Leading an Industry Turnaround: Lessons from Government Interventions at GM and Chrysler
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Leading an Industry Turnaround: Lessons from Government Interventions at GM and Chrysler


Thanks for having me. I think since we’re in a classroom setting, as Mike said, we can make this very interactive. I’ ll make a few opening remarks and sketch out what we did and we did it as quickly as I can with the clock back there reminding me what time it is and then would love to take your questions on any aspects of this. I’ll start at the end actually because when GM went public that day I had agreed to co-host CNBC and was sitting on the set of CNBC as the various GM executives and the floor people and bell rang and the first share was traded and all that, and it was an amazing moment after all the ups and downs and all the work and all the effort even though we had felt very good about what we had done to actually see it validated by the market was really quite a moment. Before I go back in time, I do want to just amplify on Mike’ s recognition of Clay Calhoun who is sitting over here because you’ll all want to read this book, because Clay is very prominently mentioned in it. He is actually in the index, but I want to just read one paragraph. This came up in the middle of the frenzy when we were trying to get Chrysler and Fiat all on the same page and they had different sense of projections and we basically said, “You guys have a weekend to figure this out,” and I didn’t want to spend the weekend in Detroit. Ron Bloom, my deputy, didn’ t want to spend the weekend in Detroit so we sent Clay and another fella called Brian Osias, so this little paragraph begins on Saturday morning: “By 11 am on Saturday morning, Osias and Calhoun convened more than two dozen Fiat and Chrysler executives and advisors around the large table in Chrysler’s 15th floor boardroom. The executives were almost all middle-aged industry veterans. Osias was 32-years old and Calhoun was 26 and both looked younger than their years. We’re going to sit at this table until we’re done, Calhoun announced.” There is much more about Clay here. You should all get this book and read it. I’m sorry Clay, I didn’t mean to embarrass you like that but Clay and I worked together at Quad Wrangle and he was a superstar there and so when I went to Washington to take this job and he asked me if we were looking for help and I said, “We’re looking for all kinds of help,” and I was really delighted that he joined us and like all the rest of our team he did a fabulous job. Let me, just as I said, try to do two things in a short amount of time and so I’ll speak reasonably quickly and then we can open it up. Let me just give you a quick chronology for those of you who didn’t follow all this all that closely and I can’t blame you for not and then, let me give you a few of the takeaways from the project that I would love you to all leave the room thinking about. And then, as I said, we can have a discussion. I think probably the most of you remember that sort of first big public event in the auto crisis in November of 2008 when the three executives flew to Washington to testify in front of the Congress in their separate planes. That’s the part everybody remembers. What people don’t remember as well is they showed up having GM and Chrysler particularly having kind of frankly suddenly discovered that they were about to run out of money, having just as suddenly told the Bush administration that they were running out of money and then being sent to Congress by Secretary Paulson and appearing there with essentially no plan, no idea what they were going to do with money and no recognition of any sort of culpability in the fact that they had run out of money. There was a lot of [inaudible] at the end of 2008. Obviously, there had been a presidential election, it was a lame duck administration. There was a banking crisis going on but President Bush and Congress ultimately just failed to act. They just couldn’t pull themselves together to do anything about autos at that point. President Bush, in my opinion, quite correctly made a decision that the auto companies were not going to fail on his watch and so one of this kind of SWAT teams of ex- Goldman guys that he brought in sort of pulled together in December of 2008 and provided bridge loans of about $17 billion to GM and to Chrysler to get them over to the end of year, get them into 2009 when the new team was going to arrive and would hopefully then have the time to band with just kind of the energy frankly to address the problem. And as I said, I think given the situation at that point, the end of an eight year presidency, a lot of very tired people, I think the Bush people did about as good a job as you can do under the circumstances. President elect Obama then of course realized that he had to deal with this problem and after some deliberation decided they would set up a separate task force to do this. There were two reasons really for that. One, they knew that the economic and financial crisis was going to occupy all of the people who had the traditional jobs of under-secretary of this or assistant-secretary of that within treasury, within commerce, within the White House. And the second reason they did it, which is an interesting reflection on how our government works is that we had no auto expertise in the government really. For that matter, we didn’t have any industrial expertise and I don’t say that critically, but in this country relative to some European countries and other countries we really have tried to stay out as a government from the industrial sector and so part of that is not really having people whose job it is to understand industry in general or even specific industries. And so, there are a couple of people on the Commerce Department who kind of monitored auto imports and we later found out that there are a few people over at the FED who actually were pretty good at forecasting auto sales in general but there was really nobody in the entire government who knew anything about autos and of course I didn’t know anything about autos either but that’s a different matter. So they decided to set up this team and they did come to me, and so you may say why did they come to me, and that would be a very valid question. The short answer is because Tim Geitner and Larry Summers; the two guys who Clay and I and the rest of our team worked for directly as well as obviously indirectly with President they had the view that this was not a management job. We were not being hired to run these companies, we were being hired to decide what the next new car should be or what cars they should make, it was really a financial restructuring exercise