Rattner on GM, Chrysler turnaround plans: 'They were delusional'

Rattner on GM, Chrysler turnaround plans: 'They were delusional' http://tinyurl.com/ydlel57
On a frigid night last January, Bob Emerson drove home to Flint from his
job in Lansing as Gov. Jennifer Granholm's budget director. When he pulled into his driveway, Emerson realized his house was the only one of six on the block with lights on. The rest were empty -- either for sale or foreclosed. All the numbers he'd seen showing state tax revenue falling off a cliff hit home.
"I was grateful I was working, my family was working," Emerson said. "I'm thinking how lucky I am -- and thinking a lot of Michigan was going to look like Flint."
The nation's financial crisis and the specter of bankruptcy for General Motors and Chrysler at the end of 2008 had forced all Detroit automakers to slash production, leading to cascading layoffs among suppliers and other businesses throughout the state. In December, the state shed 13,000 manufacturing jobs. In January, it would lose 62,000 -- one in every 10 factory workers still employed.
In the previous six months, the Flint area had lost 10,900 jobs, or nearly 9% of its employment; 4,300 of those jobs were in the city of Flint, which already was synonymous with the decline of the U.S. auto industry.
GM's slide toward insolvency had a particular impact on Emerson, 61, a former state legislator who represented Flint in Lansing for 24 years. When he was a union rep back in the 1970s, Flint and surrounding Genesee County boasted 79,000 hourly GM workers, many households with two GM incomes and the second-highest per-capita consumer spending in the nation.
Just 30 years later, the area had fewer than 6,000 GM hourly jobs, and Flint had gaping holes where factories used to be. The landscape was similar in many Michigan cities that had depended for generations on auto industry jobs, but nowhere were the losses more acute than Flint.
The ripple effects from the auto industry's woes were more like a tidal wave. As sales and income taxes fell, state Treasurer Bob Kleine had warned Granholm in October 2008 that her budget was going to fall $600 million short. Ten months later, that number would be $2 billion.
In January alone, sales tax revenue had plummeted an "unheard of" 20%, Kleine said.
"I thought something was wrong, that it was a fluke," he said. "It turns out it wasn't a fluke."
Emerson said he feared that a GM bankruptcy -- a liquidation or prolonged reorganization -- would cause state revenues to drop 40%.
"You'd have people without health care, you'd have hospitals closing, pharmacies closing," Emerson said. "How that would ripple out and the impact on the state budget was incomprehensible.
"I just said, 'No, this can't be. Please, dear God, don't let this happen.' " Paulson bears good news for Michigan
The U.S. Senate's rejection on Dec. 11 of $34 billion in auto industry loans spun Detroit's crisis back down Pennsylvania Avenue to Treasury Secretary Henry Paulson's lap. It took another week of wrangling and one all-nighter of auto executives and Treasury officials before President George W. Bush signed off on a $17.4-billion rescue of GM and Chrysler, with the money to come out of the $700 billion Congress had OK'd for a Troubled Assets Relief Program.
"We just did it," Paulson said in a phone call Dec. 19 to U.S. Sen. Carl Levin, D-Mich.
"Are you kidding me?" an exasperated Levin replied.
Levin and his staff, poring over the documents early that morning, spotted a small but significant change in the agreement's wording. The Treasury was demanding that the UAW accept the "same" wages and compensation as workers at Japanese automakers' plants in the United States. While the wages were already close, Japanese automakers offered far less generous benefits, especially for retirees. The union, Levin knew, had agreed to "comparable" wages and compensation, preserving benefits for older workers.
It was a hard-fought compromise with Republicans that had been accepted in principle as part of the Senate agreement that failed to pass. After Levin pointed out the difference to Paulson, the Treasury quietly changed the word to "comparable" in its official term sheets for the loans.
The deal set tough targets for the two companies -- a two-thirds cut in debt, a 50% reduction in payments to health care funds for UAW retirees and proof of net positive value by March 31. It also came with a threat: Should the automakers fall short, the loans would be called back immediately and bankruptcy would follow.
