A Cliffhanger to See if a G.M. Turnaround Succeeds
SATURDAY, May 30, offered the kind of warm, sunny afternoon that
rain-soaked New Yorkers had longed for all spring. In the theater
district, crowds were gathering to catch a glimpse of Barack and
Michelle Obama, who were planning to attend a Broadway show so the
president could fulfill his campaign promise to his wife of a date night
Fourteen blocks north, high up in a boardroom at 767 Fifth Avenue, Fritz
Henderson was about to make the toughest decision of his life, and one
that Mr. Obama and his advisers had seemingly foisted upon him.
As the clock ticked toward 6 p.m., Mr. Henderson told directors of
General Motors that management believed the struggling auto company’s
only path was into Chapter 11 bankruptcy protection.
“I’d been at G.M. 25 years, I’d been the C.E.O. 60 days, and here I was,
recommending that G.M. file for bankruptcy,” Mr. Henderson said in an
interview last week.
Mr. Henderson, Mr. Obama and the scores of lawyers, financial experts
and restructuring advisers whose careers were at stake were guiding G.M.
along a financial, political and emotional tightrope a few months ago,
and their decisions shaped what G.M. has become today. And it is not yet
clear whether the risks they took, and the government’s enormous
investment, will pay off.
A successful G.M. turnaround could rank as one of the greatest
restructuring efforts in business history, said Michael Useem, a
professor of management at the University of Pennsylvania.
But if G.M.’s bureaucratic culture and consumers’ disinterest continue
to plague the company, the long days, intense negotiations and legal
maneuvering — not to mention tens of billions in taxpayer money — will
have been for naught. “The stakes are about as big as they’ve ever been
for a company’s remake,” Professor Useem said.
The responsibility for keeping G.M. on track falls to its new board, led
by the former AT&T chief Edward Whitacre Jr. The new directors include
executives and financial advisers schooled in aviation, transportation
Mr. Henderson, meanwhile, shook up G.M.’s senior ranks last week. As a
flock of longtime executives announced their retirements, a single
executive committee was named to run the entire company, replacing
various regional fiefs.
There is little time to waste. In just the few short weeks since G.M.
emerged from bankruptcy on July 10, Washington’s stance toward the
industry has shifted.
Steven Rattner, who led the president’s automotive task force at the
Treasury Department, left his post Friday, as New York State and the
Securities and Exchange Commission step up an investigation into pension
fund management involving his investment firm.
Hundreds of car dealers, angry at plans to eliminate their franchises,
have started a lobbying charge on Capitol Hill for legislation aimed at
reversing those decisions — a step that both G.M. and Chrysler say could
undermine their restructurings.
Mr. Obama, meanwhile, has moved on to his next sticky political
challenge — promoting his health care package — after emphasizing that
Detroit has received all the federal aid he is willing to grant.
“We have been as clear as we could possibly be that we have zero
intention of providing any more money to either of these companies,”
said Brian Deese, a special assistant to the president for economic
policy who was the White House’s point person on the auto industry bailout.
While Mr. Obama may now be tightening the federal purse strings, he made
a fundamental decision, even before taking office, that his
administration would build on the lifeline extended by George W. Bush at
the end of his presidency to assure that G.M. and Chrysler remained in
The White House’s rescue plan evolved from simply providing billions
more and letting the companies plot their fate to taking the automakers
by the hand and escorting them through bankruptcy court.
That decision, which some analysts liken to Japanese industrial policy,
marked a rare time that an American president waded directly into the
automobile industry’s affairs. It has generated a heated debate across
the country that is likely to continue for years in classrooms,
boardrooms and the halls of Congress.
Why, after all, should the automakers receive the equivalent of a
Technicolor dreamcoat, giving them favorite-son status, when other
industries, like airlines and retailers, also have suffered from the
And, having received federal aid, should the carmakers be required to
build greener automobiles, as some environmental activists have urged,
in keeping with Mr. Obama’s focus on climate change?
Mr. Obama dealt with the first point on March 30. “We cannot and must
not, and we will not let our auto industry simply vanish,” he said.
“This industry is like no other — it’s an emblem of the American spirit,
a once and future symbol of America’s success.”
Mr. Deese, meanwhile, said these broader issues were not the objective.
“The question we were focused on was not what larger policy objectives
we should be trying to achieve,” he said, but “what is a commercially
viable restructuring that will allow them to succeed in a way that they
have not in the past?”
TO many, G.M.’s decision to file for Chapter 11 was the logical result
of a saga that began last November, when Rick Wagoner, G.M.’s chief
executive, joined other auto industry leaders in seeking government aid.
“That was the point where you realized they had no shot at making it on
their own, absolutely no shot,” said Ray Wert III, editor in chief of
Jalopnik, a Web site for car enthusiasts. “They went from fighting for
market share to fighting for their lives.”
Memories of the scolding that Detroit received from members of Congress
over the use of private jets were still fresh in February, when the
administration began assembling the group that would see G.M. and
Chrysler into their new worlds.
Along with Mr. Deese, among the first to join the effort were Mr.