and a private equity exercise for that matter. We were being hired to basically look at these companies and figure out how to take them from the disastrous place they were and restructure them into something that could be viable, and by the way, we knew that we were going to be making a very significant additional investment of government money and so it was a private equity exercise in the sense that we were investing all of your money, tax payers’ money and we needed to try to figure out whether this was a good investment or not and be able to tell the President and his other senior advisors in the White House what we thought was likely to happen. They looked at me and Clay and the rest of us who ultimately arrived as a restructuring team. I was not the most experienced restructuring guy in the world either but because of my political involvement they felt that since this was going to be an exercise that occurred in the political arena, even though there was a great commitment to having it being done in a thoughtful way that having someone who had a sense of the politics of it all would be helpful as well as the hopefully the financial skills. We were on an incredibly tight timeframe because as I said, they had been given a relatively small amount of money, $17 billion to get them through essentially the first quarter of 2009 and through the end of March, so I didn’t really even start doing anything until January of 2009. My appointment wasn’t announced until late February of 2009. The rest of the team really didn’t come together until early March of 2009 and so we were operating on this really tight timeframe, tighter than any project I think I have ever worked on and with a relatively small team. We ended up with 14 of us; mostly people like Clay and me who had come from Wall Street, because they wanted to serve but some policy people as well and that by the standards of what we were being asked to do was an exceptionally small team. I remember one of my reservations about taking the job was how are we going to find the people and get the people we needed to do this and Larry Summers said to me in one of my early meetings, “How many people do you think you need?” and I said, “In a private sector context I think 50. Here, maybe 15,” and he said, “My whole staff is only 19.” And I said, “Well, that may be but we need 15 to do this job,” so we ended up having 14. We got essentially what we needed but it was, as I said, I think JP Morgan you mentioned, David Hopper was working on this and Morgan Stanley and they had dozens and dozens of people, so it was a very lean team. From the beginning, there were two principles that the President, Larry Summers and Tim Geitner decided that were really critical to the success of our efforts. The first was that the only money that we wanted to put in and hoped to put in was in the context of a fundamental restructure and make the companies viable. They decided and I was really pleased that they did that they didn’t want to kick the can down the road anymore, they didn’t want to try to paper it over, they didn’t want to try to just get to the next election. Whatever we did, they wanted it to be something that made these companies viable again. And the second important principle that we established early on and they stood by throughout this was shared sacrifice, that this was not going to be done on the backs of the UAW alone, it was not going to be done on the backs of the creditors alone or on the dealers or the suppliers but that we were going to try to get everybody to the table and get everybody to recognize that they were not the only ones who were being asked to sacrifice. And both of those principles turned out to be very important ones. We plunged in. As I have acknowledged, I didn’t know anything about autos, so we approached this with fresh eyes. We’ve had every expert wanted to come and tell us their views about the auto industry. We met with an awful lot of them, we listened to everybody’s thoughts, we pushed back. We certainly spent time with the companies. This is all sort of now in March of 2009 because we knew that by the end of March, the President had to tell the country what he was going to do about the auto situation. And by March 25th or so we had pretty much the essential elements ready for the President to decide. The toughest decision that the President had to make really was whether to save Chrysler or not. We knew pretty well that we were going to save GM. GM was too big, too important and what we’ve thought of as a real company that needed to be saved. Chrysler was a tougher call. It was, as you know probably the third largest and third of three American auto companies. It was only a North American player, it had been owned for seven years by Daimler and then for a couple of years by Cerberus and had been pretty well hollowed out. It didn’t have single car that was on consumer report’s most recommended list and there was a strong part of our group that actually made a very passionate and very logical and analytically sound argument that Chrysler should be left to fail, that what was capitalism about if not letting weak companies fail, why was the government putting a lot of money into an old industry company and I guess I should recognize that I am in the part of new industry land here and so maybe you all don’t think we shouldn’t have saved any auto companies and put the money in Google instead, but there was that argument that if the government has limited dollars which of course it has, they should be allocated to newer industries that might have greater growth prospects. On the other side of the argument, the economy was losing six or seven hundred thousand jobs a month at this point. The immediate impact of Chrysler shutting down would’ve been around three hundred thousand jobs lost; only small part of those from Chrysler itself but you then had suppliers, you had dealers, you had all the people who have serviced this company and so on and while I don’t believe that we would’ve saved Chrysler simply because of those jobs, as I said, if we determined that Chrysler was not viable I think the President would’ve agreed with a recommendation to let it liquidate but after a lot of hard work, I think everybody on the team agreed that Chrysler could be viable and that the government could give its money back from Chrysler. It was more a question of whether it was something that government should do. Among the points that the people who thought Chrysler should be allowed to go made was that if Chrysler went out of business, what we learned as we learned about the industry was that a disproportionate amount of Chrysler sales would’ve gone to Ford and GM relative to the foreign companies, because the