November 1, 2010
Who really rescued General Motors?
In February of 2009, Steven Rattner was selected by the Obama Administration to oversee the federal bailout of General Motors and Chrysler. It was not a popular choice. Rattner was a Wall Street financier with no expertise in the automobile business. The head of the United Auto Workers, the chairman of Ford, and a number of congressmen from Michigan all complained that the White House should have hired someone with an industry background. But, as Rattner makes clear in "Overhaul" (Houghton Mifflin Harcourt; $27), his account of the experience, the critics misunderstood his role. "This was not a managerial job," he writes. "It was a restructuring and private-equity assignment," and private equity was Rattner's forte. He made his living buying troubled and mismanaged companies, turning them around, and then taking them public again—and that's exactly what the Obama Administration wanted him to do in Detroit. "Overhaul" is not a Washington memoir, even though it is set in Washington, and it involves one of the most deeply politicized issues in recent memory. It is a Wall Street memoir, a book about one of the biggest private-equity deals in history. The result is fascinating—although perhaps not entirely in the ways that its author intended.
In the past twenty-five years, private equity has risen from obscurity to become one of the most powerful forces in the American economy. Private-equity firms collectively make hundreds of billions of dollars in investments every year. The industry's most prominent player, K.K.R., was by 2007 the fourth-largest employer in the world. Traditional investors, like Warren Buffett, scout for companies that the market has overlooked or undervalued, and buy stakes in them with an eye to the long term. Private-equity investors are activists. They acquire firms outright. Then they bring in their own specialists to "fix" the company. Typically, a private-equity firm plans to take its acquisition public again in three to five years, and the theory behind the enterprise is that buying, fixing, and reselling companies can be far more profitable than Buffett-style "buy and hold" investing. In one of the deals that put private equity on the map, Forstmann Little acquired Dr Pepper for six hundred and fifty million dollars in 1984, cut costs and spun off the company's less glamorous divisions—such as its textile business and its Canada Dry operation—and then took it public again within three years, at a reported gain to investors of more than eight hundred per cent. An investor like Warren Buffett has to think that he is smarter than the market. Private-equity managers aim higher. They see themselves as smarter than the managers of the companies they are buying. It is not a field for someone with any obvious deficits in self-confidence, and Rattner, a cofounder of the Quadrangle Group, was long considered one of the most intellectually able men on Wall Street.
"Team Auto," as Rattner refers to the group that he assembled to help supervise the bailout, consisted of about a dozen people, some in their twenties and early thirties. They started work in March of 2009. One of the first major issues was whether to save Chrysler. To settle the question, Rattner tells us, Team Auto gathered in the office of Larry Summers, the President's chief economic adviser. The case against Chrysler was that most of the jobs lost by letting the company fail would eventually be offset by gains made by Ford and General Motors, as those companies picked up Chrysler's old customers. Letting Chrysler fail would make Ford and G.M. stronger. But did the team really want several hundred thousand jobs to disappear—even if the losses were short-term—in the middle of a severe recession? Chrysler's failure would also mean that Michigan's unemployment-insurance fund, for starters, would need to be bailed out. One of Rattner's team members made a counter-argument: "Given the uncertainty in our economy, it was better to invest $6 billion for a meaningful chance that Chrysler would survive than to invest several billion dollars in its funeral." Summers put the matter to a vote. The tally was 4-3 in favor of letting Chrysler die. When the vote came to Rattner, he said that it should live. Summers agreed. Chrysler lived.
