Overhaul (4 page)

That is not to say Detroit didn't have successes. After its first bailout, Chrysler, fired up by Lee Iacocca as its CEO and TV pitchman, invented the minivan and changed the world of driving for suburban moms. Ford launched the Taurus, a radically curvaceous full-size car that critics first ridiculed as a "flying potato," then hailed as a design breakthrough. Consumers made it the best-selling car in America, displacing the Honda Accord. These late-eighties successes drove Ford and Chrysler to record-breaking profits and lit up their stocks. Ford's stock price rose 1,500 percent between 1981 and 1987.

But beneath it all was an undertow. U.S. automakers' market share was eroding as the Germans and Japanese developed a better bead on what buyers wanted. Confronted with lagging demand, Detroit was always a lap behind in cutting capacity, raising productivity, and renegotiating with labor. The financial pages chronicled the Big Three's woes: a steady stream of reports about plant closures, layoffs, concessions to unions, and struggles with regulators and consumer watchdog groups.

GM, in particular, seemed incapable of effective change. Starting in the 1980s, top management gambled at least $90 billion on computers and factory robots and a sweeping remake of GM's 800,000-employee organization—all in hopes of leapfrogging the competition into the twenty-first century. Instead, the reorganization stalled and a newly engineered generation of Buick Regals and Oldsmobile Cutlasses fizzled in the marketplace.

In 1989, the once mighty GM became the butt of national ridicule when
Roger & Me,
the most successful documentary ever at the time of its release, skewered the company for exporting jobs to Mexico and impoverishing Flint, Michigan, one of the many seemingly doomed all-American factory towns. Detroit's ingrown management culture looked more arrogant than ever onscreen. How timely the film was: after the recession of 1990–1991 forced more layoffs and plant closures, GM earned the grim distinction of recording the largest one-year loss in American corporate history, $23.5 billion in 1992.

Less prosperity brought more challenges as the Big Three felt the effects of years of concessions to the UAW, including comprehensive health care for an ever-expanding number of retirees and their families. (The UAW was so central that when crunch time finally came in 2008 and Congress called the Big Three to testify about bailout needs, there were four chief executives at the table: the CEOs of GM, Ford, and Chrysler, and Ron Gettelfinger, head of the UAW.) It is not an exaggeration to say that the industry could have crumbled before the twenty-first century began had not a revolutionary development—the sport-utility vehicle—hit the streets. Consumers were in love again, not with American cars exactly, but rather with American light-trucks-turned-passenger-vehicles. SUVs enabled automakers to exploit cheap gasoline (the price of which, adjusted for inflation, had fallen to near pre-OPEC levels) and skirt clean-air regulations. Clinton's economic boom was on, and these high-riding, road-hogging, gas-guzzling monsters were the hallmark of the era. As foreign automakers initially dismissed the SUV as a craze, Detroit's profits and stocks went up once more. Detroit was on such a roll that in 1999 the
Wall Street Journal
predicted a new golden age for GM, Ford, and their top competitors (Chrysler by then had been bought by Daimler). In 2000, GM stock hit its all-time high of $93.63 a share.

Yet the reality was that SUVs slowed, but did not reverse, the erosion of Detroit's market share. By 2005, it would be easy to see all the wrong turns, including the diversion of billions of dollars of capital to acquisitions (Ford bought Jaguar and Volvo; GM picked up Hummer and Saab). None of these deals paid off. To juice up sales, the companies became addicted to incentives—cash-back offers and heavy discounts that sustained production but sacrificed profits. (Incentives weren't as stupid as they seemed: labor contracts guaranteed wages whether workers made cars or not.)

Detroit's ultimate implosion, begun long before the 2008 housing market collapse and financial panic, was triggered by the resurgence of oil prices. In 2004, gasoline, edging up at the pump for a couple of years, jumped to more than $2 a gallon. Suddenly, filling the tank of a large SUV cost $60 or more. Dealers had little to offer as consumer demand swerved back toward small, fuel-efficient sedans. The Big Three had never controlled expenses, especially labor costs, enough to be able to make money on such cars. In 2006, Ford lost $12.6 billion on $160 billion in sales.