product line up of Chrysler minivans and trucks and things like that were they were strongest lined the up best with Ford and GM. In effect, we knew we were going to be a big shareholder in GM, or a big investor anyway. By letting Chrysler go, we would make the value of that investment greater but of course then you’d have all those jobs lost, so it was a very passionate, hard-thought debate that went really, as I said, right to the President and to two meetings in the White House on the 25th or 26th of March and at the end of hearing it all, the President came down where a slight majority of our group had come down, which was to provide Chrysler with additional money if it could meet a series of very tough tests in terms of concessions, in terms of a business plan that we could back, in terms of an alliance with Fiat because we didn’t feel that Chrysler could exist simply as a North American player; we felt that it needed a global alliance and Fiat was the company that had come forward that we thought made the most sense. And so, it was still not a done deal but at least all things being accomplished, the President agreed that we would save Chrysler. So, he gave the speech on March 30th that probably all of you remember in addition to the announcement about Chrysler and the announcement that we were going to try to save GM but still had worked to do. He also announced that Rick Wagner was going to stepping down as chairman of GM. This, to us, was the most obvious decision that the President had to make. GM had lost $30 billion of cash in the 15 months of 2008 and the first quarter of 2009. As I said earlier, when Rick appeared in front of the Senate in November of 2008 there was no plan, there was no sense of responsibility. It didn’t get any better. The plan that GM submitted to us in February of 2009 still didn’t show us that they had a sense as to how they were going to become profitable and viable again and we simply believed that under those circumstances, there needed to be a change in management. Rick is a very decent hard-working smart guy who is totally dedicated to the company but we were thinking about this in a private equity context in which management really does matter and so we felt and recommended to the President that there be a change in management and with really almost no discussion, which is not meant as any disrespect to Rick, the President agreed with that. Mike was nice enough to hand out an article I wrote recently about the role of management which related to Steve Jobs’ last leave of absence and I’m happy to talk about that a bit in the Q & A because one of the things I’ve always believed in both the investment banking and the private equity business is that the jockey is as important as the horse, that it’s important to have a good business but who the CEO and who the top management team are is also important and so we felt that we could not really recommend in good conscience to the President putting more money into GM unless there was a change in management. So, as everybody knows we ended up putting both companies into bankruptcy. A lot of folks said it couldn’t be done, a lot of folks said that we broke bankruptcy law or we made new law or the heavy hand of government, I’m happy to talk about all that but needless to say, we believe that everything we did was in conformity with the law. In fact, it was litigated all the way to the Supreme Court. I don’t think when I went to Washington, I ever imagined that I was going to be worrying about Supreme Court decision as part of my job but there we were, and at the end, it was all approved in every step of the way and we got GM and Chrysler in and out of bankruptcy in essentially record time; 42 days for Chrysler and 39 days for GM. I think, as you know, since then it’s worked out quite well. We talked about the GM IPO briefly but the GM IPO simply symbolized the recovery that the two companies have made. The bankruptcy process was really essential to giving these companies a fresh start. In the case of GM, we took their liabilities from $120 billion to $55 billion. We took $8 billion a year of annual operating cost of their North America division and this was all accomplished by the kind of shared sacrifice that I alluded to before in which everybody came to the table willing to make grudgingly. It was hard thought, it was difficult but in the end willing to make changes. I remember one of our earlier meetings with the UAW when Ron Gettelfinger who was then the president basically said to us and actually this was in Detroit, at Solidarity House said to us, “Look, we’re willing to do something here because I, Ron Gettelfinger understand that if we don’t cooperate these companies may disappear but we feel like we’ve been to sacrifice in the past,” which they had, “and we feel like we are the only ones who’ve been asked to sacrifice and we want to see other people asked to sacrifice.” And so, it was that concept of shared sacrifice that allowed us to make more progress with the cost structure, the liability structure these companies then people haven’t been able to make before. A lot of it relates back to that famous saying of Rahm Emanuel’s which actually was not his but he said it first, but I can’t remember which is, “Never let a crisis go to waste,” that we had this atmosphere of crisis, we had everybody realizing that without pulling together and making this work, it would be a disaster. And so, we were fortunate to have that going for us. One of the other principles that we established early on was that the government was going to get in and get out as quickly as possible, it was going to be kind of the opposite of Vietnam. We didn’t want to be mired in the car business and so we established early on private sector boards for these companies and we really looked for directors who had exactly the right skills. It was in an effort to create a sort of Noah’s Ark compendium of two of everything, it was an effort to put together a mix of former CEOs and private equity people who really could oversee these companies and so as you see, GM and Chrysler going forward now, both very successfully, a lot of the credit goes not only to the new management teams of the two companies but also to the new boards of directors who have been really tough and have just instilled a whole new aura of corporate governance at these companies. GM in particular had terrible corporate governance. One of our colleagues liked to; I shouldn’t say this in front of the cameras but liked to speak of the GM directors in very disparaging terms and happily, we as I said made those changes. And the new management teams have done a great job. A lot of these old industry practices, some of which actually had logic in terms