Overhaul (5 page)

At 8:30
A.M.,
the GM delegation was ushered into Paulson's "small conference room," a modest, nondescript space less ornate and much smaller than the secretary's "large conference room," where the bank CEOs would gather later that day. As the GM visitors—outnumbered by Paulson, Gutierrez, and a half-dozen aides—took their places, John Bryan kicked things off with introductions. Then came Wagoner.

Leaning forward in his seat, the tall, stolid CEO explained matter-of-factly that without help, GM was likely to go bankrupt. That, he said, would almost certainly lead to the company's immediate liquidation, clearly an economic catastrophe. If GM factories locked their gates, suppliers and dealers all over America would fail in a terrible domino effect.

To explain the mess, Wagoner invoked the automakers' familiar litany of forces over which they had no control, specifically the rise in oil prices and the collapse of consumer confidence after the crises in housing and finance. He added a new reason for urgency, declaring that the end for GM might come as soon as Monday, November 3—the day before the presidential election—when GM was scheduled to announce its grim third-quarter results. Also due on that date was a multibillion-dollar payment to suppliers that threatened to drain GM's cash below the minimum reserves needed to run the business. The company's precarious state, if revealed, would not only spook Wall Street, but also, he warned, trigger "a run on the trade" by suppliers. Like panicked bank customers stampeding to withdraw their savings, the suppliers would cancel their credit and demand cash on delivery—money that GM simply wouldn't be able to pay.

The implied threat was clear: Did the administration want voters waking up on Election Day to news that the nation's largest manufacturer had gone bust? His alternative was $10 billion of
TARP
money, a loan, for which GM would be willing to pay a generous interest rate and give the Treasury a 19.9 percent ownership stake.

Ray Young, GM's chief financial officer, handed out a PowerPoint presentation to buttress the company's case. (I would later learn that nothing at GM happens without PowerPoint.) To the practiced eyes of the two cabinet secretaries, the recovery plan supposedly justifying the $10 billion loan was long on rosy predictions but short on facts and analysis. GM wanted to gamble taxpayer money on a vast, rapid rebound in auto sales as well as on gains in market share. Asked how he could be confident of such forecasts, Wagoner waxed eloquent about the new Chevy Malibu and GM's gains in J. D. Power quality studies.

Gutierrez broke in to ask about bankruptcy. "Companies in your situation tend to pursue some form of reorganization," he said. "Isn't that something that could make sense here?"

No way, said Wagoner, shaking his head; bankruptcy would sink the business by scaring off customers. "You can't sell cars to people under those circumstances," he argued, holding firm when Gutierrez pushed a little more. Bankruptcy was not on the table.

After that, the federal officials remained largely silent, in part because Paulson had made it clear that he wanted the meeting kept short. Bryan, who hadn't quite picked up the mood, jumped back in to emphasize, "This isn't really a bailout, it's a bridge loan and, as you can see, this company can pay it back." Wagoner called attention to an appendix in the handout showing the importance of auto manufacturing, particularly in Ohio, Michigan, and Indiana. Across the United States, carmakers and their suppliers accounted for millions of jobs, 775,000 pensioners, and two million health care participants. A GM collapse would damage millions of lives.

Then Paulson spoke up, reminding the visitors that
TARP
was intended to stabilize the financial system, not bail out industrial companies. "You're not going to be able to use it," he said with certainty. "You will probably need to go to Congress." Finally he circled back to soften the message. "The White House cares greatly about this. Carlos is going to be working with you on the President's behalf."

A brief silence following the visitors' departure was broken by Paulson, who declared, "This is complete bullshit!" From long experience as an investment banker, he knew a scare story when he heard one. Yet it was unclear whether this alarm was entirely false—GM was offering only the most superficial analysis, with no detailed support for its assertions.

Studying the page about the Midwest, Ken Wilson, one of Paulson's advisers from Goldman Sachs, mused, "If these companies go down, you could have riots in the streets." And Paulson remembered the terrifying speed with which Lehman Brothers had collapsed weeks before, after the government refused to intervene. With that in mind, he took his undersecretary for domestic finance, Tony Ryan, aside. "I want this kept quiet and secret," he told Ryan, "but come up with a plan in case we find out at five o'clock some afternoon that General Motors is going to file the next day. The President needs the option to prevent a very messy bankruptcy. So find out what's the smallest amount of money we could give GM to get them to the next administration and what would we get for that. Would 19.9 percent of the equity be right, or what?"

