Overhaul (37 page)

The group veered close to having the government take control of the two most troubled banks, Bank of America and Citigroup, which was already partially owned by the government by virtue of past rescue efforts. If the stress test results were unfavorable, the more aggressive attendees argued, the government's capital should come at a high price in terms of ownership and potential control. Larry Summers was tempted by the idea. As an academic, he well understood the intellectual argument that a bank with more liabilities than assets was an insolvent bank.

Taking over a couple of banks would not, in itself, necessarily be a disaster, as the AIG experience had demonstrated. What was unnerving about the March 15 discussion was that some advocated, as part of this proposed takeover, not making all the creditors of the two banks whole. Of course, just as we had done with Chrysler and were planning to do with GM, not giving all the creditors of an insolvent institution 100 cents on the dollar is fundamental to the bankruptcy process. But among the differences between banks and car companies is that the banks' creditors included counterparties to trillions of dollars of various derivative and swap transactions. The collapse of Lehman Brothers had nearly brought down the financial system when traders became terrified of being counterparties with anyone. Seeing creditors get more than they deserved was distasteful, to be sure, but compromising the counterparties of Citi and B of A would surely have had even more cataclysmic results. Fortunately, cooler heads prevailed, and when the Sunday meeting ended, seven hours after it began, Tim's plan remained intact.

Harry and I agreed on a strategy for making our case for government ownership of GM. We were not going to argue policy or politics with Larry; we were going to argue business. By the time we sat down with him on May 11 to talk about how to invest the public's money, I'd boiled down the message to something simple: "We can either get nothing for something, or we can get something for something." By that I meant that if we didn't take equity for our money, we would be shortchanging ourselves, since GM could not support more debt.

Harry was passionate. And after many years as an investment banker, I thought I was a pretty good salesman too. We started by explaining to Larry that foreign automakers, particularly the Japanese, operated with far less debt than GM would have even if he accepted what we were about to propose. Then Harry presented two contrasting scenarios. The first provided for the new Treasury money to be invested entirely as debt. Not surprisingly, even as far out as 2014, GM would be much more highly leveraged than its rivals—basically wrapped in a financial straitjacket. Any significant hiccup in the economy had the potential to send that GM spiraling into oblivion. The second scenario assumed that most of our money would go in as equity. A small portion would go in as debt, which would be fully paid off by 2014.

"
This
GM can compete and win," Harry said. Having spent the past month overseeing the rebuilding the automaker's plans from bottom to top, he was certain of GM's promise. He spoke of the potential for huge value, possibly recouping the entire investment, or more, by the government if it held GM shares.

Next came the most difficult aspect of our pitch. The way the math worked, Harry explained, the government would end up owning not merely a piece of GM's equity, but a majority stake of about 60 percent; in other words, it would control the world's second-largest automaker. Furthermore, said Harry, we thought GM should be set up as a privately held company. It would have only two other initial shareholders, the Canadian government and the UAW's
VEBA,
with a slice of equity reserved for the old GM bondholders. Not having GM shares trade publicly would have a side benefit: it would insulate GM from the constant pressures and attention of the stock market until it regained its footing. This could be private-equity-style investing at its best—a focused, efficient company with no public shareholders to distract it from completing its turnaround.

I could see Larry recoil. Any kind of government ownership was bad enough, but owning a majority interest was worse. And by making GM privately held, we would be delaying the government's ability to cash in its shares, because the automaker would first have to do an initial public offering. To make matters still worse, Larry sensed, correctly, that Harry's ambitions extended beyond just restructuring GM; with his boundless self-confidence, Harry wanted to make sure that the plan for Shiny New GM was executed perfectly. If that happened, the GM team's numbers showed that the equity of General Motors could be hugely valuable.

Larry was wary of jumping to conclusions. His comfort in our ability to restructure the companies was not matched by a similar confidence in our ability to manage them. And while Larry had his own doubts that markets were always efficient, he found it hard to believe that the value of GM's equity could really grow at more than 40 percent a year for the next five years, as Harry was predicting. "If this equity was so valuable, there would be a line of people down Pennsylvania Avenue waiting to buy it," Larry argued. In fact, no one seemed interested in GM equity, at any price. While I didn't necessarily feel all of Harry's optimism, neither did I believe that markets are always efficient. If that were true, there would be no Warren Buffetts, no investors who clearly delivered superior returns over a long period of time.

Once again, I felt pulled in opposite directions. I shared Larry's concern about government involvement in the private sector and recognized the Pandora's box aspects of what Harry was proposing. And I, too, had trouble believing that an investment in GM would appreciate anywhere near as much as Harry claimed. On the other hand, all of us on Team Auto wanted to give the company the best possible chance to succeed. Having Harry let go of GM the moment it exited bankruptcy, followed by a fire sale of the government's stake, didn't seem very sensible.

Larry soon bowed to one argument: there was no reasonable alternative to government ownership of GM. (So desperate were we to avoid government ownership that we half-seriously considered a proposal by Gene Sperling to give the GM shares to America's public libraries.) But Larry was unyielding on our second assertion—and, in retrospect, rightly so. He was determined to have the government's involvement be as short and nonintrusive as possible. Coincidentally, as the date to receive the results of the stress tests on the banks approached, Larry had launched a project known as the "USG as Shareholder." Anticipating the possibility that the stress tests would reveal the need for large capital infusions into the banks that could be provided only from
TARP,
Larry had asked Diana Farrell to lead an effort to establish rules for how the government would manage these potential investments. She assembled some of the administration's best policymakers, ranging from Gene Sperling to Herb Allison, the former Wall Street CEO who had come on board to run
TARP.
Now that the possibility of owning GM suddenly seemed imminent, Diana asked me to join.