One thing the Bush team did not do was force management changes at GM or Chrysler. Bush officials did not think highly of GM Chairman Rick Wagoner, but saw ousting him as stepping too far into the powers held by a public company's board of directors.
As Bush announced the plan in a mid-morning statement on Dec. 19, Detroit was being buried by a 10-inch snowfall. Still, it was a rare good day for Michigan.
Actually, it was not until 11:30 p.m. on New Year's Eve -- after long hours of hashing out details on such things as executive pay, with some GM officials sleeping in cots in the company's Washington offices -- that GM officially agreed to the terms. Chrysler's agreement would leak a couple of days into 2009. Granholm keeps state on everyone's mind
Washington's attention was by now shifting to the historic inauguration of Barack Obama.
But Gov. Jennifer Granholm was trying to make sure that the auto industry's troubles and Michigan's resulting economic meltdown did not lose a place on the national agenda.
Since the election that had put her fellow Democrat in the White House, Granholm's daily routine had included firing off e-mails to Larry Summers, the president-elect's top economic adviser, and other members of the Obama economic team. Each one began with a steadily growing number -- the tally of that day's phone calls from unemployed workers to the state's benefits hotline.
"I've really been quite a pain in the neck," Granholm acknowledged in one e-mail.
During one black-tie inaugural dinner in Washington, Granholm told the Free Press she spotted Summers and Treasury Secretary-designate Timothy Geithner and swooped in, oblivious to any protocol about talking shop at a formal occasion.
At 10.6%, Michigan's unemployment rate had topped double digits for the first time in a quarter-century; claims for unemployment benefits rose 76% in January 2009 compared with the year before.
The state's deluged unemployment offices were among the few places hiring, but they couldn't keep up with demand. In January, the call centers processed 212,000 requests for help. By April, that number would hit 320,000.
"I had to look them in the eye," Granholm said of Obama administration officials, "and tell them, 'You don't know how the people are feeling, the pain we are experiencing here.' "
In February, Granholm met with Gene Sperling, a Michigan native who had been a key economic adviser to President Bill Clinton and was now a counselor to Geithner, and Ron Klain, chief of staff for Vice President Joe Biden, who had been a Granholm classmate at Harvard Law School.
She told them Michigan needed a federal response equivalent to the Hurricane Katrina relief effort. Recovery bonds. Cash for clunkers. Emergency retraining programs for displaced workers. Money to launch new battery factories for electric cars.
"I knew the Obama administration was not going to allow the auto industry to go down," Granholm said.
But could she keep Michigan afloat in the meantime? Uncertainty reigns on job front for workers
As the days grew shorter toward the end of 2008, Lorenzo Byrd was hanging on at Ford, a proud manufacturing engineer who, at 39, was seeing the payoff for six long years spent working and taking classes to earn a college degree and the best job he'd ever had, challenging and rewarding.
But it was no longer secure, even though Byrd was working on the production set-up for Ford's touted EcoBoost V6 and had been sent to the company's engine plant in Lima, Ohio, to study space, machinery and manpower needs. Byrd, who had about 18 months in with Ford, knew the company was still losing money and shedding workers by the hundreds.
"I was hoping I'd be around to see the finished product," he said of the EcoBoost.
Whatever his fate, Byrd knew he at least had his education.
"It was a lot of work, but I had accomplished getting that degree, so that gave me some hope that I'd be OK whatever happened," he said.
From Ed Gordon's perspective in the winter of 2008-09, nobody in the upper ranks of business or government had a clue just how bad things were getting at street level in Michigan.
"It's impossible to get a job," said Gordon, a Teamster who'd had 10 years of a decent living trucking auto parts before his company went out of business. "There are no jobs with good pay. The companies are taking advantage of all the people out of work."
And auto industry layoffs were only making his search for work more difficult.
"Think of all of the competition I have now," Gordon said. "How many more people will that put in the job market? I'll never get a job.
"I'm well versed," said Gordon, 44, a high school graduate with a certificate in heavy equipment engineering. "I've done a lot of things over the years. I am very adaptable. Some of the Chrysler and GM people aren't so adaptable because they've never done anything else."