As a further precaution, Paulson also asked Joel Kaplan, a deputy chief of staff to President Bush whom Paulson viewed as one of the few sensible people in the White House, to alert the President to the work soon to commence on the secret backup plan.

The Columbus Day meeting set the tone for two months of struggle and confusion. Within the week, Chrysler signaled that it, too, was desperate for cash. Ford, having prudently borrowed billions early in the downturn, was in better shape, although its CEO, Alan Mulally, began calling administration officials to try to ensure that the company wouldn't be put at a competitive disadvantage if its Detroit rivals got help.

For Washington, Detroit's emergency was in some ways more vexing than the cataclysm on Wall Street. The Treasury and other federal entities were rich in expertise for dealing with a banking crisis. But thanks to a long-standing and appropriate aversion to industrial policy, the government had no comparable resources to bring to bear on imploding automobile giants. In fall 2008, this traditional distance from nitty-gritty business was compounded by the complete focus of the economic team on the financial crisis. So now, in response to Detroit's threatened collapse, the administration and Congress were going to have to start from scratch.

On the ride back to the Commerce Department after the secret meeting with Paulson and Wagoner, Carlos Gutierrez was puzzled. If GM really was in danger, was there any way to keep it afloat without having to involve Congress and without
TARP?
Gutierrez was a seasoned businessman whose career, begun behind the wheel of a Kellogg's delivery truck, had led him to the top of the $10-billion-a-year cereal company. After several uneventful years as commerce secretary, he was open to a challenge. Back at the office, he shifted into CEO mode. "We need facts," he told his lieutenants.

That afternoon, in Gutierrez's private conference room, Ray Young and a group of Treasury and Commerce staffers reviewed a chart of GM's cash position, from the PowerPoint presentation. It showed, week by week, steep decline until, right around Election Day, GM would hit $11 billion of cash on hand. "That's the minimum we need to operate," Young replied when asked about the significance of that figure. To Gutierrez, this in itself was a red flag. A well-managed business, even on GM's vast scale, should never need that much cash.

After two frustrating hours, Young left. "He's the CFO of General Motors and he can't answer a single question," complained Phillip Swagel, a high-level economist, as the team regrouped. Others would also find the forty-six-year-old Young, who had been GM's chief financial officer for only seven months, less than impressive.

During the next several weeks, the Commerce staff scrutinized two possible sources of emergency cash for GM: the Department of Energy's Advanced Technology Vehicles Manufacturing Loan Program and the abandoned plan to merge with Chrysler. GM did its best to cooperate, with Young and his staff scrambling day and night to satisfy requests for data. But Fritz Henderson, for one, despaired of getting help from the Bush administration the minute he heard that the Commerce Department was involved. "Commerce never actually accomplishes anything," he pointed out. "They're good people, but they don't do stuff ... Treasury gets things done, because that's what they do."

Nor was Wagoner reassured. GM had come to Washington hoping for a quick response—it was, after all, General Motors. Instead it got a paper chase. As the collapse in demand for new vehicles spread around the world, Wagoner concluded that neither of the solutions under study would work. The Department of Energy had yet to publish its rules for tapping the $25 billion in advanced-vehicle incentives, but it was pretty plain that as the law was written, the money was meant for retooling plants and couldn't be used for a bailout. As for resurrecting the merger with Chrysler, Wagoner decided he had to put a stop to the idea. On the day before Halloween he told Gutierrez flatly that the merger was a nonstarter—it would not address the liquidity crisis and would only compound GM's problems. By now it was clear to Wagoner that Paulson had been right; if GM wanted help, it would have to go to Capitol Hill.

Election Day 2008 came and went without General Motors running out of money. But the Commerce Department's studies confirmed that GM's emergency was real and getting worse: before the year was out, the coffers would almost certainly be empty. Wagoner wasted no time getting in touch with his counterparts at Ford and Chrysler to ensure they would be at the front of the line when Congress reconvened for a lame-duck session.