Next up was General Motors. Team Auto's idea was to bypass the traditional bankruptcy procedure, in which the entire company would be restructured through a protracted process of negotiation with creditors. Instead, the company would be divided into two. "Old G.M." would contain the unwanted factories and debts and unused assets—all of which would be wound down and sold over time. The best parts of the automaker would be transferred to "New G.M.," an entity funded and owned by the American taxpayer. The task of carving out the new entity was enormously complex, and involved rewriting countless contracts with unions, suppliers, and creditors. To minimize disruption to the company's operations, Team Auto worked with lightning speed. Rattner would rise at five-thirty, be on the treadmill at the gym by six, and in the office by seven. Lunch was a tuna-fish sandwich at his desk. He wouldn't be back at his rented condo in Foggy Bottom until eight or nine, catching up on the day's e-mails before heading to bed. One of Rattner's team members spent his first month on a friend's couch in Virginia. Another worked around the clock during the week, and then made the five-hour drive every weekend to see his family, in Pittsburgh. None had any time for ceremony. At one point, two members of Team Auto, Brian Osias and Clay Calhoon, called for a sitdown with senior Chrysler executives at eleven on a Saturday morning. "The executives were almost all middle-aged industry veterans," Rattner recounts. "Osias was thirty-two years old and Calhoon was twenty-six, and both looked younger than their years." Calhoon announced to the room, "We're going to sit at this table until we're done." They were there until 2 A.M. on Sunday. On another occasion, the Team Auto member Harry Wilson had a meeting with senior G.M. officials, who arrived with a hundred-and-fifty-page document. Rattner writes, "What's this?' Harry asked. 'The agenda,' came back the reply. Harry, almost laughing, said, 'You can't run a meeting with a 150-page agenda!' " He substituted his own. Rattner took the job as Auto Czar in February. He was back home in New York, mission accomplished, by July.
Rattner has since run into some trouble. Recently, an S.E.C. investigation into a "pay to play" scandal involving the New York state pension fund led to sanctions against Rattner, who has reportedly accepted a two-year ban from the securities business. But there is no question that the auto bailout represents one of the signature accomplishments both of his career and of the Obama Administration. In August, G.M. posted its second quarterly profit in a row, its best result in three years. Chrysler, for its part, is now safely in the hands of Fiat, at least for the time being. Two years ago, when the heads of G.M., Ford, and Chrysler came to the Senate in the hope of gaining relief, no one could have imagined such a favorable outcome. At the time, the Center for Automotive Research estimated that the collapse of the Big Three would result in as many as three million lost jobs. So soon after the Wall Street rescue, there seemed little public or political appetite for another taxpayer bailout. The reaction of Richard Shelby, the ranking Republican on the Senate finance committee, was typical. "I don't believe they've got good management," he said of G.M. "They don't innovate. They are a dinosaur. . . . I don't believe the twenty-five billion dollars they're talking about will make them survive. It's just postponing the inevitable." The reason to bring in a private-equity expert is that he would never be so defeatist. To someone like Rattner, there is nothing wrong with giving a dinosaur money if you think you can fix the dinosaur. One might even say that the private-equity investor prefers the dinosaur, because dinosaurs are cheap, which increases the potential profit at the end. And then the world will look at him with awe and say, "Wow, you turned around a dinosaur—even if, on closer examination, that wasn't what happened at all.
Steven Rattner never took to Rick Wagoner, the C.E.O. of General Motors. The problem started with Wagoner's testimony before the Senate, on the day in November of 2008 when he and his fellow auto C.E.O.s flew their private jets down to Washington to ask for taxpayers' money.
"I do not agree with those who say we are not doing enough to position G.M. for success," Wagoner said, in his testimony. "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, is not our long-term strategy. What exposes us to failure now was the global financial crisis, which has severely restricted credit availability and reduced industry sales to the lowest per-capita level since World War II."
To Rattner, that comment summed up everything that was wrong with G.M. Its leaders were arrogant and out of touch. Their sales forecasts were bizarrely optimistic. Members of Team Auto had "surreal" conversations with the company's C.F.O., Ray Young. Rattner looked in vain for a sense of urgency. In one of G.M.'s endless PowerPoint presentations, he saw a product-price chart that included no comparison data for G.M.'s competitors. "Why would G.M. present the data in such a useless manner?" he wonders. "Whom were they trying to fool?"
