American Icon (64 page)

B
y the end of the week, the UAW had come back to the table and resumed negotiations with Ford on the VEBA. They reached a tentative agreement over the weekend and announced it on Monday, February 23. The final deal changed the way overtime pay was calculated, reduced break times, and eliminated cost-of-living adjustments, the Easter Monday holiday, and a $600 Christmas bonus. It required all employees to take company-paid physical exams to lower insurance costs and allowed the company to offer yet another round of buyouts. It also did away with the jobs bank program, though Ford agreed to provide supplemental pay to laid-off workers for up to a year. Most important, it allowed the automaker to use Ford stock to cover half its remaining VEBA obligation.
^*

By now, the Presidential Task Force on the Auto Industry had finally coalesced and held its first meeting. The group was cochaired by Treasury secretary Geithner and Larry Summers, the director of the President’s National Economic Council. It included the secretaries of commerce, transportation, energy, and labor as well as the director of the Office of Management and Budget, the chair of the Council of
Economic Advisers, the director of the White House Office of Energy and Climate Change Policy, the administrator of the Environmental Protection Agency, and Ron Bloom, another investment banker from Lazard.
^*
He and Rattner would lead the day-to-day operations of the ad hoc group and oversee its small team of young technocrats.

General Motors and Chrysler made urgent calls to both men when they heard that Ford had negotiated its own deal with the UAW. Chrysler was particularly upset and accused the Dearborn automaker of trying to force it into bankruptcy. Rattner was not pleased, either. He called Ziad Ojakli after hearing the news.

“Let us handle this,” the still-unofficial car czar said.

Ojakli told him that Ford had to look out for its own interests.

Gettelfinger and King briefed local UAW leaders on the deal on February 24. In addition to Mulally’s pay cut, Bill Ford—who was still not getting paid—also had agreed to give up a portion of his deferred compensation. Union leaders were impressed. They endorsed the agreement unanimously and urged their members to vote in favor of ratification. With two of the three American automakers teetering on the verge of bankruptcy, it was not a hard sell. The amendment to the 2007 labor agreement was ratified on March 9.

Richard Linz, a worker at Ford’s Ohio Assembly Plant in Avon Lake, summed up the prevailing sentiment.

“
We feel like we’re over a barrel,” he said. “I want to retire from Ford. I don’t even know if that’s possible anymore. I want to keep working. I want to keep my job.”

He said the news that Mulally and Ford were taking pay cuts did make his own sacrifices a bit easier to digest.

The agreement was a coup for Ford. The concessions would save the company well over $500 million in 2009 alone, and the VEBA deal would give it another $3.7 billion in cash to use to buy back debt. Booth and his finance team wasted little time getting started on that. They had to. The UAW had agreed to these concessions only because Ford had promised to wrest similar sacrifices from its
other stakeholders—the bondholders in particular—just as Washington was demanding of GM and Chrysler. Hinrichs and Mulloy gave Gettelfinger and King their word that Ford would do that, and the union leaders trusted them enough to do the deal on the strength of that promise. Now Ford had to make good on it.

O
n March 4, Ford did just that. As GM and Chrysler continued to haggle with the union, the Dearborn automaker announced a three-part debt restructuring program. First, it offered bondholders $80 in cash and nearly 109 shares of Ford stock for every $1,000 in senior convertible notes they sold back to the company.
^*
Second, Ford Credit issued a $1.3 billion cash tender offer of 30 cents on the dollar for unsecured, nonconvertible Ford debt, which was then trading at just 20 cents on the dollar.
^†
Finally, Ford Credit issued another $500 million cash tender offer—later increased to $1 billion—for Ford’s senior unsecured term debt, with the price to be set at auction. This mix of cash and stock deals was designed to prevent investors from working together to get better terms from the company. Each component of the program played to a different investor base.
^‡

It succeeded beyond Ford’s most optimistic expectations. Over the next month, Ford and its lending subsidiary spent $2.4 billion in cash and issued 468 million new shares of stock to retire $9.9 billion worth of debt. Wall Street was stunned by the take rate.

“Investors jumped on the offer like it had slapped their mothers,” analyst Shelly Lombard of Gimme Credit declared just before the deal closed.

It was one of the largest debt swaps in U.S. history, but it was not Ford’s first. Over the past couple of years, Schloss and his team had
been quietly working Ford’s balance sheet. In August 2007, they had converted $2.1 billion of preferred securities into equity. Over the next twelve months they exchanged another $998 million worth of Ford debt for company stock. Between August and October 2008, they sold another $434 million worth of stock and used the proceeds to purchase Ford Credit bonds.
^*

All of these moves hurt Ford’s shareholders because they diluted the company’s stock. However, since the Ford family’s shares could not be diluted, this was largely academic. No matter how upset the other shareholders might get, there was really nothing they could do about it. And as long as they did not sell their shares in anger, investors ultimately benefited greatly from these plays. As for the bondholders, the March offering was entirely optional. It was a sweet deal for the company. Ford was able to buy back its debt at 30 cents on the dollar. At the time, at least, it seemed just as sweet to bondholders. They were able to sell their paper back to Ford for a dime more per dollar than it was currently worth. Given the state of the American automobile industry, many of them were happy to get anything.

