Overhaul (10 page)

This definition was notable in part for what it did not say. It pointedly did not include protecting all jobs. Or rule out bankruptcy. And it did not include industrial-policy goals, such as the development of electric vehicles. Instead it mirrored the hard-nosed approach that a private owner might have taken—except the new owner was to be the American taxpayer.

We expected objections from other parts of the administration, in the form of an "interagency process" in which Energy, Commerce, Labor, and other departments would weigh in. I braced for compromise. But perhaps because of the magnitude of the crisis, or because everyone in the new administration was equally overwhelmed, no other part of the executive branch got involved. Indeed, as we worked, Obama's "climate czar," Carol Browner, mediated between the administration and Congress on tougher fuel-efficiency rules without ever asking us to twist arms at Chrysler or GM.

The flow of auto industry issues became a torrent as I tried to calm colleagues and hand off leadership at Quadrangle. As I began to address the task force's logistical issues, from staffing and space to computers and phones, I struggled to comply with onerous vetting requirements and spent countless hours helping to search for ways to defuse questions on my qualifications.

Being vetted can be a full-time job. At Josh's suggestion, I had begun talking to my attorneys in mid-December, in part to ascertain whether public office was feasible for me. Every senior appointee has to complete two massive documents: the SF-86, an impossibly tedious security-clearance statement that requires listing—j ust for example—every foreign trip an applicant has taken in the previous seven years, and the SF-278, which involves the disclosure of every financial interest and obligation. Like most recent administrations, this one had added its own questions, derived from past debacles, such as Zoe Baird's failure to become Bill Clinton's attorney general after neglecting to pay the so-called nanny tax. I can't count the hours I spent complying, but I do know that the honor of working for the federal government cost me more than $400,000 in legal fees.

The vetting rules were more than a personal nuisance; they hampered our effort to assemble a first-class team. As part of his pledge to rid government of special interests, Obama layered new conflict-of-interest strictures on top of the statutory rules that applied mostly to financial holdings. He targeted lobbyists with rules that barred any candidate who had worked for an organization that would be a party to the matter that the individual would be handling in government. This seemingly logical concept had the unintended consequence of severely restricting our ability to hire anyone who knew anything about the automobile industry, a limitation that fueled the very criticism we were trying to counter.

I didn't see Larry Summers again until two weeks after the inauguration, in his new West Wing office, a 16-by-17-foot space that appeared to have been last renovated in the Eisenhower era. The view was of a white parapet perhaps two feet away. Larry didn't care; offices in the West Wing are all about proximity to "the Oval." Neither did Deese. In what must originally have been a reception area were jammed a half-dozen desks for support staff. Deese had commandeered one, and for the first few weeks was sure he'd get evicted. But eventually he was told that he could either stay or decamp to a real office, in the Eisenhower building across the driveway. Always wise, Deese also understood the value of proximity and elected to remain in a location that gave a huge boost to our efficiency by guaranteeing ready access to Larry during a period when his every moment was precious.

My visit was motivated by my growing despair. Every day had brought additional evidence of the seemingly intractable problems of GM and Chrysler—loss of market share, overwhelming structural costs, bleeding cash. Having had experience in the mosh pit of restructurings, overhauling entities the size and complexity of the automakers on tight deadlines felt impossibly daunting. Simultaneously, the Greek chorus of criticism intensified. On February 2, I saw Senator Carl Levin of Michigan, whom I knew slightly, at the swearing-in of Hillary Clinton. When I reintroduced myself, he politely but firmly announced, "If you're going to do this job, you'd better have some people around you who understand manufacturing."

My growing impulse—notwithstanding my desire to serve in a time of crisis—was to snuggle back into the comfort of Quadrangle. "I don't mind a challenge but I like to know it's possible," I e-mailed Larry. Larry can be an indefatigable and relentless salesman and batted back my concerns one by one. Among other things, after weeks of patient inquiries, I still had little idea of how many people I would be allowed or how to get them on the payroll. When I mentioned this to Larry, he asked how large a team I needed. "If we were in the private sector, I'd say fifty people," I told him, "but in a governmental context, maybe fifteen."

"But the whole NEC is only nineteen professionals!" Larry exclaimed.

In spite of all this, somehow I left the meeting willing, for the moment at least, to soldier on.