of the structural problems in the industry led the companies to do things that made no sense like have too much inventory on the dealers’ lots, like the famous incentive as in the 0 financing and all that stuff where they couldn’t make money in the end. There were reasons why they did all that, so it wasn’t as crazy as it seemed but by changing their balance sheets and changing their cost structures, we essentially gave them a reason to operate in a more logical and rational business way and that’s what they are doing. Inventories are under control, incentives are under control and most importantly, through the restructuring we dramatically changed to the break even of these companies. So GM, prior to restructuring really couldn’t make money unless 16 or 17 million cars a year was sold in this country which is something that’s only occurred a few times in our history. After the restructuring, GM could make money in a 10 or 11 million car sale environment and so standing here today, with car sales running about 12.5 million, they were actually 11.5 million for last year, GM last year had its first annual profit since 2004 and its highest profit since 1999. So even with car sales still very depressed, GM is making substantial net income and Chrysler is actually pretty good operating profits although not yet net income. And I continue to be very optimistic. If for no other very simple reason that we need to sell 15 million cars a year in this country simply to keep the fleet from aging. In other words, to deal with replacing cars on the road plus a small addition of new drivers every year it’s roughly a 15 million car sale rate. For the last three years, we’ve been below that, well below that in 2008 and so, this is the first time in history that essentially more cars have been scrapped than have actually been sold. So that whole situation is not a long term sustainable one in my opinion and I think car sales will continue to climb. I think they’ll be somewhere between 13 and 14 million this year and then just keep going, and given the changes in the cost structure of these companies, they can make a lot of money as GM already has as car sales go up even just a little bit because of the operating leverage that’s inherent to them. Let me quickly run through what I think are the takeaways, if you kind of want to leave the room with a thought about what does this all mean. This is what I think it all means and I think I have about six of them. First, that this really could not have happened without the President’s insistence on shared sacrifice and only putting money in if the companies could be viable. That is not intended to be a political statement or endorsement or whatever. I’m off the government payroll, that’s what I actually believe that without that kind of support in the face of what a lot of people thought would be an enormous pressure from labor, for example, to be less tough, I don’t think we could’ve done this. Secondly, we were able to do this; for that reason, we were able to do this just almost exactly as if we were in the private sector. As I said, we approached this as a private equity investment exercise, we made all the same kind of decisions and did the same kind of analysis that we would’ve in the private sector, although obviously under a different spotlight and I think we, as a result, invested the tax payer dollars wisely. Thirdly, as I said before, contrary to what some of you may have read or think and again, I’m happy to debate it, everything we did was not only legal but in accordance with precedent and in accordance with, I think, fair treatment of all the stakeholders. Fourth, as I said, management really matters and I mentioned the decision about Rick. We made a similar decision in the case of Chrysler that we felt that management was critical and a key part of the alliance with Fiat and in deciding to partner up with Fiat was the fact that Sergio Marcioni was the CEO of Fiat and Sergio, who was not also a lifelong auto guy had done a great job of turning Fiat around which had been a very troubled auto company. It had actually done very poorly in the US in particular which they exited, but Sergio had done a great job and we really felt that Sergio was a jockey that we could bet on. And so, we now in Detroit have this rather interesting situation of the so-called big three which they now call the Detroit Three because they are not so big anymore are all being run by people who are not from Detroit. Two of whom Mulally and Dan Akerson, who is the current CEO of GM are not auto guys and Sergio, who is certainly not a typical auto guy or a lifelong auto guy. And so, even though we certainly got a lot of blowback from the auto community about who are we a bunch of non-auto guys, and who is Akerson and all this kind of stuff, I think that having fresh blood in this industry has turned out to be the right decision. Bill Ford, who I only met after this was all over, because Ford really was not under our care, gave a speech in about I think in 2006, ’07, right about time we brought in Mulally which I mentioned in the book in which he basically said, “We are an ancilar company and an ancilar industry in an ancilar town,” and it was something that very few people in Detroit would acknowledge or recognize but Bill Ford did and made that decision to bring in Alan Mulally and it was a really smart decision, it was a very humble decision and I think it was a very important moment of introspection on Bill’s part. The fifth point I just want to leave you with which is more of a Washington point but I assume some of you are interested in or all of you hopefully are interested in how our political process works is that we could not have done what we did without the existence of TARP. I’m sure you all know what TARP is, the $700 billion financial rescue fund that was passed actually President Bush’s watch, even though President Obama now gets blamed for it but it was probably the single – I call it the single most important piece of economic legislation in certainly my lifetime because it gave the Secretary of the Treasury the ability to deploy $700 billion. It was actually never all used. I think only $450 billion was used to save the financial sector and to save the auto sector where we but $82 billion. Without TARP, either administration, both administrations would’ve had to have gone to Capitol Hill for every appropriation, for every dollar that went into the banks or that went into the auto companies and having now spent a good bit of time in Washington, I have to doubt that the Congress would’ve never pulled itself together to appropriate that money in any kind of timely way and you would’ve had a meltdown in the banking sector, we would’ve not had