JONATHAN COHN SEPTEMBER 20, 2010
Steven Rattner’s Overhaul hits bookstores this week. But if you were expecting shocking revelations about inner workings of the Obama White House, you’ll be disappointed.
Yes, Ratther is the first former administration official to write a book about his time there. But the palace intrigue in Overhaul isn’t really that intriguing. So Rahm Emanuel drops a lot of f-bombs? Larry Summers can be a bully? At the risk of depressing Rattner’s sales, I think we knew that already.
But Overhaul does offer something else—something I, for one, find a lot more valuable than Washington gossip. It offers a careful, but lively, account of the auto industry bailout. Rattner takes us from the very beginning, when the Bush Administration was still in charge and two Detroit automakers were on the verge of total collapse, almost until the present day, when one of the companies (General Motors) seems to be thriving and the other (Chrysler) seems at least to be surviving.
As leader of the administration’s auto industry taskforce, Rattner was a key player in the drama—giving him a unique perspective on both the industry itself and the way this White House operates. And at a time when neither the bailout nor the administration is particularly popular, he has (mostly) good things to say about both.
Last week I conducted a telephone interview with Rattner, in which he shared his thoughts on a few topics—among them, why he thinks the unions get more blame than they deserve for the automakers’ woes:
Ford was playing with exactly the same deck of cards. They had effectively the same UAW contract. They had effectively the same manufacturing footprint, up in the upper Midwest area. They had the same kind of dealer network issues that GM and Chrysler had. And yet while Ford certainly struggled for a while, they got through this and have been making good money for some time now. … So, what’s the difference between Ford and GM? I would argue the difference between Ford and GM is management.
On his misgivings about the government’s efforts, mostly via the stimulus, to bolster the electric car industry:
In an effort to revive the economy, we engaged in a massive spending program. I get why we did it, and I agree that we needed to do it. But … when Congress allocates X billion dollars for electric cars, or for batteries, or for windfarms, the money ends up in the hands of some government agency which has to decide how to invest it. And I candidly don’t believe that government is the best allocator of resources, especially within a compressed time frame.
And on the president’s management style:
I found this White House very disciplined, very collegial in the sense that there were many disagreements, but there was no sort of backstabbing or trying to go behind people’s backs and this and that. The debates were all very out in front and everyone could express their opinion. And I found the president, who had no particular credentials on this, to be a really, really great CEO. He knew how to run a staff. He knew how to run a meeting. He knew how to run the government. So again, from my own vantage point on the auto thing, we presented him with a series of tough decisions—he didn’t walk away from them, he didn’t make snap judgments, but he also didn’t become frozen in terror. He just went about his business in a very calm and clear-headed way, and I was genuinely impressed.
A full, lightly edited transcript follows:
JC: Let’s start with the basics: By early 2009, a lot of people were saying we should just let GM go under. That’s what happens in capitalism: Companies fail. So why rescue them?
SR: Companies do fail all the time and in a normal economic and financial environment there is a mechanism for dealing with failing companies. They go through a bankruptcy process so there is private capital available to finance them in bankruptcy, called DIP financing, and then they eventually emerge restructured. In some cases they get liquidated if they’re simply, not viable, but most major companies that go through bankruptcy emerge and continue to function.
But late 2008 and early 2009, private capital markets were frozen, so there was no private capital available to finance GM in a bankruptcy. And without DIP financing, GM would have simply run out of money, closed its doors, and filed a bankruptcy petition that quickly turned into a liquidation. It would have put out of work all of its people, all of its dealers and employees—or most of them—along with many of its supplier jobs. It would have rippled through the auto sector and it’s quite possible, if not likely, that Ford and Chrysler would have been forced to shut down, too, because of the supplier problems. So this was an extraordinary problem, of a magnitude that I’ve never seen in my lifetime. I think it was appropriate for the government to step in.
JC: You did not spend a lot of time with auto industry before this. What surprised you as you, pardon the phrase, got “under the hood” at GM? Was the company in even worse shape than you had feared? Better?
SR: Both actually. There were negative surprises and there were positive surprises.
Let me start on the positive side. I came in to this project with, as you noted, less than zero knowledge of the auto industry. Nearly all I knew was what I had read in the popular press. So what I found on the happy side was that GM and Chrysler—both companies—had dramatically improved their manufacturing efficiency. When you looked at how long it took them to make a car versus how long it took Honda or Toyota, they were on par. They had dramatically increased their quality. GM was now receiving complaints at a similar level—or even a lower level—than the Japanese companies. And this was before the Toyota recalls, of course. GM had made significant improvements in its product line. So the whole process of actually building a car was in far better shape than I would’ve imagined.
What was in worse shape was the management and the finances—they just had no handle over their finances or their financial needs. [So] they got themselves to a point where they just literally ran out of money. They had a very insular culture with no real accountability, no real consequences of failure. It was all very collegial, but a kind of ‘get-along-go-along’ culture. It was shocking beyond anything I would’ve guessed.
JC: Let’s talk about the decision to save Chrysler, by providing some financing and then encouraging this deal with Fiat. In the book, you say opinion on the Chrysler deal was very divided—and that you, personally, had very mixed feelings.
