Overhaul (39 page)

Later, he stopped Harry to ask, "I know you are an expert on autos, but have you ever met my retirees?" Harry took the needling in stride and kept pushing a predominantly common stock settlement.

By the time the meeting broke up, around 3
A.M.,
Ron and Harry had upped the bid to 17.5 percent of common, $6.5 billion worth of preferred, and a $2.5 billion zero-coupon note. Gettelfinger rejected that too.

Harry was upset as they left, but Bloom was sanguine: "I've seen him do this," he told Harry. "I'll call him tomorrow and he'll agree." The next morning, Bloom called Gettelfinger and threw in some warrants, or rights to buy GM stock later at a very high fixed price. The warrants still didn't provide the cash Gettelfinger wanted, but at least they guaranteed the UAW an additional share of the upside if GM turned out to be more valuable than anyone expected.

Gettelfinger's adviser from Lazard, Andrew Yearley, told him and his aides, "This is the last offer. It is decision time." Gettelfinger announced that he needed to think. He left the hotel to walk the streets on a delightful spring morning, the temperature still in the sixties and the humidity blissfully low.

There was no easy option. Gettelfinger could reject the offer, publicly calling out Obama for forcing large, unfair benefit cuts on older, retired Americans. But that would be the UAW putting a gun to the head of the administration and GM in a time of economic crisis and might cause a political backlash. Yet if he accepted the deal, his retired members would feel the cutbacks. Gettelfinger had promised many of those same retirees in 2005 and 2007—the years of previous GM contract talks—that they would not lose benefits or see their copays rise. Now he'd have to stand in front of them and deliver the bad news. One of his aides confided to Yearley that Gettelfinger "always takes these decisions very personally."

After about two hours of walking, Gettelfinger called Bloom and told him the UAW would accept the deal. He wasn't happy about it and ended the call by swearing at Bloom. Later he told his aides, "Everyone is sacrificing here. I think we can sleep at night knowing we did the best we could for our constituents."

Throughout all this, I had been holding my breath. No one outside Team Auto—not the UAW, not the company, not the press—seemed to realize that the balance of power was vastly different than it had been in the case of Chrysler. In taking on the UAW's Chrysler agreement, we were wielding a stick: President Obama had gone on national television and said that without a shared sacrifice by all stakeholders, the government would provide no further funding to Chrysler, leading to certain liquidation for the automakers and massive job losses for the UAW.

But with GM, Obama clearly wanted the company saved. His public statements, like "We cannot, and must not, and we will not let our auto industry simply vanish," and "I'm absolutely confident that GM can rise again," left us with no doubt that fixing GM was our mission.

Suppose Gettelfinger had simply refused any or all of our demands? We could still force GM into bankruptcy, which would void the UAW contract and, in theory, free GM to start over, either with the UAW or by hiring replacement workers. But I had meant what I'd said to the Chrysler banks when they'd whined about the amount of equity going to the retiree health trust: to make cars, we need workers. We did not believe that hiring non-union laborers to replace skilled UAW members was practical. The assembly of cars by GM involved hundreds of individual teams of five to six people executing highly specific tasks in forty-five- to fifty-second intervals. Nor did we believe that Barack Obama would be willing to discharge the autoworkers the way Ronald Reagan had fired the air traffic controllers in 1981. The idea that a Democratic administration would engage in union-busting was unimaginable.

So even in bankruptcy, we'd have been right back at the table with Gettelfinger—only then GM would be hemorrhaging cash and consumers would likely be holding off on buying GM cars until they saw the outcome of the standoff. It would have been a disaster.

I kept wondering why Gettelfinger didn't call our bluff. We had no backup plan, no notion of what we would do in that event. And we hadn't had much time to think about it. Fortunately, though he bargained hard on many issues, he stayed at the table and never threatened to blow up the whole deal. Although he kept his own counsel, his advisers speculated that he understood that the companies had to be fixed, and that as long as other stakeholders were sacrificing, he would go along. It's equally possible that he didn't realize how much leverage he had.