the money to save the auto sector and all the consequences that I alluded to before about Chrysler would’ve happened except multiplied. I’m not here to tell you that we shouldn’t have democracy, I’m not here to say that we don’t need a Congress but it was a real eye opener for me how difficult working with Congress can be and how hard it is to get stuff done and how much when people blame the President, either President, any President for the problems of this country. Frankly, they should be turning a lot of their attention to Congress because the President really has much less power than you would imagine. Our founding fathers had a purpose in mind in establishing Congress at the Capitol, on the top of the Hill and the President in the White House at the bottom of the Hill, that wasn’t a complete accident. It’s just something we all need to think about. Congress mostly left us alone, happily. When they finally focused on autos, it was only because of the dealers. We closed a lot of dealers and Congress infuriated by that and so in the summer of 2009, they spent a lot of time having hearings and calling us up to explain why this dealer was being closed or that dealer was being closed, stuff that we actually had nothing to do with and that was being done thoughtfully, but it was sort of an odd juxtaposition that the onetime Congress decided to focus on autos it was over dealers, which in our minds were not the essential part of it. The last point I wanted to leave you with is that this was really the first time I had spent a lot of time in the manufacturing sector. Clay and I did media and telecom stuff at Quad Wrangle’s, most of what I did in my career and we can have a whole discussion about the manufacturing sector but I did come away really very much appreciating and even scared about the state of our manufacturing sector; really not through our fault but we are competing in a global world now. We’re competing against other countries that are very good and getting better and better at doing a lot of things that we used to be at our own level in doing and it’s had its impact on our manufacturing sector. In my opinion, it’s going to continue to. I’ll give you just a couple of quick little anecdotes that struck me in the course of this that I talk about in the book. One was talking to Fritz Henderson who was the CEO of GM after Rick for a while and GM had plants in Mexico, has a very thriving business China, it has operations in India and I said, “Fritz, what do you pay outside the US?” So in the US, the base wage for UAW worker is $28/hour. In Mexico, they pay $7/hour, in China they pay $4/hour and in India they pay $1/hour. And I said to Fritz, “So, what’s your productivity like in Mexico?” and he said, “It’s at least as good as the US, maybe better.” And so, this is what we’re up against. The other vignette that stuck in my mind that I talk about in here was one day; I think it was in March sometime, Delphi came in to see us, the executives of Delphi. Delphi, as you all probably know, was GM’s parts operation. It was spun off by GM in 1999. It went bankrupt about three or four years ago. It was sort of sitting in bankruptcy for several years and they came in as one of the many suppliers who came in to see us to tell us they were being crushed by the problems at GM and Chrysler and could we help them? And so, they were kind of making their case for help and Delphi is based in Troy, Michigan. They were very earnest, solid Mid- Western kind of folks and I’m listening and I don’t know why it popped into my head but at one moment I said, “How many people do you guys employ?” The numbers are here but the answer was something like 135000 and I said, “How many of them are in the US?” and they said, “15000”, so Delphi, this quintessential American company had quietly, carefully, deliberately moved 90% of its workers offshore. This is the challenge we face in manufacturing and we can, again, have a lively debate about whether we should do more or less to help manufacturing, but I just think we should be mindful of the fact that it is a challenge. Let me close, because probably some of you are wondering what the score card was on our adventures in autoland. I mentioned that we invested $82 billion in these companies. If you look at where GM stock is trading now, if you look at how GM values at stake and [inaudible] which actually was our second biggest investment after GM, a bit larger than Chrysler, if you look at the valuations that are out there on Chrysler equity, US tax payer, as we sit here today would recover about 85% of the money that was put up. In other words, a loss of potentially around $10 billion. I continue to believe that there is a lot of upside in the sector. It’s had a bump in the road, no pun intended; in the last few weeks because of the oil price stuff, shares are down but I think the general trajectory will continue to be up and so I think we can actually do better than that, but even if we end up losing $10 billion, I would argue that $10 billion was money well spent to save the sector because no only would we have lost Chrysler, we would have lost GM, we would’ve lost the suppliers, we would’ve lost actually Ford because they wouldn’t be able to get parts at least for a while and it would’ve been an economic calamity akin to what would’ve happened if we hadn’t saved the banking sector and I think devastation across much of the Mid-West. I’m proud of what we did, I’m proud of the President’s decision to do what he did and glad to be here to tell the story and happy to spend what time we have left on questions or comments. Sir – [Inaudible] to what extent you played out and what would happen under new scenario, because my intuition would say that we wouldn’t stand to lose all that; like the assets are not going to sit there. They are going to be bought up either by foreign auto companies or Ford, part suppliers still need to supply and there is a certain intrinsic demand for autos, so to what extent do you have this [inaudible] different ownership and how does that change the decisions that you guys made? That’s a good question. With respect to the overall decision to intervene, we honestly didn’t have the time and we were too terrified of what the result would be to sort of say what would happen if we did nothing. I just gave you a real capsule at the end of what I think would’ve happened if we had done nothing which would’ve been GM and Chrysler would’ ve run out of money at the end of March of 2009. They would’ ve closed their doors, they would’ve stopped paying people. You’ve got all these grants. They told you that they would close their doors, just like them without a plan. Do you think that the CEO [inaudible]. Can I respond to that? So