The culprit in all this, Rattner believed, was Wagoner. When the two men met, Rattner was struck by Wagoner's combination of "amiability and remoteness." The previous day, Team Auto had met with the Chrysler C.E.O., Robert Nardelli, and his engaged and direct manner had impressed Rattner. But Wagoner "gave listeners very little to grab onto." Rattner writes:
He made a few opening comments and then turned over the floor to his lieutenants, occasionally interjecting a remark here and there but mostly presiding. While I respected the collegiality this implied, it left nearly everyone with the impression that he held himself aloof. If Rick had taken a more central role it would probably not have affected our assessment of the company, but might have affected our judgment of him.
Wagoner, in Rattner's judgment, simply didn't have what it would take:
Born and bred as an insider, Wagoner never displayed any fortitude for remaking GM's hidebound corporate culture. He operated as an incrementalist, and a slow-moving one at that. His guiding star appeared to be an unshakable faith that GM was not like any other company; it was General Motors. Whatever happened to other companies couldn't possibly happen to GM.
Wagoner's testimony at the Senate hearing, to Rattner's mind, had been typical: "He and his team seemed certain that virtually all of their problems could be laid at the feet of some combination of the financial crisis, oil prices, the yen-dollar exchange rate, and the UAW." In fact, Wagoner's corporate team was simply dysfunctional: "A top-down, hierarchical approach" afflicted G.M.'s upper management. Wagoner and his senior executives "involved themselves in decisions that should have been left to executives several layers beneath them."
This is a perplexing bundle of criticisms. We learn that Wagoner is aloof and excessively collegial—and also a meddler. We learn that Wagoner is perhaps unreasonably partisan toward his own company. We learn that his testimony before Congress rubbed Rattner the wrong way, and we learn that his subordinates gave flawed PowerPoint presentations. What we don't learn is whether Wagoner was any good at the job he was hired to do—that is, run General Motors—which is a critical omission, because by that criterion Wagoner actually comes off very well.
Wagoner was not a perfect manager, by any means. Unlike Alan Mulally, the C.E.O. at Ford, he failed to build up cash reserves in anticipation of the economic downturn, which might have kept his company out of bankruptcy. He can be faulted for riding the S.U.V. wave too long, and for being too slow to develop a credible small-car alternative. But, especially given the mess that Wagoner inherited when he took over, in 2000—and the inherent difficulty of running a company that had to pay pension and medical benefits to half a million retirees—he accomplished a tremendous amount during his eight-year tenure. He cut the workforce from three hundred and ninety thousand to two hundred and seventeen thousand. He built a hugely profitable business in China almost from scratch: a G.M. joint venture is the leading automaker in what is now the world's largest automobile market. In 1995, it took forty-six man-hours to build the typical G.M. car, versus twenty-nine hours for the typical Toyota. Under Wagoner's watch, the productivity gap closed almost entirely.
Most important, Wagoner—along with his counterparts at Ford and Chrysler—was responsible for a historic agreement with the United Auto Workers. Under that contract, which was concluded in 2007, new hires at G.M. receive between fourteen and seventeen dollars an hour—instead of the twenty-eight to thirty-three dollars an hour that preëxisting employees get—and give up all rights to the traditional retiree benefit package. The 2007 deal also transferred all responsibility for paying for the health care of G.M.'s retirees to a special fund, administered by the U.A.W. It is hard to overstate the importance of that second provision. G.M. has five hundred and seventeen thousand retirees. Between 1993 and 2007, the company paid out a hundred and three billion dollars to those former workers—a burden unimaginable to its foreign competitors. In the 2007 deal, G.M. agreed to make a series of lump-sum payments to the U.A.W. over ten years, worth some thirty-two billion dollars—at which point the company would be free of its outsized retiree health-care burden. It is estimated that, within a few years, G.M.'s labor —which were once almost fifty per cent higher than the domestic operations of Toyota, Nissan, and Honda—will be lower than its competitors'.
