Overhaul (9 page)

Amid the media and stakeholder frenzy, I shouldn't have been surprised that word of my acceptance on January 7 leaked almost immediately, though I'd hoped to keep the news confidential until I could inform my partners and our investors. But within a few hours, Senator Chuck Schumer called to congratulate me. How had he heard so quickly? "From Larry!"

Less than twenty-four hours later, Jake Tapper of ABC News posted a report on his website. For me, this was a potential disaster. My eighty-five Quadrangle colleagues had just been blindsided, not to mention more than one hundred investors in our private-equity funds, whom I had hoped to inform of my departure. Dismayed, I called Larry, who—to my amusement—wondered aloud whether the problem had arisen "from your end or our end."

Soon all hell broke loose. The first to take a swing at me was Bill Ford, the Ford Motor scion and ex-CEO whose company was not even on the federal dole. "It would be really helpful to have somebody in there who would take the time to have a deep understanding of our industry," he told reporters at the annual Detroit auto show. Ron Gettelfinger was quoted in the
Wall Street Journal
saying that the government should appoint someone who "knows something about the auto industry" rather than a Wall Street guy.

Politicians piled on. Michigan's two senators questioned my lack of knowledge of manufacturing and, in particular, autos. Why should they believe that a Wall Street guy who hadn't been to Detroit in three decades could handle an emergency that might wreck their state? As scared as I was, I agreed with Tim's and Larry's instincts in picking me for this assignment. This was not a managerial job; it was a restructuring and private equity assignment. And while I was not a classic restructuring guy, I had been through a number of bankruptcies. I certainly considered myself a qualified private equity investor. Equally important, I had been around the political arena for many decades, the kind of experience that Larry and Tim correctly deemed important. Others were kinder about my appointment, including Hillary Clinton, who sent me a BlackBerry message during her confirmation hearings for secretary of state: "Anything I can do to help?"

I quickly had my first taste of the popular parlor game of impugning the integrity of government officials, often without regard to facts. On January 9, the
New York Post
claimed that my appointment was being held up because of a suspicious link between Quadrangle and Cerberus, the owner of Chrysler. There was nothing suspicious: Cerberus had loaned money to a struggling portfolio company of ours that owned
Maxim
magazine. Later, in lieu of payment, Quadrangle had decided simply to give the company to Cerberus, which resolved the matter.

Yet, to my distress, the mainstream media picked up the tabloid report without independent verification. Ultimately, when my government vetters questioned me on the matter, they dismissed it as a nonissue.

What was I getting into?

Without question, I had a great deal to master. Deese shared with me the work that he, Brian Osias, and Josh had produced, and I began to read everything, from auto industry research reports to books about the history of the Detroit Three. But the only material we had from the Bush period were term sheets for the Chrysler and GM loans. Except for one of Hank Paulson's advisers who had stayed on to help Tim, we would, unfortunately, never meet with or speak to any of the Bush team.

***

Brian Deese greeted me on that first visit to transition headquarters. He looked as young as I'd expected from having spoken with him on the phone, and wore a workaday suit and tie and had a scruffy beard. Remarkably poised and exceptionally intelligent, he reminded me of the White House staffers I'd known as a reporter covering the Carter administration—talented politics-and-policy types who had always dreamed of passing through the White House gates each morning to work for the President.

Brian and I settled into a small empty office, a few doors away from Tim and Larry, and began discussing the daunting questions.
How should we define success? Was bankruptcy a realistic option for GM? Could Chrysler be a viable company? What did "competitive" labor costs mean? What was the most efficient and productive way to assemble an effective team, including outside consultants?

So much was on the table that not all of it immediately penetrated my consciousness. It would be days before I realized that the problems of the auto finance companies, GMAC and Chrysler Financial, were as great as those of the automakers. No solutions to the automakers' problems could occur without a sustainable restructuring of the finance companies as well.

Around noontime, I sat with Tim Geithner as he munched what looked like a tuna fish wrap. I later learned that in the course of the morning he had received word that the Senate Finance Committee was in an uproar about his neglecting to pay Social Security and Medicare taxes earlier in his career. Yet I detected no sign of distress.

