important hearings late into the night to make sure all sides had their say, and then to deliver a balanced, well-written opinion the very next day.

Fritz and Harry prepped intensively for their testimony, but that didn't cramp Harry's style. A cardinal rule in giving a pretrial deposition is never to get into a debate with the opposition lawyer; the risk of stumbling or saying something wrong is too high. Harry, being Harry, not only violated that principle but even turned the tables, questioning the questioner. A Cadwalader lawyer on hand couldn't believe what he was hearing. "Harry is scary," he texted us.

Harry's court appearance, on July 1, was only slightly more restrained. The e-mails from the courtroom came fast and furious:

9:48
A.M.:
"Harry is the toughest witness I've ever seen. It's scary. I would not want to cross him."
9:49
A.M.:
"Harry is an animal on the stand."
10:08
A.M.:
"He's continuing to do well. The judge seems to like him and is listening attentively."
10:59
A.M.:
"First tort guys are done. They didn't lay a glove on Harry."
12:12
P.M.:
"Splinters are done ... we're really rolling."
12:28
P.M.:
"Harry has been one of the most phenomenal witnesses I've ever seen. I feel very comfortable about the overall sale."

True to his reputation, Judge Gerber wrapped up the hearing before July 4. Hoping for a positive outcome, we prepared to close. But hiccups occurred, some typical of complex transactions and others emanating from GM's lack of rigor. For example, GM projected that it would need $1.5 billion to make up for lost sources of dealer financing outside the United States. To arrive at that figure, GM simply assumed it would lose a certain percentage of its funding sources in those locations. The company had made no effort to check its assumptions, had not so much as called its offices in those countries. Our finance company guru Brian Stern checked with various financing sources and concluded that only $200 million of funding would be lost.

A more important example of the lack of financial rigor surrounded the decision of how much financing to provide GM as it exited bankruptcy. On Sunday, June 28, Brian Osias (who had joined the GM team to help with the burdensome workload) and Sadiq Malik met with their counterparts in New York to try to resolve how much capital GM would need. A month earlier, before the bankruptcy petition was filed, GM had estimated that its total peak capital need would be $59 billion. However, over the ensuing four weeks, GM's cash flows had been better than expected, in part because again, as with Chrysler, consumers showed more loyalty than we had budgeted. Nonetheless, GM kept its need at $59 billion by assuming that whatever outperformance it had achieved over the previous few weeks would be offset by underperformance later in 2009.