Having directed the McKinsey Global Institute think tank, Diana was in her element. She knew the issues intimately, and her collegial manner fostered a thorough, efficient policy process. We deliberated four or five times, meeting in whichever space happened to be available in the crowded West Wing. At one point, to my surprise, I saw on my calendar that our next meeting would be in the Situation Room, the legendary White House command post established by John F. Kennedy after the failed Bay of Pigs invasion. We descended to the basement, making our way through a warren of twisting halls and small offices. The command complex was said to occupy a basketball-court-sized five thousand square feet, but the Situation Room itself was cramped and bunkerlike, barely big enough for a long polished wooden table, which seated fourteen and was flanked by extra rows of chairs. The ceiling was low and the walls were lined with display panels and communications gear, all switched off while we were there. Beyond an open door to one side, I could see military technicians huddled over screens in a darkened room, monitoring who knows what.

As Diana's work proceeded, the results of the stress tests arrived, revealing, as the Treasury and the Fed had expected, a need for large infusions of capital, although less than what had been expected. Meanwhile, the markets had improved sufficiently that almost all the banks were able to raise the cash they needed from investors, allowing them to avoid the dread grasping tentacles of
TARP.
But we knew that for GM, Chrysler, and GMAC there was no escaping
TARP,
so much of the work of the "USG as Shareholder" group ended up being applied to Team Auto's companies.

Still determined to limit the government's involvement as much as possible, Larry kept a close eye on the group's work. Tim also joined the meeting in the Situation Room and seemed to share Larry's concerns. As it emerged, the policy envisioned government ownership as a three-phase process. In the first, brief phase we'd be very active, setting business goals and guidelines and picking executives and directors. Once this rebooting was done, we would step back and let the board and management run the company. Finally, we would sell our stake "as soon as practicable" to recoup the taxpayers' money. (I had bargained for the word "practicable" in lieu of the more felicitous "possible" because I thought it connoted less of a rush for the exit.)

Choosing leaders to transform GM's culture was at the top of my long list of tasks. We had already made a major bet on Fritz Henderson, who had been the only responsible choice available to us in March. I very much wanted him to succeed. Yet while I had acquiesced in his request to have "interim" removed from his title, as the weeks passed I concluded that his chances were no better than 50–50. I was determined to bolster Fritz with a strong board and, particularly, a strong chairman.

Kent Kresa, the interim chairman, had been gracious in accepting the job under the difficult circumstances of Wagoner's dismissal. He was dedicated and energetic, but at seventy-one he was only one year away from GM's mandatory retirement age for directors. Moreover, after more than five years on the board, I doubted that he was enough of a change agent for GM. This was why I had asked him to serve only for a couple of weeks as I continued to look for a longer-term chair.

Once President Obama made his March 30 announcements, there was no longer any need to keep the search secret. I stepped up my calls, drawing often for advice from Welch and from Tom Neff, the dean of executive recruiters, whom GM had retained. Nevertheless, it was not an easy task. All of the other obstacles I had encountered in March remained, particularly the scarcity of distinguished former CEOs who were still young enough to serve for at least five years. Of the long list of people that we reviewed, Ed Whitacre stood out.

I had met Ed once or twice in my work as an investment banker in media and telecommunications, but I knew him better by reputation. Our backgrounds could not have been more different. Ed had been raised in Ennis, Texas, the son of a railroad engineer and union member. He grew up playing baseball and football and hunting, pastimes that never appealed to me. He'd been the first in his family to attend college, studying engineering at Texas Tech. Along the way, he got a summer job at Southwestern Bell that involved hammering in fence posts and measuring telephone wire, and after graduation he signed on full time. His record at the company was extraordinary, leading Southwestern's transformation from a backwater regional player into today's AT&T through a balanced mix of strong management and strategic vision.

His reputation was for toughness. I remembered having once read a
Business Week
story that described him killing rattlesnakes on his Texas ranch (he would pin down the snake with a stick and crush its head with a rock). His flinty image was reinforced by his lean, six-foot-four frame, his full head of gray hair, and his laconic speech. Ed believed that we are born with two ears and one mouth and we should use them in roughly that proportion.

When I reached Ed, he had no idea why I was calling or even that I was serving in the government. As far as he knew, I was still in New York doing media and telecom deals. My proposition startled him. His first reaction was not encouraging: "I am happily retired and I don't know anything about cars." But I thought I heard a hint of uncertainty in his voice and persisted in a follow-up call a day or so later.

As an investment banker, I spent many years comfortably peddling my products and trying to recruit talent to our firm. That was business. In my new role, I felt passion and tried to convey it. "This company needs to be saved," I said. "This country needs this company. We've got a mess on our hands and you can help."

For the second time, he replied, "I don't know anything about cars and I don't think I'm qualified to do this." Yet even more than in our first conversation, I sensed a chink in his armor.

Ed was headed to Singapore for an ExxonMobil board meeting, but we agreed to talk when he returned. I was twitching with excitement about the possibility of reeling him in. In our phone conversations he had lived up to my impression of his directness and clarity of thought and so I waited anxiously for his return. Harry was just as anxious. He viewed GM as his baby and saw fixing the culture as being just as important as fixing the brands or the UAW contract or the manufacturing footprint. He lobbied me relentlessly in his soft, determined way with ideas for remaking the board.

I shared his views but didn't want us to get ahead of ourselves. First we needed a chairman. When Ed returned from Singapore, I could tell that he had mulled over my offer and concluded that he was open to it. This was typical Ed; he didn't need a lot of talk or meetings to make up his mind. On my next call, he asked point-blank what would be the government's role in the company, making clear that his interest was dependent on GM being run without interference from Washington. I assured him that the Obama administration was committed to that. After a few more conversations, he confirmed that he would be willing to serve. I was ecstatic.