Each Detroit giant responded in its own way. Chrysler's owner, Daimler, decided to bail—in essence giving away an 80 percent stake in the business, for which it had paid $38 billion nine years before, to the private equity firm Cerberus. Ford, by contrast, strapped in, raising $23.5 billion by taking loans on its factories, real estate, patents, and even the rights to its distinctive blue-oval trademark. GM unloaded assets, including a majority stake in its huge finance company, GMAC.

By 2006 GM's domestic market share had fallen to less than half of its historic peak. Industry watchers began to speculate about whether Toyota might usurp GM as number one in the U.S., once unthinkable in a country where World War II vets had insisted on American-made cars. (Toyota was on the brink of displacing GM worldwide, which it did the following spring.) It was a classic business saga, not unlike those of companies in many other industries that saw a once dominant market share challenged by new competitors. For the U.S. steel giants, it was imports. For the three broadcast TV networks, it was cable. As for Detroit, years of mismanagement had allowed structural problems such as labor costs to become intractable.

These decades of decline had left Detroit frighteningly vulnerable to the mounting calamities of 2008. That summer, when gas prices topped $4 a gallon, car dealers suffered double-digit decreases in sales. As the decline in housing prices gathered speed and the intensifying recession dried up credit, consumers could no longer get car loans and dealers couldn't finance their inventories. Sales plunged and cash began draining from the automakers' treasuries at a dramatic rate.

Increasingly desperate, the companies went into panic mode. Chrysler explored mergers with Fiat and Renault-Nissan. Ford, after experiencing the worst quarterly loss in its 105-year history—$8.7 billion in the second quarter of 2009—announced a radical shift in its product lines. GM's second-quarter loss was nearly double the size of Ford's—$15.5 billion. Amid other restructuring steps, the company said it would slash production capacity by 300,000 vehicles.

For the president of GM, Fritz Henderson, the months leading up to the company's one hundredth anniversary, in September 2008, were the hardest in his lifelong GM career. A stocky, energetic pragmatist, Henderson began worrying seriously about his company's survival as soon as sales began to ebb in the first quarter. In June, after successfully negotiating the end of an ugly, months-long UAW strike that had crippled production of SUVs, he saw an alarming statistic: GM had more days' supply of unsold trucks at the end of the strike than at the start. Consumers had stopped buying. "We should have let the strike run another sixty days," he grimly joked to the company's North American chief.

At first, the sales collapse was purely domestic—Europe was still strong, as were Asia and the emerging markets. But with oil at $140 a barrel, Henderson knew the malaise would spread and tried to prepare. Money in the capital markets was evaporating; it was becoming as hard for GM to finance operations as it was for consumers to get car loans. Henderson was soon elbow-deep in implementing what General Motors CEO Rick Wagoner and the board of directors called GM's self-help plan—taking production down, slashing jobs and orders with suppliers, cutting inventory and working capital. With Wagoner's acquiescence, he explored even more radical steps.

By late summer, teams of GMers sequestered in a hotel near Detroit were secretly analyzing a merger with Chrysler. The number three Detroit automaker had approached GM after its courtships with Fiat and Renault-Nissan failed. Henderson and his task force made a case to a skeptical Wagoner that by absorbing its smaller rival, GM might attract new investment and bolster its chances of survival, even if demand continued to fall.

The financial panic on Wall Street in September crushed that hope. At a very subdued hundredth anniversary gala two nights after Lehman Brothers went bankrupt, Henderson sat thinking how much he hated birthdays. He wondered if GM would even make it to 101.

The automakers by now had begun quietly asking Washington for help, focusing at first on diverting money from a $25 billion incentive program set up by Congress to speed production of electric cars and other "advanced technology" vehicles. Henderson was sure that GM had no alternative to federal aid. But it filled him with foreboding. In early October he shared his concerns with Wagoner in an e-mail. He believed the government would help—he couldn't envision George W. Bush letting the automakers fail in the last three months of his presidency. Yet if it accepted help, GM would jeopardize its autonomy, and its leaders risked losing their jobs. "Once you open this door, you don't know where it's going to go," Henderson told Wagoner. "You just need to understand that. Because when you ask for support from the taxpayer, things could change."