Larry and Tim and I had agreed that, to dispel the furor surrounding my appointment, the task force needed to be bolstered with someone who could balance my Wall Street credentials with credibility in Detroit. We considered veteran industrial executives, like my friends Henry Schacht, former head of Cummins Engine, and George David, chairman of United Technologies. I was eager to hire Steve Girsky, formerly a top auto equity analyst at Morgan Stanley who had also worked for both General Motors and the UAW. Steve had forgotten more about the industry than I would ever know. But a stint as an
unpaid
adviser to the UAW during bailout negotiations the previous fall disqualified him under Obama's rules.

As a potential deputy, many suggested Ron Bloom, whom I knew slightly as we'd overlapped at Lazard before he'd gone on to a totally different career. The son of leftist parents who sent him to a Zionist labor youth camp, Ron had been inspired to help workers. Yet unlike most aspiring labor activists, he went to Harvard Business School and then Wall Street. At Lazard, he and his partner Gene Keilin engineered large, creative restructurings aimed at giving workers both equity ownership and seats on the employers' boards.

In 1996, Ron became, in effect, the United Steelworkers' chief restructuring officer. Cheap steel from emerging nations was causing American steelmakers to fail, often resulting in ugly bankruptcies that left workers and pensioners in the cold. Rather than try to prop up doomed companies, Ron showed his genius in helping them consolidate, identifying and saving the jobs that would last and arranging the softest landing possible for steelworkers who were displaced. We convened at the Ritz-Carlton, where he ordered a martini—not exactly a steelworker's drink. But with his long, solemn face and warm eyes, he looked every bit the workingman's advocate. Like many negotiators, he had a ribald sense of humor. He liked to compare his style to that of the patient in a dentist's chair who grabs the dentist by the genitals and says, "Now, let's not hurt each other." His sense of humor extended to himself. "I get it," he said one day early in his tenure, as the team was filling with Wall Street veterans, "I'm affirmative action."

Like me, Ron was used to running his own show. Yet I liked him and we had a lot in common. We'd both been through many restructurings. Like me, he was soft-spoken and fact-based. We shared a firm capitalist perspective: companies had to be viable, and saving loss-makers was pointless. And we agreed on another key issue that Ron raised. "Just so you know where I'm coming from," he said, "my agenda here is to save as many jobs as possible."

"So is mine," I replied.

Finding Ron was a step forward, but my doubts deepened days later, when the White House officially refused to grant Girsky a waiver from the vetting rules.

At almost exactly the same moment, five senators—including the Michigan Democrats—sent an open letter to Obama that seemed aimed at me. They asked him to "create a group of advisors to oversee the loans and provide the insight needed to steer our domestic automakers through this unprecedented crisis." The senators said the panel should "understand manufacturing."

I'd had enough. I drafted a long e-mail to Larry listing the reasons for me to withdraw. But I didn't send it. I actually sent a shorter, milder note, offering again to step aside. "I am sorry that we are putting u in this position," Larry responded, not letting me off the hook.

Meanwhile, with February 17 looming, we tried to get organized. As Deese had done with his desk in the West Wing, Haley Stevens simply commandeered a spacious, airy room at Treasury. She had desks placed around the perimeter facing the yellow walls and put a conference table in the center. Telephone and Internet access was delayed, so we used our cell phones and wireless cards, wondering how past incoming administrations had functioned. The windows of the room looked out on the White House, a constant reminder of the pressure on us.

Officially I had no office. Not having completed the appointment process, I was not supposed to be in the Treasury building except for meetings, although many rules were bent in this crisis atmosphere. I was given the use of a cavernous office, decorated with an antique typewriter and a framed collection of 1938 currency, a dozen or so doors down from Tim's suite. History seeped from the walls. In this room, President Andrew Johnson had signed the Amnesty Proclamation on May 29, 1865, restoring the rights of those who had joined the Confederacy. A printed copy hung on the wall with his signature, although it turned out to be a facsimile.

I felt like a kid in a new school, but all the teachers were also new. It was so hard to get through the Secret Service checkpoint that on my second day, I e-mailed Haley, "Is there a cafeteria in this building? I'm afraid to go out—I may never get back in!" Everything was complicated, including communicating with Tim, who I assumed would have e-mail and a BlackBerry. But within ten days of his taking office, e-mails to his address were routed to the "Executive Secretariat," a group whose job was to manage the message flow to Tim, with rules and forms for everything. Every communication needed to adhere to a specific format and clearance process.