This stoicism helped me see why the President-elect had chosen Geithner in the first place. Obama's options for Treasury secretary had been quite limited. Essentially, only Larry and Tim had the necessary government experience, along with the credibility vital in the financial world. Obama could have recruited a leading business figure, but the record of CEOs at Treasury was mixed at best, as evinced by the forgettable performances of Hank Paulson's predecessors, Paul O'Neill and John Snow. Meanwhile, choosing another Treasury secretary from Wall Street, like Hank Paulson, was politically out of the question after the financial meltdown. As head of the Federal Reserve Bank of New York, Tim had facilitated the bailouts of AIG and the banks and helped to prevent a systemic collapse. That had earned him Wall Street support, even though he was neither an economist nor a financier.

I had long heard great things about Tim and knew he had spent most of his career in public service and that he was almost indifferent to the creature comforts prized by Wall Streeters like myself. His only outside interests seemed to be tennis, basketball, workouts at the gym, and cooking at home on weekends. Like Obama, he had the adaptability of one who had grown up around the world: his dad had worked in international development, and Tim had spent much of his childhood in Zimbabwe, India, and Thailand. In the 1980s, the senior Geithner oversaw the microfinance project of Obama's mother, Ann Dunham, for the Ford Foundation in Indonesia.

Tim had followed Larry up the ladder at the Treasury Department, where he'd gained a reputation for his ready grasp of difficult issues and sound judgment. The big question about Tim during the selection process had been whether he was personally imposing enough. As Ken Duberstein, ex-chief of staff to President Reagan, told the
Washington Post,
"Tim at 47 looks 32, and you need to have ... grey hair and gravitas. It's not that he's not qualified; it's how he looks." It was said that Obama chose Tim over Larry both to signal a step past Clinton and because of personal chemistry.

From Tim's office, I went next door to visit Summers, who was sipping one of the numerous Diet Cokes that he typically consumed in the course of a day. Far more expressive and voluble than Tim, he exclaimed several times, "This is going to be great." I'd known and liked Larry since the Clinton administration and was in awe of his intellect, vast knowledge, and ardent curiosity about unfamiliar subjects—such as the auto industry. His appetite for work was prodigious, but he was also the archetypal absent-minded professor (habitually late, chronically disorganized). Happily, his determination and drive more than compensated. As fast as his mind worked, his mouth was often in a lower gear. He could start a sentence several times before settling on exactly what to say. Early in our relationship, I had learned to resist trying to help him complete his thought. And I'd seen flashes of the intellectual arrogance that contributed to his fall at Harvard, where he was president from 2001 to 2006. But I had been delighted when Obama asked him to take on the pivotal job as director of the National Economic Council (NEC). I could not imagine the new administration tackling problems of the magnitude it was facing without Larry's help.

In due course, our conversation turned to the controversy swirling around me. "We underissued that one," Larry said, introducing me to a new bit of Washington jargon. I took him to mean that the Obama team should have anticipated the flap and acted to head it off. I offered to step aside on the spot. "You shouldn't feel any obligation to me," I said. But Larry responded that both he and Tim were convinced that my Wall Street experience and part-time political work were the right skills for the job.

I wasn't so sure. I had accepted the job welcoming the fact that I would be reporting to Tim and Larry, and now the press had turned me into a czar (which would have amused my Rattner ancestors who were fur merchants in Moscow). I felt that I had a huge bull's-eye painted on my back.

I made only one other visit to transition headquarters, coincidentally on the day the Senate agreed to the second $350 billion of
TARP
funding, January 15. Pushing through the second tranche of the unpopular program was a heady success for an administration that hadn't yet taken office. The news occasioned high-fives in the economics corner of the eighth floor and a victory-lap appearance by Rahm. I met Haley Stevens that day, even younger than Deese and a native of Michigan, who had wanted more than anything to assist with autos and had gotten a mutual acquaintance to send me her résumé. Haley had spent most of the three and a half years since graduating from college in one political job or another while also earning a master's degree. After the election, she'd worked on confirmations for cabinet-level appointees. Since she was already on the transition team's payroll, Deese and I quickly decided to make her our chief of staff. We would come to find her tireless, cheerful, and blessed with a social conscience and a talent for improvisation.