Rattner and Ron Bloom, a restructuring expert who had advised unions
representing steelworkers and pilots.
Faced with the prospect of spending tens of billions to restructure the
companies — some experts said G.M. alone might require $70 billion to
$100 billion to fix — Mr. Obama told his automotive task force to
approach the matter with a commercial mind-set, not a political one,
according to several members of the group. As it turned out, the group
acted like a private equity firm, demanding quick answers and making
fast decisions, rather than getting bogged down in government bureaucracy.
To date, the G.M. case has cost roughly $50 billion, while Chrysler has
received about $15.5 billion.
“We tried to ask ourselves what we would do if this was our money,” said
Mr. Bloom, who has replaced Mr. Rattner as head of the task force. “The
president made the fundamental decision to do it, but the direction was
also, ‘Don’t spend more than you need to spend.’ ”
In Detroit, Mr. Wagoner repeatedly said a bankruptcy could be
devastating for G.M. because consumers would not buy vehicles from a
bankrupt company — a fear echoed by Michigan’s governor, Jennifer M.
Granholm, an adviser to the president.
They were not alone. “We were all afraid of bankruptcy,” Mr. Rattner
said. “There is virtually no precedent for a company making consumer
durable goods going into bankruptcy and surviving.”
He added: “We weren’t sure whether people would be willing to buy cars
from a bankrupt company. If they had stopped buying cars, the cash
hemorrhage would have been enormous."
Yet, early on, the auto panel and its advisers knew that the best hope
for keeping G.M. in business was most likely the courts.
“We came to believe, within a short time of arriving, that inside of old
G.M. was what we used to call ‘shiny new G.M.,’ ” Mr. Bloom said. “We
also knew that finding it and pulling it out would require a huge amount
Even before the task force was created, the Treasury Department hired
Cadwalader, Wickersham & Taft, a New York law firm, to advise the
In mid-February, “we were given to consider a hypothetical: how could
you get a car company through bankruptcy in the shortest amount of
time?” recalled John Rapisardi, the co-head of Cadwalader’s
For Mr. Rapisardi, the assignment came a few weeks before he was headed
to Delray Beach, Fla., over Presidents’ Day weekend to visit his mother.
Because she didn’t have a fax machine, he persuaded a clerk at a local
supermarket to let him use the store’s to receive hundreds of sheets of
paper from Washington.
After about a week of strategizing, Mr. Rapisardi and Todd Snyder of
Rothschild, an investment banking firm also advising the task force,
came up with the bankruptcy framework eventually used by Chrysler and G.M.
Each would seek bankruptcy protection; then a sale of the best assets
would be performed under Section 363 of the bankruptcy code to create a
new company. These new entities would emerge from bankruptcy and go back
into business — G.M. on its own, Chrysler as part of Fiat.
Despite seeing a Section 363 sale as a likely course of action, the
government and the companies initially tried to avoid it. Chrysler and
G.M. — in what would prove to be their last chances to control their own
fates — were allowed to submit restructuring plans to the White House on
Those plans, Mr. Rattner said, fell far short of what was needed to
overhaul the companies. He believed that G.M., especially, had made
assumptions about auto sales and its ability to handle its liabilities
that were at odds with the task force’s conclusions.
It was not only the flawed revitalization plan. Mr. Wagoner also had
presided over a company that veered close to running out of money,
despite receiving nearly $20 billion from the Bush and Obama
administrations since late 2008.
For more than three years, Detroit had regularly swirled with rumors
that Mr. Wagoner was in jeopardy. G.M. always denied it. As late as
March 20, Mr. Wagoner insisted that he was in his job to stay.
But in his discussions with the Treasury under both presidents, Mr.
Wagoner made clear that he was willing to step aside if necessary,
according to participants in those meetings. On March 29, before a
meeting with the task force, Mr. Rattner asked to see him privately and
told him he would have to go.
Despite his offer, Mr. Wagoner appeared surprised by his ouster, which
in turn surprised members of the task force. So did the heated reaction
several days later in Detroit, when Mr. Wagoner’s departure came to
light — touching off fears within the industry that General Motors would
morph into Government Motors.
In truth, the task force had no interest in running G.M. But the only
available alternative to Mr. Wagoner was Mr. Henderson, a lifelong G.M.
employee, and he did not initially impress some task force members,
according to administration officials involved in the discussions.
When asked at an early meeting to discuss G.M.’s culture, he gave what
some members of the task force described as a long, meandering answer,
concluding: “I’ve been here 25 years. This is the only culture I know.”
However, Mr. Henderson quickly added that he was determined to change it.
The panel considered making him an interim chief executive, but decided
that G.M. employees, rattled by the financial crisis and the departure
of their boss, could not handle more uncertainty.
Likewise, the task force sought to demonstrate that it did not plan to
run G.M., but to fix it. To prove that this was possible, the panel had
to start with Chrysler.
CHRYSLER’S repackaging in the courts took 36 days and was a key to
making G.M.’s own trip, which lasted 40 days, an easy one, Mr. Bloom
said. The showdown between the government and Chrysler’s financiers over
the terms of its restructuring was also pivotal, Mr. Bloom noted.