you knew exactly when they were going to run out of money? No, we didn’t actually. You had no idea when? From having seen the very knitty gritty balance sheets of these businesses, they had absolutely no idea how much cash they had. The alternative is, he knew the government was going to bail him out, so he needed to spend all that money… The CFO of GM could not any given day tell us within $500 million how much cash they had. They did not have the systems to know. As a result, they said they needed $11 billion of cash to operate and they should’ve been able to operate $6 billion of cash or some number like that. They didn’t know. They really didn’t know. Do you know? I mean you just told us you are not an auto guy. Do you know more than the guys who were running it all their life. It just doesn’t seem to be very – I don’t know how many times or how many days but I can tell you, they didn’t have any money. They could not have paid their people. I’m sure they didn’t have money, but they did that intentionally. You think that they did that intentionally? You were willing to hand them extra money. You think that GM basically ended 2007 with $30 billion of cash and spent all that money on purpose so that the government would bail them out. You’ve got $30 billion. Think about it, you’ve got $30 billion, pay [inaudible] Sir, with all due respect, you hijacked my question. [Laughter] In fairness to everybody else who paid the $12 to come to this meeting, why don’t I answer this gentleman’s question? The answer is they would’ve closed their doors, they would not have been able to pay their people, they would’ve all lost their jobs that day. The suppliers were actually in worse shape than GM and Chrysler because their business had fallen off just as much but they hadn’t got the $17 billion at the end of 2008, so that’s why we heard from the suppliers. Actually, first thing we in fact did was the supplier kind of guarantee program which was frankly more optics than substance because we didn’t feel we could help every company in this industry, but the suppliers were in tough shape and most of them actually did end up going bankrupt but restructuring in bankruptcy, but they would’ve closed their doors. The dealers would’ve temporarily closed their doors and we can debate the number, but I think we would’ve had a couple of million people out of work very, very quickly. Now, your point is completely right and we did do a lot of analysis around Chrysler on this point that obviously people would’ve picked up some of that business. For example, and Clay will help me, I think roughly half of the business of a typical car dealership is actually repairs, it’s not selling new cars. So obviously, people were going to still have their cars repaired so some of these people would’ve kept their jobs and would’ve been hired back. Some part of a car dealership is selling used cars, that would’ve continued. You are correct that for example, the Jeep line that Chrysler had we thought was worth a fair amount of money and would be sold to some European but would they keep making Jeep in the US or would they simply take the name plate and make the cars wherever they happened to be based and send the cars to the US, who knew? So, you’re right that there would’ve been a gradual process. You would’ve had a onetime loss of this huge number of jobs and then a gradual process of the jobs coming back in one form or another, because as you implied in your question, the number of cars that would be sold in US would probably not change very much, it was just a question of who was going to sell them, but in our view it would’ve been a long painful process. There would’ve been certainly a permanent loss of American jobs because Ford was in no position. Ford was worried they themselves were going to go out of business. They were in no position to buy anything. So it probably would’ve been some non-US entity and we don’t know at the end of it how many jobs would’ve remained, just like we don’t know if we had not bailed out AIG we don’t know what would happen. If we had not put in the TARP money into those banks on Columbus Day, that Hank Paulson put the money into, we don’t know what would’ve happened. We just felt it was an unacceptable risk to take, not some kind of social experiment to say let’s let Chrysler and GM go out of business or run out of money and then we’ll see what happens. We just didn’t feel that was the responsible outcome and we had an alternative that we felt was financially viable and relatively small financial exposure for the American tax payers. Thanks for coming. You alluded a little bit to the potential fire struck that the administration had over this [inaudible] that Unions got over the bond holders. Can you talk a little bit more about the politics and giving up the restructuring and dealing with bond holders and how that all came out? Can you explain how it’s consistent with the bond investment while you’re at it? Okay. When people raise that issue, they are generally talking about Chrysler and Chrysler’s capital structure essentially consisted of $6.8 billion of so called secured debt that was actually a bunch of banks. It was six or seven banks. There were no bond holders actually technically in Chrysler and then there was some second and third lien debt that was held by little bit by Daimler, little bit by Cerberus, a bunch by the US government and then obviously there was equity. So, the challenge with Chrysler was that the $6.8 billion of senior secured debt was not really secured by anything. It was sort of notionally secured but Chrysler didn’t have $6.8 billion worth of assets. Chrysler’ s value in liquidation was $1 billion or less in our opinion and JP Morgan would agree with this. Essentially, the first question was what was the fair recovery for those banks? The debt was trading at 15 cents on the dollar, that’s roughly a billion dollar valuation. As I said, our view was that if we simply handed the keys to those banks which is one way to handle a bankrupt situation, they would’ve knocked out more than a billion dollars out and probably they’ve acknowledged and when I talked to them [inaudible], they acknowledged it was actually probably less they would’ve gotten out. So we paid them in the end $2 billion of cash basically to go home and it’s also normal in a bankruptcy as you all probably know for the banks not to get cash but to get more paper, so we actually were incredibly generous with those banks relative to what they were entitled to. And in fact, Jamie Diamond at JP Morgan when I talked him about this months after he said to me, “My problem is not what we’ve got. I think we were treated fairly. My problem is with what the UAW got.” So, let’s turn to the UAW and