A little later, I met a far more senior new colleague, Diana Farrell, who was slated to join Larry's NEC as a deputy director. Like me, Diana came from business. Unlike me, she was versed in management consulting, having been the director of the McKinsey Global Institute. While neither she nor I knew what her exact role on the team would be, Larry had inserted her to provide some senior support for Deese during the muddled early days, and I was delighted. From the start, Diana realized that GM and Chrysler were going to need much more of an overhaul than the President's political advisers and even Larry expected, a point she helpfully tried to drive home to them.

When inauguration day arrived, I deliberately remained in New York and watched Barack Obama be sworn in on TV. I had decided to keep my trips to Washington at a minimum until my appointment went through. I saw culture shock ahead: my career had involved moving to smaller and smaller firms with less and less red tape—from Morgan Stanley to Lazard to Quadrangle. Suddenly I was entering the world's largest bureaucracy, a realm of meetings and memos. The new administration was drowning in questions, often with higher priority than those of our team, and almost no one knew how to make things happen. I would have to be polite, work the system, and keep nudging. But the inefficiency sobered me. It was what Wall Street would call a risk factor.

Like nature, government abhors a vacuum. I was flooded with e-mails and calls even though my appointment was by no means official. Seemingly small matters foretold of major issues to come. For example, in mid-January GM blew its first deadline under the Bush loan agreements, failing to satisfy certain reporting requirements for its second installment of $5.4 billion. The company's accounting systems, it emerged, were simply incapable of producing data on GM's cash position in the form that the Treasury wanted. The GM bureaucracy was equally unsuccessful at revising its corporate expense policy on time. Five days later, it complied and got the money.

Automotive suppliers started to fail, which was how I discovered that the scope of my assignment was much broader than I'd anticipated. GM and Chrysler had dominated the conversations with Tim and Larry. None of us appreciated that, with auto sales down 40 percent, the collateral damage among related businesses would be vast. These companies, which provide factories and repair shops with raw materials and parts, were in deep trouble, and because of their interconnectedness, the trouble could become wildly contagious. Bailing out the giant automakers wouldn't be enough if they could no longer get the parts they needed to build cars. A collapse of just a few key suppliers could cause the Big Three (and possibly some transplants as well) to shut down abruptly, triggering widespread economic disarray. Yet no government money had been allocated to help the auto parts manufacturers. Like the seven-second delay in live television, the suppliers' problems took a little while to surface. This was because the Big Three usually didn't pay for parts until forty-five days after delivery. A slowing of the assembly lines actually made the suppliers temporarily more flush—they could collect on prior deliveries without having to spend money to fill new orders. But when the shock wave from collapsing demand caught up with them, its effect was brutal. And with capital markets frozen, they had nowhere to turn.

Most of the failures were companies that I had never heard of—like Contech, a privately owned, one-thousand-employee metal-casting company outside Kalamazoo, which declared bankruptcy after revenues fell by nearly one-third in 2008. Multibillion-dollar businesses whose names I vaguely knew—like American Axle, Lear, TRW, and Dana—saw their stocks collapse. As I later learned, the rule of thumb is that for every automaking job there are two supplier jobs, suggesting that 650,000 jobs were at risk among suppliers.

Since early January, Brian Deese had been thinking about a definition of success for our team. It was clearly not just a matter of dollars and cents. How should we balance the bailout's huge cost and risk against the need to preserve communities and jobs and limit the economic ripple effects? We quickly settled on two principles to propose to Larry and Tim. First, further government funding should come only in exchange for fundamental restructuring that made automakers truly viable and got them off the federal dole. Second, all stakeholders in GM and Chrysler—investors, creditors, employees, and retirees—ought to share the pain of such an overhaul.