Overhaul (6 page)

Yet the hearings proved pivotal in other ways, providing a public display of the automakers' state of denial and revealing Washington's confusion about whether and how to help the industry. Most senators and representatives glossed over tough issues and tossed around terms like "prepack bankruptcy" without any real idea of what they meant.

And the hearings created one of the unsung heroes of the auto bailout, Senator Bob Corker, a Republican from Tennessee. I came to Washington with a bias against Corker because he had beaten my favorite Senate candidate of the 2006 election, Congressman Harold Ford Jr., after a particularly ugly campaign. Small and wiry, with an intensity belied by his soft southern drawl, Corker had been a mayor and businessman before being elected to the Senate. In that arena of show-horses and workhorses, he was proving to be a workhorse.

For Corker, the hearing was an eye-opener. Just returned from a trip to Russia and Ukraine, he was tired, had a headache, and hadn't spent more than a minute thinking about autos. But it wasn't lack of sleep that left him dumbfounded. The automakers were asking for $25 billion but hadn't even told the senators how they were going to divide it up. Nor had any of them submitted or prepared plans to show how, if the request was met, their companies could be made viable without further outlays.

Corker, getting down to business with terse, biting questions, pressed the CEOs on how the money would be split. Wagoner replied that GM wanted "our proportionate share," in a tone that irritated Corker. He asked Gettelfinger to rank the three companies' "shape," best to worst: "Ford, Chrysler, and General Motors," the union chief acidly replied. Corker hammered the CEOs over the lack of analysis in their request, and Gettelfinger over an extreme provision of the UAW contract under which laid-off workers received 95 percent of their normal pay.

For Corker, this was his chance to "own" a major issue, at least among Republicans. Returning to his office in the nether reaches of the Dirksen building, he gathered his staff and began to lay plans for a fact-finding mission to Wall Street. He would seek out the finest auto industry analysts and financiers and maybe, just maybe, come up with a rescue plan.

With Thanksgiving fast approaching, Congress ended its session without taking action on autos. Instead, in a public letter, Pelosi and Reid offered the CEOs a do-over: the House and Senate would return for a rare second lame-duck session in December, devoted exclusively to autos. But that session would take place, the letter warned, only if each company presented "a credible restructuring plan." Interestingly, the letter did not directly address the most important issue: whether $25 billion, as staggering as that sum would have seemed just months before, would even be enough.

The coda to the week happened not on Capitol Hill but on
Saturday Night Live.
The show opened with a parody of what the second set of hearings might be like. In the skit, the CEOs do not fly to Washington, they drive—and apologize to Congress for showing up late because their cars all broke down. "I was going to drive my 2009 Cadillac XLR-V, a model we at GM are very proud of," says the ersatz Rick Wagoner, "but every time I tried to start it, I just got a powerful electric shock, and the upholstery would catch on fire." The CEOs ask Congress not for $25 billion but for hundreds of billions, to be paid over in quarterly installments over five years. "As you can see, Mr. Chairman," says Wagoner, "this proposal is specific, it is detailed, and it is both short- and long-ranged." When the congressmen protest, he adds testily, "With all due respect, we are not talking about a gift or a subsidy. We are talking about
a loan.
" The skit careens on until the CEOs end up boasting that they have entire factories devoted to building lemons, and acknowledge amiably that they probably will never pay the money back. As over-the-top as it was, the parody spoke to the unpopularity of using tax dollars to rescue the automakers: by early December, most polls showed public sentiment running against the idea.

Hank Paulson kept tabs on the auto crisis, but in truth Detroit's headaches were pretty far down his list of major problems. The struggle to stabilize the financial system was gobbling auto-rescue-sized chunks of federal funding every week, and at the rate at which Treasury was bailing out banks, Paulson feared that
TARP
would run out of money. Congress had appropriated half of the $700 billion authorized in the law that established the program; of that $350 billion, the Treasury had already committed more than $200 billion and the rest was going fast. If one or two more financial giants failed—Bank of America, say, or the huge financial operation at General Electric—the Treasury might not have the resources necessary to stave off a systemic collapse. Paulson's worries intensified just before Thanksgiving, when Citigroup needed a second bailout—$20 billion on top of the $25 billion the Treasury had already kicked in.

