Overhaul (44 page)

Harry was unyielding. Over the July Fourth weekend, lawyers for Treasury and GM got into a tussle over a small but important aspect of how the new loan agreement would be structured. To an e-mail list of sixty-four participants, most of them lawyers, Soo-Jin Shim, a Weil Gotshal attorney representing GM, said that the closing would have to be delayed while the issue was resolved. Harry didn't hold back. "Soo-Jin, I am stunned that you would so offhandedly threaten the closing for which we are all working so hard," he wrote at 8:24
P.M.
on July 4, while most Americans were concentrating on barbeques and fireworks. "To be clear, this will not delay [the] closing. Nor will anything else." He went on in the same vein for several paragraphs, also pointing out that he had been trying to reach "GM people" all afternoon to discuss the matter, with no success. To Harry, it was indicative of GM's problems: he and hundreds of others were working around the clock to save the company, yet most of the management team had turned off their cell phones at a critical juncture in the deal.

Judge Gerber not only worked on his opinion over the weekend, he delivered his ruling on July 5—a Sunday. It gave us a complete victory, clearing the way for Shiny New GM to emerge from the carcass of Motors Liquidation Company by July 10, the seemingly impossible deadline we'd set.

That forty-day limit set by Harry and Matt turned out to have been a deciding factor, the judge's two written opinions in the matter made clear. The primary objection from the bondholders had been that the sale of GM's best-performing assets to a new entity gave them a raw deal. They wanted GM to go through a conventional Chapter 11 restructuring under the supervision of the court, which they thought offered creditors a fuller, fairer recovery and could be completed almost as quickly as a 363 sale. With powerful eloquence, Judge Gerber rejected this argument and reminded the creditors that they were only bit players in a game of enormous stakes:

This case involves not just the ability of GM creditors to recover on their claims ... it involves the interests of 225,000 employees (91,000 in the U.S. alone); an estimated 500,000 retirees; 6,000 dealers and 11,500 suppliers. If GM were to have to liquidate, the injury to the public would be staggering. This case likewise raises the specter of systemic failure throughout the North American auto industry, and grievous damage to all of the communities in which GM operates. If GM goes under, the number of supplier bankruptcies which we already have ... is likely to multiply exponentially. If employees lose their paychecks or their healthcare benefits, they will suffer great hardship. And states and municipalities would lose the tax revenues they get from GM and the people employed by GM, and the Government would be paying out more in unemployment insurance and other hardship benefits. Under these circumstances, I find it hardly surprising that the U.S., Canadian, and Ontario governments would not stand idly by and allow those consequences to happen.

Addressing the urgency of the case, the judge agreed with Harry and the Treasury legal team:

Anyone with a knowledge of Chapter 11 cases ... can well understand why none of Harry Wilson's advisors thought that GM could survive a normal plan confirmation process ... The court fully understands the unwillingness of the Government to keep funding GM indefinitely—especially to await the resolution of disputes among creditors trying to maximize their recoveries ... The problem is that if the 363 Transaction got off track ... customer confidence would plummet; and that the U.S. Treasury would have to keep funding GM while bondholders (and, then, perhaps others) jousted to maximize their individual incremental recoveries. The Court fully takes Harry Wilson at his word.

July 5 was my birthday, as it happened, but Harry and Matt certainly had reason to celebrate too.

The ink on Judge Gerber's signature had barely dried when Congress started undercutting the deal. On July 7, the House Appropriations Committee passed a spending bill that included an amendment by Ohio Republican Steve LaTourette that would reinstate dealer franchises canceled during the GM and Chrysler bankruptcies. Brian Deese and the legislative affairs people at Treasury believed the bill was headed inexorably toward passage into law.

Deese's summer had been remarkably successful up to that point. While the rest of Team Auto had been consumed with GM and Chrysler, he'd virtually single-handedly taken on Cash for Clunkers, the sales incentive program that we'd added to our charter almost accidentally in March. He faced a difficult set of negotiations, navigating among environmentalists who wanted the program to favor small cars, Detroit boosters who wanted the Big Three to be the principal beneficiaries, and the executive branch, which wanted to be sure that no international trade rules were violated by having legislation that blatantly favored Detroit.