The deal gave GM substantially more financial flexibility than Chrysler had, and far and away the healthiest balance sheet among the Detroit Three. Instead of having to pay interest on a $10 billion note, as the
VEBA
had initially proposed, the company would be on the hook only for 9-percent-a-year dividends on the preferred—payments it could skip in a pinch. Though I couldn't prove it, I believed Harry's efforts had paid off. If he hadn't applied his powers of persuasion to selling the future value of GM shares, we probably would have been forced to give the
VEBA
a much larger percentage of the company.

Next it was Fritz who wanted to push the UAW harder. For years he'd been itching to revamp the UAW pension plan—its members were among the dwindling minority of American workers who still enjoyed traditional defined-benefit pensions, in which benefits are guaranteed no matter what they cost the employer. GM's pension expenses, much like its health care costs, had been rising for years, with cycle after cycle of union negotiations driving costs ever higher. ("Any little change," Fritz told me, "was like writing a $5 billion check to future retirees.") The market meltdown had compounded the funding challenge.

Fritz knew he couldn't ask for outright pension cuts; he wanted to freeze pensions as they were and have further benefits come in a plan similar to an IRA. Those changes alone would be worth billions to GM. But we had declined to address union pensions in the Chrysler negotiations, and when Fritz broached the subject to Gettelfinger late in the GM negotiations, the UAW chief turned him down flat: "We aren't going to sit in this room if pensions are on your list."

"OK, we'll get to that another time," said Fritz, who had been through countless difficult talks with the UAW leader.

When they heard about this, Ron and Harry discussed calling the UAW back to the bargaining table. But they concluded that attacking the union's sacred cow after virtually every other issue had been resolved could jeopardize the whole agreement. Failing to make meaningful changes in the pension plan became Harry's biggest regret. He felt it especially keenly in an airport bookstore two weeks later, when he noticed Roger Lowenstein's
While America Aged: How Pension Debts Ruined General Motors, Stopped the NYC Subways, Bankrupted San Diego, and Loom as the Next Financial Crisis.

I felt about the GM bondholders the same way I'd felt about Jimmy Lee at Chrysler: they had made a poor loan and deserved to be treated accordingly. In a conventional bankruptcy, the GM bondholders, who were junior creditors, would get little or nothing. Nevertheless, the firms representing them were fighters. They launched a populist PR campaign, pointing out that among the bondholders were not only workers' pension funds but also people of limited means. "GM Bondholders Are People Like You and Me" read the headline of a
Wall Street Journal
op-ed, ostensibly written by a retired blue-collar worker. There was truth to this: GM had marketed some of its bonds to individuals, selling them in face amounts as low as $25. Thus it had thousands and thousands of small bondholders. Unfortunately, there was neither logic nor a mechanism for treating them differently from the institutional investors, which held some 80 percent of the debt.

It didn't take Harry and Matt long to discover that we were in a difficult negotiating spot. Back in April, in order not to be accused of foot-dragging on GM's bond exchange plan, we had offered to give bondholders a 10 percent stake in GM in exchange for 90 percent of the bonds. But that was before we decided to invest our new money as equity, which had the effect of making a 10 percent stake hugely more valuable because the new GM would not be up to its axles in debt.

Why should the bondholders get this windfall? I wanted to adjust the percentage so the dollar value of our offer stayed the same. But Harry and Matt resisted the idea.

"They're fixed on the 10 percent," said Harry.

"Ridiculous!" I said. "Ten percent is worth at least twice as much now as it was before. We need to dial it back to less than 5 percent."

"They're not going to buy it. They'll think they're getting less value, not just a smaller percentage."

"But this isn't Joe Six-Pack you're talking to," I protested. "They're very sophisticated advisers. I think they'll understand." To my surprise, Harry and Matt disagreed.

We didn't have to reach a deal with the bondholders, I pointed out. Arguably, they didn't deserve anything, and we could fight it out in bankruptcy court. This prospect made Matt very unhappy. A knockdown dragout fight with the bondholders would mean delays and uncertainty, and possibly billions of dollars more to hold GM together if the bankruptcy process stalled. On the other hand, Matt pointed out, by making a deal with bondholders representing at least 51 percent of the debt, we would eliminate a major risk of delay in bankruptcy court.