In the same period, G.M.'s product line was transformed. In 1989, to give one example, Chevrolet's main midsize sedan had something like twice as many reported defects as its competitors at Honda and Toyota, according to the J. D. Power "initial quality" metrics. Those differences no longer exist. The first major new car built on Wagoner's watch—the midsize Chevy Malibu—scores equal to or better than the Honda Accord and Toyota Camry. G.M. earned more than a billion dollars in profits in the last quarter because American consumers have started to buy the cars that Wagoner brought to market—the Buick Regal and LaCrosse, the Envoy, the Cadillac CTS, the Chevy Malibu and Cruze, and others. They represent the most competitive lineup that G.M. has fielded since the nineteen-sixties. (Both the CTS and the Malibu have been named to Car and Driver's annual "10 Best Cars" list.)
What Wagoner meant in his testimony before the Senate, in other words, was something like this: "At G.M., we are finally producing world-class cars. We have brought our costs, quality, and productivity into line with those of our competitors. We have finally disposed of the crippling burden of our legacy retiree costs. We have expanded into the world's fastest-growing markets more effectively than any other company in the United States. But the effort required to bring about that transformation has left our balance sheet thin—and, at the very moment that we need a couple of years of normal economic activity to refill our coffers, auto sales have fallen off a cliff. Do you mind giving us a hand until things get back to normal?" This is not arrogance. It happens to be something very close to the truth. And, when senators like Richard Shelby seem to have no idea what your company has accomplished in the past decade, forcefully making the case for your own company's merits is probably a sound strategy.
Rattner was perfectly aware of the strides that G.M. had made. When members of Team Auto toured some of G.M.'s factories, he tells us, they came back marvelling at the "truly collaborative" relationship that existed between management and labor, and at how "consistent and disciplined" the manufacturing process was. One of his first major conclusions, after studying up on the auto industry, was that "U.S. automakers were no longer as pathetically inefficient as people thought." What Rattner cannot seem to see, though, is that his contempt for G.M.'s leadership is contradicted by the evidence of the company's accomplishments. How can Wagoner be a slow-moving incrementalist when, in less than a decade, he took the world's largest company from an uncompetitive monolith to a worthy competitor of Toyota and Honda? "GM's day-to-day workings were solid," Rattner writes at one point. "It was the head that was rotting." But, if the head was rotting, how did the day-to-day operations become solid?
It is not hard to understand what is going on here. Team Auto was engaged in an act of financial engineering: it used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back. This was cleverly and swiftly done. It was badly needed. But, at the end of the day, cleaning up a balance sheet is cleaning up a balance sheet. Kristin Dziczek, of the Center for Automotive Research, estimates that the "new" G.M. is roughly eighty-five per cent the product of the work that Wagoner, in concert with the U.A.W., did in his eight years at the company and fifteen per cent the product of Team Auto's efforts. That seems about right: car companies stand or fall, ultimately, on the strength of their product, and teaching a giant company how to build a quality car again is something that can't be done on the private-equity timetable. The problem is that no private-equity manager wants to be thought of as a mere financial engineer. The mythology of the business is that the specialists who swoop in from Wall Street are not economic opportunists, buying, stripping, and selling companies in order to extract millions in fees, but architects of rebirth. Rattner wants us to think of this as his G.M. "As we drafted press statements and fact sheets," he writes, "I would constantly force myself to write that 'GM' had done such and such. Just once I would have liked to write 'we' instead."