But there were thousands of them in the same hunt as Gordon. It didn't matter much, though, because nobody was hiring. Rattner ready to take on the auto industry
Steven Rattner had been anticipating the call for years.
The 56-year-old private equity dealmaker and former New York Times reporter had built a reputation in financial circles as a nexus between Democrats on Wall Street and Washington. Having helped raise millions of dollars for the party, Rattner had long thought of capping his financial career by going into public service.
But the timing and politics had never been right, and Rattner didn't need an empty title; his Wall Street work had given him a net worth in the hundreds of millions of dollars. If it didn't work out, so be it.
Shortly after Obama was elected, the call Rattner had been seeking came from Geithner, Obama's choice for Treasury secretary. Geithner, who had been to parties at Rattner's Park Avenue apartment, told him he was looking for people to deal with problems by topic, and that Rattner might work on the auto industry.
Rattner knew little about carmaking -- he could barely distinguish among models from behind his Le Corbusier-style eyeglasses -- and hadn't closely followed the industry's travails. But the more he read, the more interested he became.
"If you want to deal with economic problems, what are you saving yourself for?" Rattner said in an interview with the Free Press. "This auto thing was beyond, in scope and magnitude and results, well beyond anything I ever expected."
The Obama team began piecing together its plan for Detroit well before the inauguration. Rejecting the Bush administration's framework, Geithner and chief economic adviser Summers wanted far more data about what was going on inside GM and Chrysler. Chrysler's outline of a deal with Fiat would need to be torn up and renegotiated.
The team also rejected the idea of a car czar -- a detached figure who would pass judgments with limited input from above.
"Fundamentally, these were going to be incredibly consequential decisions that involved not only tens of billions of dollars but thousands of jobs," Brian Deese, one of the young advisers Obama assigned to work on the auto industry's problems, told the Free Press. "The president could not outsource those decisions."
Rattner and other task force recruits were also worried about political influence -- and told they would be free to make calls as they saw fit.
As Rattner assembled his team, legions of executives in Detroit sweated over the viability plans due Feb. 17 that were supposed to include reworked labor deals with the UAW and agreements with bondholders.
As the deadline approached, GM President Fritz Henderson and Chief Financial Officer Ray Young held a weeklong set of meetings in the GM boardroom to dive deep into the restructuring effort.
Each area of the company presented conclusions and recommendations for the viability plan. Everything was put on the table, including how to cut dealers and compensate them for their loss.
Everything, that is, except bankruptcy, which GM had started working on as a backup only if all other plans failed. Three times a week, GM's bankruptcy team would review Plan B with Wagoner, Henderson and Young. Yet most of the company's energy was focused on Plan A -- the viability report.
Wagoner was "terrified of bankruptcy" and he could not have conceived how the government would insert itself into the bankruptcy process, one Wagoner confidant said. Henderson took on the task of explaining in the viability plan GM's reasons for staying out of court at all possible costs.
"He felt he could articulate why a bankruptcy didn't make the most sense," a Henderson confidant said. "He had strong views about that and said, 'Let me take a crack at writing that.' "
Deese and other Obama staffers got their copies of the plans from GM and Chrysler at 5 p.m. on a Friday. With Obama and Geithner traveling together, the group settled in -- after marking Deese's 31st birthday -- and worked until past midnight to produce their summaries for the president. The following morning, they began a round of conference calls with the automakers to explore the details.
GM and Chrysler had pushed to cut deeper and again anticipate what officials in Washington would want. Neither had deals with bondholders or with the UAW on cuts to trust funds for retiree health care. Each remained steadfast in warning that bankruptcy was simply not a viable option.
That wasn't the view inside the Obama administration.
Summers, according to people familiar with his thinking, saw bankruptcy as likely for both companies. Rattner, who wasn't familiar with the industry, soon began to share that view. Both saw GM and Chrysler as larded with debt and UAW contracts they could no longer sustain.
The companies' viability plans only hardened their view of how much change Detroit needed.
"They were delusional," Rattner said. "They were just more of the same. You could spend five minutes with them to know we weren't going to accept them, and we were clearly going to want more."
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