Reluctantly, I saw the logic of their argument and told them to proceed. Naturally the bondholders still wanted to negotiate right down to the wire; in the end Harry became convinced that even 10 percent of the equity would not get us an agreement and pushed me to sweeten the pot with some warrants. Even more reluctantly, I agreed to that too. We valued the package at about 12 to 15 cents on the dollar, more than what they deserved (zero) but considerably less than the 33 cents that Corker and Bush had been prepared to let them have.

The capital structure of Shiny New GM was finally taking shape. It was radically different from what we'd imagined, as though we'd set out to build an Impala and ended up with a Volt. Rather than a small stake, the Treasury would own 60.8 percent, and the remaining 39.2 percent would be split among the
VEBA
(17.5), the bondholders (10), and Canada (11.7).

But while the percentages took shape, the overall capital need remained a moving target. All through May, Team Auto struggled to nail down how much we'd have to inject into GM at its bankruptcy filing. The company's list of needs was vast, and every few days new items would pop up, further evidence of its lack of a real handle on its finances.

The uncertainty was unnerving for our Canadian allies. They had been standup partners from the start. They'd matched the U.S. government's total $12 billion Chrysler investment with $3 billion of their own, a sum roughly proportional to the percentage of Chrysler production across the border. And while GM mattered less to the Canadians—it had fewer employees there—they were committed to making a comparable investment in this restructuring too, which was where the headaches began.

On May 12, the first time we met with the Canadians about GM, Ron and Sadiq told their emissary, Paul Boothe, that the GM investment would total $50 billion (counting the $15.4 billion already put in and $34.6 billion of new money to come), and warned that the figure could grow. Then Ron talked with Boothe about how much Canada would contribute. They agreed on $8 billion to $10 billion. It would be the single biggest investment the Canadian government had ever made in a business.

In exchange, the Canadians wanted GM to sign a "vitality agreement," a guarantee that the new GM wouldn't turn around and cut its Canadian production and workforce. Ironically, we had inserted just such a provision into Chrysler's agreement with Fiat, for fear that Fiat would cut too many American jobs. Boothe made it clear that a vitality agreement was a political necessity for the prime minister. Harry thought signing such an agreement was bad economics and bad for the business. If we were going to truly let GM operate as a private company, we shouldn't be tying its hands, he argued.

In addition, the UAW had made concessions in its negotiations with GM to allow a small car that was to be built in Korea to be built economically in the United States instead. This was a source of excitement for Rahm Emanuel, who saw the evident political advantage in such a development. (When finally announced, the new plan generated far less public notice than we had hoped. Critics suggested that we had pressured GM to shift production to the States.)

The decision on the small car meant that the percentage of GM's cars headed for sale in the U.S. that also got assembled in the U.S. was expected to rise to 70 percent from the current 66 percent. Nonetheless, the question became part of another emotional meeting in Larry's office. As had been the case with Chrysler, Ron and Harry took opposite sides. To Ron, what was the point of saving GM if we weren't going to safeguard American jobs? While I sympathized with Harry's view, this ultimately became a practical decision: if the Canadians weren't going to invest without a vitality commitment, then obviously we needed to give them one. And in my mind, giving them one and not taking one for ourselves failed the
Washington Post
test.

To the Canadians' dismay, though, the all-in number kept going up. Boothe, an affable, gray-haired, goateed economist whose title was senior associate deputy minister of industry, would come to Washington only to have to fly back to Ottawa to tell his bosses the new number and get clearance. A week later, the number rose to $54 billion. Then, on May 27, it reached $59 billion, with Canada now on the hook for nearly its full $10 billion.

Harry was partly responsible, unbeknownst to the Canadians. He felt that GM's inadequate financial controls posed large risks for the business and heavily discounted all of the cash projections he received from management. He was convinced that GM needed a margin of safety to offset these poor controls. If we paid in too much, he figured, as 60.8 percent owners American taxpayers would get back most of any excess and the Canadians would get their share (although the 27.5 percent "leakage" to other shareholders annoyed him no end).