I would start by arguing that frankly, what UAW got is none of his business. In other words, he got at least as much, I would argue, substantially more than he was entitled to get or would’ve gotten under any other circumstances. We made a decision; the UAW had a $12 billion claim against Chrysler for what was called a VEBA, it was for the famous retiree health care benefits that you’ve all read a lot about. The company has actually to their credit had done a good job before we showed up of putting a box around these open-ended health care liabilities and by doing a deal with the UAW in which they both agreed to put a fixed amount of money into a trust that would pay these health care costs and in return for that, that would be all the companies had to pay. There could be no further retiree health care liability to companies. In Chrysler’s case, it was a $12 billion obligation. They had funded about $1 billion I think and I think there was $12 billion left. It’s an unsecured claim against the company. We could’ve wiped it out. We could’ve basically said, “You’re down in the capital structure,” I hope this all makes sense to you guys. I assume you’re in business school, hopefully it does. So we said we could’ve wiped that out but we felt that if we did that we would simply not have workers to do this job, that essentially this was all part of a negotiation and in order to reach some we were the UAW to make a lot of sacrifices but asking them to wipe out all the retiree health care funds which would affect obviously the retirees but also the people who were still working there was simply a bridge too far and so we converted half of that into a note and gave them equity for the other half. And that happened to be 55% of the equity of the company underneath a huge mountain of debt that was still sitting on top of it, of US government debt and other debt and our view was that that equity was not worth a huge amount at that point in time. We hoped it would be worth more later but we didn’t put a lot of value on it at that moment but we felt it was something that was important to do to have an acceptable range with the UAW. And there is precedent for this and my colleague Ron Bloom, my deputy had done a whole bunch of steel industry bankruptcies and many of those actually had VEBAs like Chrysler and in some of those cases those VEBAs also got equity in the company as part of their compensation and the restructuring. So, it was litigated all the way through bankruptcy court, all through the court of appeals, all the way to the United States Supreme Court and essentially every judge said what we said, which was that the key element is that every creditor got at least as much or more than they were entitled to get or would’ve gotten in a normal bankruptcy and the fact that some got this much more than they would’ve gotten and some only got this much more than they would’ve gotten isn’t really a litigatable issue. Everybody got at least as much or more than they would’ve gotten and that’s why we thought it was fair, and there were no politics around it. Honest to God, I was never told by the White House to do anything about the UAW other than what we did. In fact, at one point Ron Gettelfinger wanted to go in and see the President Rahm Emanuel and basically they said, “Look, the auto team is doing this and deal with them.” Yes, Ma’am – Thank you. I’m curious as to how your team approached setting a new precedent as you went through this. You talked a little bit about looking backwards at this had a precedent but how did you think about what you were doing at the time being a potential future model for similar cases? Actually, we thought about it a lot and Larry Summers particularly thought about in our behalf; maybe in the opposite of the way you mean your question which was, we really did not want to set a precedent for the government intervening in the private sector. We all thought we were pretty smart, we all thought we knew what we were doing but none of us, I’m sure we didn’t know as much as we thought we did but in any event, none of us liked the idea that the next group and the next group and the next group and any industry could come in and say, “Do for us what you did for the car companies,” and get government money, we hated that idea just the way we hated what my Vietnam analogy, just the way we hated the idea of having a long term ownership position in these companies, which is part of why GM went public so quickly was for the government to be able to sell. We viewed ourselves as investors of last resort. If there had been any private capital that wanted to come in instead of us, we would’ve said it’s all yours. We didn’t want to be here or to do this. And so, our goal was to leave as light a footprint as we could to be in and out as quickly as we could, to have as little to do with running these companies as we could, to have these private sector boards and frankly to set as little a precedent as we could for future involvement, because we believe rightly or wrongly, even as Democrats, that the government to the maximum extent possible should stay out of the private sector, especially the industrial sector. We didn’t believe that any of us had the wisdom to override the kind of decisions of investors and the market place and capitalists who were allocating capital. We didn’t thing the government should be doing that. Yes, sir. There was a case in 1980 that also applied for a government bailout and received it. To what extent were you influenced by that? There are few cases. Chrysler, I think it was actually ’79 or maybe it was ’80 and Lockheed is one, Con Rail. There are certainly a few precedents for the government stepping in under extreme circumstances. We were not particularly influenced by that early Chrysler precedent and I would argue that each of those; I don’t know enough about them to evaluate whether they were the right or the wrong thing, I would argue that I hope the people who made those decisions in those cases basically made the same decision we made which was systemic risk call it too big to fail, call it what you want, that it was just too much of a risk to put on the economy at that particular moment in time but again, I think the number of cases like that is a small handful and I think it should stay a small handful and I think it should only happen under the most extreme circumstances and hopefully, part of what I’ve tried to say in the book, what I try to say in these talks and what we’ve said publicly and the President said publicly is we just want this to be the exception and not to have people feel this is not the long arm of government, this is not creeping socialism, this is not Obama Motors, this is sort of a decision that we had