All of Washington realized that the lame-duck Congress was unlikely to appropriate the second half of
TARP.
Bailing out Wall Street—unpopular back in October when
TARP
had first been passed—had become more politically toxic in the intervening six weeks. And of course President Bush, on his way out, had exhausted his political capital. Winning approval for the second half of
TARP
would certainly be easier in 2009, with a new President and a new, more heavily Democratic Congress.

But Paulson didn't think the matter could wait. He set out to make the case to Obama for securing the second half of
TARP.
He called Rahm Emanuel, Obama's chief of staff, two days before Thanksgiving.

"We need to take down the last part of the
TARP
and we can only do that with you and we need your help," Paulson said.

"That's not good news," Emanuel replied in his blunt fashion. He directed Paulson to call Larry Summers, the incoming President's top economic adviser. Summers questioned Paulson about
TARP,
and then, to Paulson's surprise, pointedly brought up autos. "You are not going to let the autos fail, are you?" Summers asked. The Democrats were moving Detroit to center stage.

Bush's White House staff, more focused than Paulson on the auto crisis, had expected this. In his first postelection press conference, Obama had emphasized his commitment to autos, which he called "the backbone of American manufacturing." He'd made the point again in his first private meeting with President Bush, pressing for help for the auto industry.

Bush's team saw that to obtain the additional
TARP
funding that Paulson argued was essential, they would have to rely on Democratic votes. That support, they believed, would be contingent on two things: the active endorsement of the President-elect and relief for the auto companies. But they didn't want to help Detroit unless they could attach strings—they wanted the automakers to secure concessions from major stakeholders to ensure their long-term viability. Otherwise, Bush's advisers argued, the incoming Democrats would cave in to special interests—particularly the UAW—with $25 billion becoming $50 billion or more. Meanwhile, the auto companies would do no genuine restructuring and instead end up wards of the state. To address these worries, Joel Kaplan, a deputy chief of staff, floated an interesting idea. Kaplan was a young, articulate Harvard Law graduate who had worked in the Bush White House since 2001. Paulson much preferred dealing with Kaplan and his boss, Josh Bolten, than with others among the White House's hefty contingent of rigidly ideological conservatives.

Kaplan proposed creating a "financial viability adviser" and granting him or her the power to hold the automakers accountable—they would get no long-term money from the government without showing they could survive as going concerns. Importantly, from the Bush team's perspective, the incoming administration would publicly embrace that same commitment at the time of the viability adviser's appointment.

Paulson responded warmly to the idea. Bailing out an industry so fundamental to the American identity and way of life was a politically charged subject. Only someone outside the usual chains of command, someone of authority and integrity—Paul Volcker, the former Federal Reserve chairman, was mentioned—could force the tough decisions the industry would need. What was more, if the White House could persuade the Democrats to agree on the choice of an adviser now, there would be someone securely in place to hold off the unions and keep the bailout in check after Bush left office. "Financial viability adviser" quickly got shortened to "car czar," an epithet that would come to cause me much grief.

Paulson and Summers went round repeatedly that week about
TARP.
Summers felt that Paulson hadn't truly sold the Bush White House on the importance of taking down the second half of
TARP
and was trying to enlist the Obama team in his cause instead. In the course of every conversation with Paulson, Summers brought up autos. Although skeptical about the car-czar idea, he had started thinking about possible recruits, hence the call to me the afternoon before Thanksgiving.