Meanwhile, January auto sales were abysmal—GM was down 49 percent, Ford 40 percent, and Chrysler 55 percent. The companies were burning through their money at an alarming rate. GM's cash position was skirting close to the $11 billion minimum the company said it needed to operate; Chrysler forecast that it would drop below its minimum operating requirement of $2.5 billion before March ended.

Given these figures and the Bush loan agreements, which set very specific benchmarks for the automakers to achieve by February 17, we could not delay opening a dialogue with both companies. The first call—between Ray Young, of GM, and Brian Deese, Diana Farrell, and Mike Tae, a new arrival at Treasury—revealed that GM was still dreaming. Each company was required to include a pessimistic or "downside" assumption about future auto sales, but GM's idea of a downside was 20 percent market growth. Diana tried to push Ray to think of more appropriate downside cases but couldn't make him understand. "Okay, let me try this one more time," she finally said. "Ray, I'm not sure you're hearing what I'm saying. What I'm saying is that your
worst
case is our view of the absolute
best
case, and you need to start thinking about radically different outcomes."

So concerned were Brian and Diana (I was still operating behind the curtain) that they recommended to Larry that he alert the GM board. He agreed and called Erskine Bowles, his friend who had been one of the directors who had visited Paulson back in October 2008. We also worried that GM had too little contingency planning under way. Thanks to Wagoner's refusal to consider bankruptcy, the company had not even hired restructuring lawyers until mid-December. With Chrysler, the task force did a similar reality check, emphasizing the need for conservative assumptions about demand. Chrysler was already pessimistic in its downside assumptions, though with its sales down 55 percent, the company's planners could hardly have been otherwise.

Bankruptcy, of course, had always been the elephant in the room. It was scary even to think about. Yet if managed successfully, it could enable GM and Chrysler, under the protection of a court, to stay in business while restructuring debts, renegotiating contracts with unions and suppliers, selling or scrapping obsolete and underused plants, and otherwise positioning themselves for a fresh start.

From the first moments in December when Josh Steiner had started sharing tidbits about what he and Deese were learning, I had thought bankruptcy was inevitable. Especially at GM, there were too many actors on the stage and too many liabilities that needed to be expunged or dramatically reduced for me to believe that a purely voluntary restructuring could work. Conceivably, the company could renegotiate its labor contracts without court protection. But what about the thousands of individuals and institutions who held GM bonds? How could GM ever corral all these creditors and persuade a large majority to accept pennies on the dollar, something a voluntary restructuring would require? And what about GM's vast, overgrown dealer network—more than six thousand independent businesses across the country, each protected by contracts and state franchise laws?

Senator Corker had tried to prepare the way for a restructuring without bankruptcy by designing the three conditions that then became embedded in the Bush loans. But they proved nowhere near tough enough to ensure financial viability and impossible to implement outside bankruptcy. GM and Chrysler wasted many hours trying to comply with them, while in the end their principal benefit was to provide a baseline that all the stakeholders would understand and thereby ease the pressure on us to produce conditions of our own.

At the same time, the risks of bankruptcy were immense. I was far from being an expert, but I'd seen enough in my investment banking career to know that bankruptcy disrupts a business from top to bottom. As the automakers were always quick to remind us, customers dislike dealing with bankrupt companies; suppliers demand cash on delivery. And imagine trying to hire talented people if they know your business is bankrupt. Instead of being able to concentrate on competing in the marketplace, executives must spend much of their time huddling with lawyers and advisers and placating bondholders and banks. The longer the exercise goes on, the more distracting and expensive it becomes. I remembered the head of our restructuring practice at Lazard, a crusty veteran of scores of deals, telling me again and again that "bankruptcy should never be thought of as the solution of first choice for a troubled company." Todd Snyder, a Rothschild bankruptcy specialist who had advised on the Bush bailout plan, became our indispensable guide. He knew all the tools and techniques for effecting corporate overhauls. I was particularly gratified when he agreed with my amateur's assessment that our salvation might lie in a form of asset sale known as a Section 363, after the part of the bankruptcy code that governs it.