to make but Bush, we hadn’t have to make. [Informal Talk] Thank you for coming. Looking back on some of the past government policies and protection policies; from an outsider view do you think that some of these policies are put in Chrysler and GM situation [inaudible]? Like what kind of policies? Some of the trading agreements, protecting agreements they had specifically in [inaudible] went against Bush’s free trade agreement and business protection there, do you think that they are as managed as those? The whole thing; when I was a report at the New York times actually I covered a little bit the crisis or bailout in ’79 or ’80 and during that period there was a lot of debate about the Japanese and whether it was fair trade or free trade and whether we would have kind of been taken for kind of suckers or not and in fact, part of the reason that Japanese started assembling cars here was that they were afraid that we were going to put in import quotas on them and therefore they’d be shut out of the market and so, one of the reasons why they started assembling here was to avoid that possibility. Look, one of the things and this gets back to my management matters theme of that article that you all have, one of the things that struck me in the course of this is the fact that GM had this huge problem. We put $50 billion into GM. GM actually turned out in some ways worse shape than Chrysler even though it’s much bigger kind of company proportionate to its revenues it got more capital than Chrysler and so, here you have GM that runs for $30 billion in 15 months and literally did show up having run out of money. Ford did get into the trouble as I said; Ford had a tough brush, but Ford got through it and Ford had huge profits last year, near records profits last year and never needed a government handout. And so, the question is why? They are playing exactly the same set of cards, right? Same UAW contacts, same Japanese competition or South Korean competition, same oil prices, same credit crisis; so why is Ford doing so well and Jim isn’t. The only conclusion I can come to is management. So, I can’t tell you that every policy decision the government made over the last 40 years about autos helped or hurt whether it was right or wrong, but I do think that a fair amount of the trouble that Detroit got into was of its own making and the difference in how the three companies went through it does reflect the quality of management and the strategic decisions made the long way. Yes, sir. If it’s true that management that you say that sort of distinguishes whether an auto company is going to succeed, why didn’t the private sector step in earlier? I could imagine like a private investor recognizing that there is a depressing value in this particular management stepping in. Is there any inefficiency in our take over market here that sort of could have prevented this problem at an earlier stage? I don’t know if it would’ve prevented the problem. I was with you until that last part but we’ll come back to it but one of the things that Larry Summers and I used to debate and I shouldn’t be debating about anything but at least in this one area I felt like we were kind of on neutral territory which was the sort of efficient markets hypothesis which actually Larry has argued both sides of it different times in his career and I respect markets. I’m a private sector guy but I also think markets don’t always work and in March of 2009, you could’ve bought Ford stock for a dollar or something. It’s now at $14 something. So there was a case where private capital could’ve said, “This is a great opportunity, let’s come in,” and they would’ve made a lot of money. Even when we put $30 billion into GM; of the $50 billion $30 billion went in on June 1st when GM went into bankruptcy and the first $20 was kind of lost, it has sort of fallen over bankruptcy process. That $30 billion was what bought us our 60% of the equity. If anybody had showed up and said, “I want a piece of that $30 billion,” we would’ve said, “Great. Here, take it.” That $30 billion today is worth $40 – $45 billion. It’s not ten times but it was a very good investment that we made on June 1st. So, I think markets can be inefficient and this I guess is good questions that you all have asked about precedent and about when the government should intervene; markets do fail and I think we can debate the financial rescue, the bank stuff and I have views about all that, but I think broadly speaking, there are moments when government does have a role to play when markets do fail, when private capital isn’t being allocated efficiently or intelligently and you see some of that going on, Europe is going to face those decisions over the next few weeks about what they do about Greece and Portugal and Ireland, same kinds of decisions. So, they are tough decisions, they are really tough decisions. I do think that both the Bush administration and the Obama administration really got most of them right in this case but I think these kinds of interventions should be the exception, not the rule. Yes? [Inaudible] I do think that the notion of trying to avoid the necessity of government ever intervening by reducing every institution to whatever it’s considered to be the maximum size that makes them not systemic is not practical. The example I like to use is LTCM in 1998 was not on anybody’s list of the 25 biggest institutions or most important institutions and it almost brought down the whole financial system and required a fairly dramatic intervention. The Canadian banking sector is far more concentrated than our banking sector is and yet they got through all this without needing the government intervening. So those are two examples on either side of the question. Look, I think obviously a lot of mistakes were made in deregulating the financial sector. It is too integral to be allowed to just sort of run a mock and whether the Dodd Frank stuff and all the pieces of it, the Velcro and so forth are the exactly the right things or not, time will tell but I think some of what we did was right but nobody should kid themselves that either Dodd Frank or what we did in autos or breaking these companies down would avoid the need for government ever intervene. That’s part of why you have government, is to deal with extraordinary circumstances and I’ve said a couple of times and I’ll say it one last time, what we should all hope and pray for is that our leaders in the future are thoughtful about when they do choose to intervene because I do think it should be by far the exception and obviously when you do it, you want to do it right as I said, I think both administrations have done over the past couple of years.

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