Over the holiday, the White House stepped up its effort to engage Obama in a joint approach on both
TARP
and autos. Bolten phoned Emanuel to ask for a face-to-face meeting, but Rahm was reluctant. In the last presidential transition occurring during a historic economic crisis—Franklin Roosevelt's succeeding Herbert Hoover in 1933—FDR had deliberately remained aloof until he was in office. The Obama team doubted that there was a workable way to co-govern. And it had studied that precedent and concluded that it had little to gain politically by collaborating on any issue, let alone
TARP
and autos. This carefully calculated decision was packaged under the appealing sound bite "there can be only one President at a time."

This was a source of frustration to Bush officials, who were pleased when Emanuel, unwilling to reject Bolten out of hand, agreed to a meeting—although he did not want it to take place in the Bush White House and specified that Summers, not he, would lead the Obama delegation. On Sunday afternoon, November 30, the two sides, mostly dressed in khakis and sports coats, gathered at the Treasury Department in Paulson's corner office, Paulson in his customary wing chair and Summers on the couch next to him. The Bush delegation, led by Bolten, Paulson, Gutierrez, Kaplan, chief congressional liaison Dan Meyer, and Keith Hennessey (whom Summers would be replacing), far outranked the team from Obama, which was still forming a staff. Paulson laid out the White House proposal: if the incoming administration would "link arms" to win approval for the second $350 billion of
TARP,
then the outgoing administration would support an auto rescue plan. Following this, Kaplan outlined his proposal for including an auto rescue in the uses of the second tranche of
TARP.
President Bush would issue an executive order appointing a financial viability adviser to administer the bailout, and the new Treasury secretary would agree to make
TARP
funding available only if the automakers could show that they were viable. As Summers already knew, this adviser would have broad authority to require financial plans from the automakers and to impose his own measures—including Chapter 11 bankruptcies—if the companies fell short. While the adviser would be officially selected by Bush, the Republicans made it clear that only someone acceptable to the Obama team would be named.

Summers zoomed in on
TARP,
probing for evidence that the added money was actually needed before Obama arrived. Next he asked a lot of questions about autos, not hiding his skepticism about the idea of a car czar. Why would Obama want to outsource a problem that was his responsibility? Bolten replied that the White House was open to other ideas, but the meeting ended inconclusively after ninety-five minutes. Paulson, ever relentless, called Summers twice the next day, and Hennessey also gave Summers a ring. The clear impression among the Bush team was that the Obama team did not want to say yes or no and was slow-walking them.

This triggered two recalculations. First, the administration decided to back off on
TARP:
as much as Paulson wanted the extra safety margin of $350 billion, an ugly fight over gaining access to the money could roil the markets as badly as another bank failure. Second, worried about the sufficiency of
TARP,
it returned to a legislative strategy that involved pushing Congress to make the advanced-technology funding available as a bridge loan to the auto companies.

"Every industry in America is hurting today. Show me one that couldn't be assisted and made more viable and more profitable with an additional $34 billion," demanded Texas Congressman Jeb Hensarling. "So why the folks before us and not other folks?" By Friday, December 5, Detroit's CEOs were back on Capitol Hill for round two.

In two scant weeks, the amount of their bailout request had ballooned from $25 billion to $34 billion. GM, at this point, wanted a $12 billion loan and a $6 billion line of credit, including $4 billion immediately to ensure survival past January 1. Chrysler wanted $7 billion. Ford, breaking ranks, said it needed no immediate cash, just a $9 billion line of credit.

In the midst of what was becoming a predictable circus, some truths emerged. Most compelling was the testimony of Mark Zandi, the chief economist of Moody's
Economy.com
, who had delved into the automakers' restructuring and restoration costs. According to his analysis, their recovery plans rested on too optimistic assumptions. Just to avoid bankruptcy in the next two years, Zandi testified, the automakers would need not $34 billion but rather $75 billion to $125 billion—numbers that would prove amazingly prescient.

Yet Zandi conceded that, in its battered state, the economy could not stand Detroit's implosion. Like other witnesses, he recommended that Congress provide emergency aid, though not as much as the automakers had asked. More could be offered later if the turnarounds began to work.