“They all thought government would blink. They all thought we wouldn’t
have the chutzpah,” he said. “That was the breakthrough on Chrysler.
People understood Uncle Sam wasn’t going to be Uncle Sucker.”
But it was harder for many to understand the role played by the United
Automobile Workers union in the G.M. rescue. Mr. Obama had gone out of
his way in his March 30 speech to praise workers and blast debt holders,
who he implied had forced Chrysler into Chapter 11.
To the union, one of the crucial issues was the fate of a health care
fund expanded during contract talks in 2007 to shoulder the automakers’
enormous burden for retiree medical benefits.
The contracts called for the carmakers to invest cash and stock in the
funds, which in turn would make them the automakers’ biggest
shareholders. But the cash the union was owed had run short, especially
at G.M., and it was clear that the U.A.W. would have to make concessions
as part of any deal to save the company.
It had already reached an agreement at Chrysler, giving the fund a 55
percent stake in the company, when talks with G.M. accelerated in May.
Ron Gettelfinger, the union’s president, argued that because G.M. had
more retirees than Chrysler, its fund required more cash.
On May 19, in talks at Cadwalader’s Washington offices, the task force
proposed giving the union a 16.5 percent stake in G.M., as well as a
$2.5 billion note and $6 billion in preferred stock.
Mr. Gettelfinger, saying his members would not accept the deal, made a
counterproposal: 20 percent, $6.5 billion in preferred stock and the
$2.5 billion note. Then he left the bargaining table.
The next morning, as he was packing to leave for Detroit, he received a
call from Mr. Bloom. The government was willing to offer $6.5 billion in
stock and a 17.5 percent stake, along with warrants that could raise the
stake to 20 percent in the future.
Asking for time to think about it, Mr. Gettelfinger walked the
Washington streets for two hours, according to a person close to the
discussions. When he returned, he acquiesced, and G.M. workers later
accepted the deal.
The U.A.W. declined to comment for this article. But Mr. Bloom praised
the group. “The U.A.W. was an indispensable part of the puzzle,” he
said. “We needed to make peace with the U.A.W. If you didn’t have a deal
with labor, you didn’t have a deal."
For years, a G.M. bankruptcy seemed daunting.
“The case would last my lifetime, my son’s lifetime, my grandson’s
lifetime and maybe my great-grandson’s lifetime,” Stephen P. Yokich, the
late president of the U.A.W., said in a 1995 interview, talking about an
earlier G.M. crisis.
Instead, the Section 363 sale that created what is now officially the
General Motors Company went on for little longer than the Tour de
France, stunning legal experts and surprising members of the task force,
who initially expected the case to take 60 to 90 days. (The remains of
G.M., now called the Motors Liquidation Company, will take years to
“It was remarkable how much we accomplished in such a short period,” Mr.
Making the case even more unusual was that the government provided both
bankruptcy funding and the financing that allowed the companies to emerge.
Some experts say the government’s role cowed creditors, who might have
tied up both cases much longer. Mr. Rattner disagreed.
“The reason this worked was not because we were the government,” he
said. “The reason this worked was because we were the lender and
investor of last resort to two companies that judges recognized were
melting ice cubes.”
Mr. Rattner, who declined to discuss his company’s legal situation, said
he was leaving the task force confident that his work was done.
Indeed, Chrysler’s fate is now in Fiat’s hands. And G.M. is just
embarking on a long and uncertain journey, albeit with protections that
few companies have ever enjoyed.
Though the car market remains dismal, the steep decline in auto sales
that Mr. Wagoner and Governor Granholm warned would accompany a
bankruptcy did not occur, in part because of a government program to
back the warranties on G.M. cars bought during its bankruptcy. (The
program ended last week.)
“We had to foam the runway,” Mr. Rattner said, referring to the tactic
used at airports when crippled planes are about to land.
G.M.’s liabilities have been reduced so that it can break even in an
overall market of just 10 million cars a year, roughly the current sales
level, compared with the market of 16 million to 17 million it needed
before its bankruptcy.
STILL, no one can force consumers to want G.M.’s products, Mr. Wert
said, and there is little indication that the overall industry will soon
rebound from its slump. Like Mr. Rattner, Mr. Wert is also concerned
that G.M.’s deliberate and nonconfrontational corporate culture could
stymie the changes that Mr. Henderson must pursue.
“Their culture is built to react like it’s 20 or 30 years ago” when G.M.
controlled more than a third of the American car market “versus the G.M.
of now and in the future — G.M. with a smaller market share, G.M. that’s
the underdog,” Mr. Wert said.
The situation is certainly not what Alfred P. Sloan Jr., whose portrait
hangs near the New York boardroom where G.M.’s directors met in June,
would have envisioned for the company. Mr. Sloan led the company from
1923 to 1946, and his management tenets still infuse it.
Mr. Henderson, who invoked his renowned predecessor on the day G.M.
sought bankruptcy protection, said Mr. Sloan would never have seen a
quick bankruptcy as a victory. “He’d say: ‘You have a second chance at
life. Make sure you make it pay.’ ”