P
resident Obama did not wait until March 31. It was already clear that neither GM nor Chrysler would be able to meet the terms his predecessor had established as a condition for further government aid. But he decided to give them one more chance. Like George W. Bush,
Obama had concluded that the uncontrolled collapse of the two automakers would be too big a blow for the already battered economy to absorb.

On March 30, Mulally was presiding over the now-daily SAR meeting in the Thunderbird Room when Ojakli was notified that Obama
was about to address the nation. The technicians in the control booth got CNN up on the big screen just before 11:07
A.M
., when the president stepped into the Grand Foyer of the White House and, flanked by the members of his new task force, delivered his final ultimatum to Detroit.

“Year after year, decade after decade, we’ve seen problems papered over and tough choices kicked down the road, even as foreign competitors outpaced us. Well, we’ve reached the end of that road,” he said. “We cannot, and must not, and we will not let our auto industry simply vanish. [But] we cannot make the survival of our auto industry dependent on an unending flow of taxpayer dollars. These companies and this industry must ultimately stand on their own, not as wards of the state.”

The president gave GM sixty days to produce “a better business plan” that addressed all of its legacy issues and transformed the automaker into a leaner, more competitive company. He also fired Rick Wagoner. Obama said it was too late for Chrysler. Instead he gave the Auburn Hills automaker thirty days to negotiate a marriage with Italy’s Fiat SpA.

There was something in it for Ford, too, at least indirectly.

“We must also recognize that the difficulties facing this industry are due in no small part to the weaknesses in our economy as a whole,” the president said. “Therefore, to support demand for auto sales during this period, I’m directing my team to take several steps.”

Obama said he would speed up the release of funds already appropriated to purchase new government vehicles through the recently passed American Recovery and Reinvestment Act. He would take additional steps to free up liquidity for automotive finance companies so that they could provide credit to dealers and consumers. He would also order the Internal Revenue Service to alert consumers to a new tax break for those who purchased a new car or truck. And he would work with Congress to develop “an even more ambitious incentive program to increase car sales.”

“Yes!” shouted Ojakli, punching his fist in the air. He and his staff had been working for months to convince Washington to do
something to spur new vehicle sales. Similar programs were already making a big difference in Europe. This was the first sign it might happen in the United States, too.

The president concluded by promising to help communities in Michigan and other parts of the Midwest deal with the consequences of this epic restructuring.

“If we can carry one another through this difficult time and do what must be done, then we will look back and say that this was the moment when the American auto industry shed its old ways, marched into the future, remade itself, and once more became an engine of prosperity not only in Detroit, not only in our Midwest, but all across America,” Obama promised.

When the president finished speaking, everyone in the Thunderbird Room looked at one another and let out a collective “Wow!”

After asking for the video feed to be shut off, Mulally addressed his executives.

“Guys, this is an amazing moment for us to come together around the Ford plan and make history,” he said. “You’ve spent all of your working lives waiting to make a difference. Well, now is your time. This is about the soul of American manufacturing, and you’re part of the solution.”

The White House had e-mailed Ojakli a copy of Obama’s speech while the president was delivering it. Copies were quickly made and passed out to everyone seated around the table. Mulally had been taking notes throughout the speech, listing each of the things that Ford’s competitors were going to be required to do. He began going over the details, pausing after each item.

Obama told GM it needed to consolidate its brands.

“Have we done it?” Mulally asked. “Check!”

The president ordered GM to clean up its balance sheet.

“Have we done it? Check!”

Obama told GM it needed to create a credible business model that would allow it to succeed in the global marketplace.

“Have we done it? Check!”

Everyone agreed that it would take a miracle for GM to accomplish
these things in the short time allotted to it. Bankruptcy was now inevitable. Several of the Ford executives were ready to declare victory.

“There is no way bankruptcy can work,” one of them said. “No one will buy their cars.”

Mulally shook his head.

“You better believe that, if the federal government is going to get involved in it, it’s going to work,” he said. “You can count on it. They can write the rules, and they can rewrite the rules. They can put a man on the moon. It
will
work. We are going to have to stick to our plan and execute with more skill and courage than ever.”

The mood in the room was suddenly somber as the executives began contemplating what that might mean for Ford.

“Their debt is going to be wiped out,” someone sighed.

“So is ours.” Mulally smiled. “We’re going to accelerate the implementation of our plan and pay back the loans. Who’s going to move faster? Who
can
move faster? Who’s going to have to have every one-hundred-million-dollar purchase approved by Washington?
We
are in charge of
our
destiny.”

Someone made a crack about Wagoner’s posterior and the president’s boot. Everybody laughed—except for Mulally. He held up his hand and stopped the snickering.

“We’re not going to gloat,” Mulally said. “This is our time to be humble and stay focused.”