C
OLUMBUS DAY IS
A
holiday for government workers, but on Monday, October 13, 2008, the Treasury Department was frenetic. CEOs from nine of America's largest banks had been summoned by George Bush's Treasury secretary, Hank Paulson, for an afternoon meeting. Together they would be told that to preserve the financial system, each would be required to accept a multibillion-dollar infusion of public money from the Troubled Asset Relief Program
(TARP).
This intervention in the banks' business—the single most important step in the government's rescue of the financial industry—dominated the news.

Unknown to the world, another summit had taken place at Treasury that morning. General Motors, the second-largest industrial company of the largest economy on earth, was on the verge of bankruptcy and had come to the government, hat in hand. Had this become public knowledge, it would have grabbed more than a few headlines from the banks.

At 8:30
A.M.,
GM's CEO Rick Wagoner arrived at Paulson's office, accompanied by his chief financial officer and two carefully chosen members of the GM board, Erskine Bowles and John Bryan, both courtly southerners. Bowles had been chief of staff to President Clinton and was expert in the ways of Washington. Bryan, who had brokered the meeting, was Paulson's longtime friend.

What brought the GM team was money: the giant automaker was hemorrhaging cash. In the first quarter of 2008, $3.5 billion had drained away. In the second quarter, the outflow was $2.8 billion. Results for the third quarter, which had ended only two weeks before, were still unannounced—and horrendous. GM had burned through almost $9 billion.

Time had run out on the last of Wagoner's many efforts at a turnaround. The program of selling assets to raise cash had almost reached the end. To try to conserve cash, there had been white-collar headcount reductions, elimination of health care for older white-collar retirees, elimination of executive bonuses, and suspension of the dividend. Privately Wagoner had weighed the merger with Chrysler—an opportunity for significant cost savings—but scuttled it as GM's crisis became too urgent for the benefits of a merger to have time to kick in. "I was trying to reduce brands. Why add Chrysler's?" he later explained to me.

Then, on October 3, GM recognized a potential godsend when Congress created the
TARP
at President Bush's behest. The program established a $700 billion war chest for the Treasury to use in preventing a financial and economic collapse, of which fully half, $350 billion, was at the immediate disposal of Paulson and his staff.

Understandably, Paulson this morning was focused on banks, not cars. Compared with the upheavals on Wall Street, the woes of General Motors seemed small beer. Paulson, a sixty-two-year-old former Eagle Scout from the Midwest, had survived twenty-seven remarkable months at Treasury, where he had arrived in the sixth year of an unpopular administration obsessed with global terrorism. No one had expected him to be able to accomplish much. Then, in 2007, the housing bubble burst. As the impact spread through the U.S. economy and the world financial system, Paulson became, inarguably, the most important member of the Bush administration.

Indefatigable and relentless, the former Goldman Sachs CEO juggled crises and crammed in cell-phone calls while striding between high-pressure meetings. He had little patience for ceremony or bureaucracy. When some of his former Goldman colleagues materialized at Treasury as "special advisers," there were bruised feelings among the career staff. But Paulson made no apologies and, as the problems worsened, seemed to become ever more blunt. In September he'd caused a furor with a curt three-page pitch to Congress requesting not only a staggering $700 billion for
TARP
but also the authority to deploy it without review.

Still Wagoner, who had called twice in the past ten days, appeared convinced that his emergency deserved attention too. So Paulson had shoehorned the automaker in before Federal Reserve Board Chairman Ben Bernanke, who was due at 10
A.M.
to prepare for the meeting with the bankers. But the Treasury secretary had taken preemptive steps to keep the automakers off his department's crushing caseload. The White House, sympathetic to Paulson's burdens, had agreed to have Commerce Secretary Carlos Gutierrez greet the visitors with Paulson and serve as the administration's point man on GM.

In the back of Paulson's mind, snagging his attention at every turn, was a frightening scenario. He feared that the $350 billion appropriated for
TARP
would be insufficient to shore up the financial system. The last thing he wanted was to divert rescue money to car companies. With liquidity short throughout the economy, he also worried that bailing out Detroit would entice other strapped companies to try to get on the federal dole too.