By mid-May, Brian had succeeded in getting the House and Senate to add $1 billion for the program, now officially known as the Car Allowance Rebate System, onto a supplemental appropriations bill for the Iraq and Afghanistan wars. A month later, the President signed it into law. In the end, Deese had maneuvered the new law to emphasize the scrapping of SUVs and trucks, a win for Detroit, because most were American brands, likely to be replaced with American brands, and a win for environmentalists, because SUVs and trucks had the highest emissions.

He next pushed the Department of Transportation to develop the necessary implementation policies and procedures. What, for example, would be the steps for making sure the clunkers were truly junked? Using the Team Auto approach of daily early-morning conference calls, in just over three weeks—a nanosecond by bureaucratic standards—Cash for Clunkers was up and running. It was an extraordinary success, far beyond anything we had imagined. The first $1 billion was exhausted in less than a week, and the White House scrambled to persuade Congress to appropriate more. Cash for Clunkers became an all too rare example of what can happen when a smart and energetic staffer develops a good idea and runs with it.

In the midst of pushing through the historic GM bankruptcy, Matt and Harry remained attentive to Delphi—including midnight phone updates during which Harry would occasionally fall asleep—and managed to put the parts company onto a glide path toward successful resolution. On the same day that GM filed for bankruptcy, Delphi announced an agreement with GM under which the automaker would buy four key factories from Delphi, along with Delphi's global steering business. This would give GM access to the critical parts that had allowed Delphi essentially to extort billions of dollars of financing from GM over the years. The rest of Delphi would be bought by a private equity firm, Platinum Equity, that had made a specialty of troubled investments.

Under bankruptcy rules, the agreement among GM, Platinum, and Delphi was subject to higher bids from others, including the existing debtor-in-possession lenders, who had been negotiating toward a separate, but ultimately unsuccessful, agreement in May. In late July, the existing lenders decided to trump the agreement by credit bidding—basically, turning in their claims for the equity in Delphi. While the
DIP
lenders tried to portray this as a victory over GM and the government, in truth we didn't care who got Delphi as long as GM could extricate itself from the continual drain on its finances and assure itself of a reliable supply of parts; we had actually proposed a very similar deal to the lenders way back in April. The successful bid by the
DIP
lenders allowed GM to accomplish these objectives. And the transaction ended up being profitable for all the buyers, including GM. For an investment of $2.3 billion in the new Delphi, it had—as of May 2010—a stake with a value estimated by JPMorgan at $4 billion.

Still, there was no way for Deese, or anybody else, to contain the politicians' anger over dealer closings. It simmered all summer, erupting periodically like a geyser fed by a vast underground reservoir of superheated water. Hapless members of Team Auto would be summoned to Capitol Hill at such times to get browbeaten by legislators or their staffs. In early July, it was House Majority Leader Steny Hoyer's moment to vent. A tall, jowly, gravel-voiced Democrat who represented an area of Maryland just south of D.C., Hoyer had been among the most persistent critics of the dealer-reduction plans. Among his constituents were two particularly visible and unhappy dealers who each operated both GM and Chrysler stores, Tammy Darvish and Jack Fitzgerald. When we asked GM and Chrysler to fill us in, we learned that the franchises more than deserved to be closed. Fitzgerald, for example, had sold only around three new Chryslers in 2008.

I was mystified that the House majority leader chose to devote so much time to this. The nation was plagued by economic and financial crises; why would the second most important member of the House after Speaker Pelosi think that two car dealerships merited his personal attention?

Deese and other colleagues worked patiently with Hoyer's staff to explain the need for reductions and the logic behind these particular ones. Brian came away from those conversations believing that he had convinced Hoyer's staff that the automakers were acting appropriately. Nonetheless, Hoyer was not satisfied and called me to say so. Then he ordered a summit meeting of several senior congressmen and representatives of the car companies and Team Auto. We wanted the leaders of
NADA
to join us but, true to form, the trade association found an excuse not to attend. On July 8, we gathered in Hoyer's small meeting room in the maze of the Capitol. Like the other principals, I was accompanied by a clutch of aides (Deese, Markowitz, and Calhoon). We felt as if we were entering the O.K. Corral.