So what did Rattner do with Wagoner? He fired him, of course: "Though I'd met Wagoner only once, to my mind there was no question but that he had to go." (Wait: once?) If this was to be Rattner's G.M., it needed to have Rattner's man at the helm: "After nearly a decade of experience as a private equity manager, I believed in a bedrock principle of that business: put money behind only a bankable team." Bankable does not mean a self-effacing C.E.O., with a heavy PowerPoint deck and a manner that leaves his listeners with nothing to hang on to. Bankable means a star. Rattner called Jack Welch for advice. He consulted with headhunters. He pondered the question during his morning runs on the treadmill until he found his leading man—Ed Whitacre, a former C.E.O. of A.T.&T. And, at this point, a book that began as a case study in twenty-first-century economic realities descends into schoolboy romance.
"His reputation was for toughness," Rattner says of Whitacre. "I remembered having once read a Business Week story that described him killing rattlesnakes on his Texas ranch (he would pin down the snake with a stick and crush its head with a rock). His flinty image was reinforced by his lean, six-foot-four frame, his full head of gray hair, and his laconic speech. Ed believed that we are born with two ears and one mouth and we should use them in rough proportion."
The two men have a date in Washington. Rattner chooses the steakhouse Bobby Vans, "on the theory that Ed, being Texan, would want red meat." Whitacre agrees to take the job, even though he has never worked for a manufacturing company in his life. Rattner follows Whitacre on his first trip to G.M. headquarters. "Having had no experience as a corporate executive, I was eager to observe a top-notch one at work," Rattner explains. He trails along as Whitacre meets with G.M. management: "For all his reputation as a tough guy, I was fascinated to see him take the time to get to know the individuals as people. By the end of the day, he could talk knowledgeably about each executive's background, personality, and aspirations." The top company brass gather in the chairman's conference room, and the lanky snake-killer rises to address the group:
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. . . . 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.
Whitacre makes commercials for G.M., with himself as the star. He takes lunch in the food court, mingling with the rank and file. "Hi, I'm Ed. Who're you?" he'll say to some dumbstruck middle manager in the elevator. He walks into one meeting, listens for a while, says, " You are all smart guys, right? You know what to do," then walks out. He flies back to Texas every weekend, just to keep things in perspective. He is the face of the new G.M., the man handpicked to lead one of America's greatest companies through its time of gravest crisis. And then one day last August—just nine months into his term as C.E.O.—Rattner's superlative leader suddenly and mysteriously quits. Does this make Rattner question his own judgment? That's not the private-equity way. "I shared the board's disappointment," he writes briskly, and moves on with his narrative of triumph.
Early on in his time in Washington, Rattner realized that Team Auto would have to make "at least one trip" to Detroit in order to
avoid more criticism from the heartland. By early March, we could delay no more. All the same, we were determined not to waste more than a day, and so arranged a packed itinerary that would touch all the right bases. To satisfy the futurists, we would visit GM's Technical center and drive its next generation vehicles. For traditionalists, we would tour an old-line Chrysler assembly plant. And to acknowledge the importance of labor, we would visit with UAW leaders at their headquarters, Solidarity House.
One would have thought that a man as savvy as Rattner would have made the Detroit visit sound a little less of a burden. The Auto Czar should want to see the industry he is supposedly fixing, shouldn't he? But this is what makes "Overhaul" so unexpectedly fascinating. It is the product of someone so convinced of the value of his contribution, and of the private-equity model, that he feels no need to hide his condescension.
Team Auto makes sure to rent a car at the airport with G.P.S., "since none of us knew our way around Detroit." At the U.A.W., Rattner looks with pleasure at what he takes to be evidence of his own industry's handiwork: "Far from browbeating us, they gave a thorough presentation that included as many details and figures as investment bankers would have used. (I later learned that my old firm Lazard had helped prepare it.)"
Then it was on to G.M. and finally to Chrysler. But not for long, because time was short and the real work of saving Detroit, of course, has nothing to do with Detroit. "We walked among the vehiclessedans and trucks and even a Fiat 500as the Chrysler people talked about advanced hybrid power trains and new, environmentally friendly diesels," Rattner continues. "But by this point our goal was not to miss our flight back to the mountain of work that awaited us back in Washington."