The Democrats' victory parties had scarcely ended when, on November 6, the CEOs of the Big Three, along with Ron Gettelfinger, the UAW chief, paid a visit to House Speaker Nancy Pelosi, Senate Majority Leader Harry Reid, and other Democratic leaders. For ninety minutes, the visitors pleaded for loosened restrictions on the $25 billion of advanced-vehicle incentives so they could borrow the money to stay afloat. Not surprisingly, given Obama's support from midwestern union voters, the Democrats listened attentively, but Pelosi's subsequent effusive statement of support was carefully hedged.

The next day, the automakers unveiled dire third-quarter earnings reports (GM having quietly dropped its plan to post results the day before the election). GM's in particular caused an uproar on Wall Street. It revealed that the company was now burning through a stunning $3 billion a month—roughly $4 million an hour—more than double the losses of the previous quarter. And for the first time, GM acknowledged publicly that its cash balance would approach "the minimum amount necessary to operate our business" by the end of 2008.

Wagoner made a customary pilgrimage to CNBC, where auto correspondent Phil LeBeau didn't hold back. "The numbers are not pretty," he began. "How close is General Motors right now towards bankruptcy?"

Wagoner ducked, but LeBeau kept asking, finally eliciting a direct response: "We have no plans whatsoever to consider anything other than continue to run the business," Wagoner said. "We don't think anything positive would come out of any sort of consideration of reorganizations. I've seen pundits write this stuff, but you can't sell cars to people under that circumstance."

This wasn't spin. The GM chief executive was convinced that, while consumers might fly on bankrupt airlines, they would never buy cars from a bankrupt automaker because of the need for warranty coverage and concerns about resale value. Our task force would later learn that, on Wagoner's instructions, GM was making no contingency plans, no preparations whatsoever for a possible bankruptcy filing. Its investment bankers from Morgan Stanley and Evercore Partners had taken the unusual step of beginning to explore bankruptcy options on their own. But in October, when they'd advised GM's board to prepare, Wagoner had cut off the discussion, curtly thanking them for their time. He had similarly dismissed every other effort to convince him to prepare for a possible bankruptcy. This attitude would add materially to the cost of the eventual rescue.

The auto industry was high on the agenda when Congress returned to work on November 18. At 3:02
P.M.
on that overcast Tuesday, Senator Christopher Dodd gaveled to order a hearing of the Banking Committee on the automakers' bailout request. Perhaps underrating the import of the moment, Dodd's aides had passed on storied Senate venues like the ornate Caucus Room in the Russell Senate Office Building, where the Watergate hearings occurred. Instead the session took place in a remote hearing room in the Dirksen building, a drab 1958 relic. It was packed with photographers crowded in front of the dais, attendees in rows of chrome-and-plastic chairs, and banks of TV cameras. Dodd quipped, "If I had known the interest, I would have held this at RFK"—the former football home of Washington's beloved Redskins.

The guests—CEOs Wagoner of GM, Mulally of Ford, and Robert Nardelli of Chrysler, as well as the UAW's Gettelfinger—testified in alphabetical order. Mulally and Nardelli bemoaned poor vehicle sales, and Wagoner summed up GM's problems as not of its making, as he had at Treasury: "Mr. Chairman, I do not agree with those who say we are not doing enough to position GM for success. What exposes us to failure now is not our product lineup, is not our business plan, is not our employees and their willingness to work hard. It is not our long-term strategy. What exposes us to failure now is the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per-capita level since World War II." As business skidded further in the weeks following the election, the automakers had dropped the pretext of requesting speeded-up advanced-technology incentives. Instead they asked Congress point-blank to open up
TARP
and direct the Treasury to provide $25 billion of emergency bridge loans.

That week is remembered less for anything the CEOs said than for the furor that erupted after Brian Ross of ABC News reported that the three had flown to Washington in separate private jets. Wagoner had been advised by his Washington PR person, Greg Martin, to fly by commercial jet, but he had rejected the idea. "I have meetings," he told Ross after the hearing. "I have a tight schedule."