I did not wish to get on the bad side of important lawmakers, so I vowed to make myself as inconspicuous as possible. I mentally staked out a chair for myself set back from the main table, where lesser aides generally sat. But as soon as Hoyer arrived and took his seat in the center of the rectangular table, he pulled out the chair next to him and said, "Steve, come and sit here."

Hoyer made a generic opening statement: "We're proud of all the work everyone is doing. We know you're working hard. We just want to make sure everyone is treated fairly." Then he turned to me, expecting a response. I was exceedingly uncomfortable. "We are just here to facilitate the conversation," I said as neutrally as I could. "We didn't have anything to do with what dealers were chosen and this entire process was decided by the companies. Therefore, the companies are here to talk with you. We hope we can get something resolved quickly."

Neither I nor anyone else from Team Auto said another word after that. Hoyer and the other House members took turns hammering the GM and Chrysler executives. Like us, they had no interest in antagonizing Congress, but the questioning was intense. Each legislator had a pet dealer and kept insisting the dealer was effective, profitable, and meritorious. Representative Gabrielle Giffords of Arizona was especially adamant about a Chrysler dealer and repeated her talking points over and over. The conversation went in circles, mercifully ending after an hour or so. But the legislators left unsatisfied and determined to move forward with bills to block the much-needed reduction in stores.

Even my friend Bob Corker, who had railed against government meddling with the car companies, did some meddling himself with the dealers. Back in 2008, Corker had complained about Detroit's bloated dealer networks and expressed frustration that dealers couldn't be eliminated efficiently outside a bankruptcy. (Indeed, he had said that GM should have only 1,500 dealers, versus the 3,600 that we settled on.) But now he introduced the Automobile Dealers Assistance Act, which would have provided much more generous terms to superfluous dealers than common sense would dictate. His proposal was a long way from the notion—so strongly endorsed by him just a few months earlier—of shared sacrifice.

I was back in Detroit with Ed Whitacre on July 9. Shiny New GM was about to debut, and I went mainly to accompany Ed as he continued to immerse himself in the giant enterprise he was about to chair. We spent the morning at RenCen headquarters, in presentations designed to explain to him what went on at the world's second-largest automaker.

Ed wasted no time picking out what he saw as a grave flaw in the management structure: too many executives reporting directly to the CEO. It appalled him to hear that Rick had had more than twenty, and he "encouraged" Fritz to slim down the number. After lunch, he gathered the company's dozen or so top executives in the Chairman's Conference Room, where Team Auto had held many of its meetings. The men and women listened intently as Ed explained in his measured Texas drawl that he had no interest in presiding over a second-rate company. He praised the people. He stressed the need to make decisions. He emphasized his personal belief in the power of marketing. Then, looking straight into the eyes of one attendee after another, he said, "I'm used to winning and have no intention of seeing that change at GM." The GM executives, unused to this sort of bluntness, were impressed, and so was I. It was superlative leadership as I had always imagined it.

Fritz Henderson himself gave the final talk, which started with a PowerPoint slide that read: "A realignment of the operating model and culture with the strategy of the new GM is necessary." Ed and I were pleased. Unlike Rick Wagoner, who seemed to believe that GM's practices were automatically the world's best, Fritz was at least outwardly on the program that we had laid out for him in March.

The next morning, Ron and I went to visit Sergio and his team at Chrysler. This was the first time I'd made the trek to Auburn Hills, the company's headquarters outside Detroit. Lee Iacocca had built the vast 5.3-million-square-foot complex as a monument to himself at a cost of $1.6 billion. At one end of the facility stood a fifteen-story office tower with imposing horizontal bands of black and silver glass and a gigantic Chrysler pentagon on the roof. It looked like the Death Star. Sergio had taken one look at the capacious executive suite on the top floor of the tower and immediately decamped to a modest office on the fourth floor of the central building, where many of his direct reports worked.