SR: Yes, I was very torn about whether to save Chrysler. In retrospect I’m very glad we did—very glad we did. But at the time I saw very clearly the arguments for why it should be allowed to disappear basically. … We had six conditions for the Chrysler deal, including the unions and including finance companies and all kinds of things, and I said that I thought at this point in the deal I didn’t think the odds were better than 50-50 of getting it done, and in my experience deals generally get worse, not better.
JC: Okay, yes, that makes sense. But you say you feel pretty good about it now—what is making you feel good? We’ve seen a lot of good news about GM lately. But we haven’t heard so much about Chrysler, and it seems like they don’t have as much new product in the pipeline. What makes you feel so good about Chrysler?
SR: I think you’ve made a fair assessment. GM, we always felt could show very quick signs of progress because there were some underlying strengths of the company that just needed to be, kind of, shaken by the ears at the top … Chrysler, we always knew, was going to be a longer process because their product pipeline was simply not what it needs to be to be competitive.
And so, why do I feel better about Chrysler? First, because it turns out that even though we thought Chrysler was better managed than GM, particularly in terms of controlling costs and things like that, it turns out that the new management team from Fiat has been able to find even more cost savings and generally improve the efficiency of the operations. As a result, Chrysler actually reported an operating profit for the first six months of this year, which was materially better than anything we expected that they would be able to do. So, on a day-to-day basis, they’re running the company very tightly and being very miserly with cash—and all that is very good news.
The second thing is that Sergio Marchionne, the new CEO, has really thrown himself into the product issue and is completely aware of the need for product. Just yesterday, he had a meeting with all of his dealers in Orlando, in which he unveiled a whole series of new products. They seem to have gotten quite good reviews from the dealers. These are obviously just first impressions, but it’s clear that Sergio understands perfectly what the issues are and is really working hard to address them. He seems to be making good progress, although I still would say there is not yet a final verdict on Chrysler.
JC: Let’s talk about the unions for a second. There are a lot of people who think that the unions are substantially if not primarily responsible for the problems at the Big Three. Obviously management had to be collaborating in this, but, as the argument goes, unions basically bargained for and secured packages that in today’s economy are just not competitive. And it wasn’t just the compensation, it was also the rigid work rules specifying who could do what, which made the factories really inflexible. I know you’re familiar with all of that. Talk for a second about your perception of the role the unions played in the problems the Big Three had, and then tell me a little bit about your experience dealing with them.
SR: The unions were not the major reason why GM and Chrysler got into the position they got into. There are certainly issues around the labor situation, which I’ll discuss in a second, but to lay this all at the feet of the UAW, which I know some management teams have tried to do, is simply not fair. I’ll give you two data points. First, labor only accounts for only about 7 percent of the cost of a car. So, if you cut that to 6 percent, you’re going to make a bit more money, but this is not the biggest expense that an automaker has.
The second thing I would point out to you is that Ford was playing with exactly the same deck of cards. They had effectively the same UAW contract. They had effectively the same manufacturing footprint, up in the upper Midwest area. They had the same kind of dealer network issues that GM and Chrysler had. And yet while Ford certainly struggled for a while, they got through this and have been making good money for some time now.
So, what’s the difference between Ford and GM? I would argue the difference between Ford and GM is management. I don’t know what else to attribute it to. It’s one of the few cases where you actually have two examples that you can put side-by-side and it would be a very valid comparison.
Having said that, there’s no question that the UAW contract contained excesses that probably never made good sense for almost anybody but certainly didn’t make sense in the current environment. I mean, I am a strong believer in unions and in the role of unions in making sure that workers get their fair share of the pie. But what I don’t believe in are unions, union contracts, and union efforts to create inefficient work practices and feather-bedding. So the fact that at GM they had something like 300 job classifications for UAW workers, and nobody in one job classification could be asked to do even the most menial task of someone in another, is just inefficiency—and wasteful.
The fact that GM and Chrysler UAW workers got a whole series of holidays that the rest of us don’t get—for example, at GM, the entire Fourth of July week—is an example of inefficiency that I don’t think you can defend. The jobs bank, I don’t think you could defend.
So we did push hard on many of those things. And, as you suggested, my view was that the UAW and Ron Gettelfinger, in particular, were very professional people to deal with. They fought hard for their interests, they were not shy about their points of view, but they were straight shooters, it was professional, and they were good partners in a difficult bargain.
JC: A few months ago the UAW elected new leadership. Near the end of the book, you mention that you were chagrined to hear the new president, Bob King, call for winning back concessions made during the rescue. How worried are you about this?
SR: Look, I understand why Bob King said the things he said. If I had just been elected president of the UAW, I would say exactly the same things, I think. But, unfortunately, this is where I came away from my experience very worried on behalf of these workers about where the world was going.
In my mind there’s no question that globalization has put downward pressure on wages for these types of workers. GM itself pays about seven dollars an hour to its workers in Mexico, who they say are just as efficient and productive as their workers in Michigan, which obviously get paid many times that. They pay about four dollars an hour to their workers in China, and they pay a dollar an hour to their workers in India. And so it’s not hard to see that these downward pressures on wages will continue and that’s a huge problem for our country. I wish I had a solution to it, I don’t, but part of what I wanted to try to do in the book was make everybody aware of it.
JC: You say in the book that you’re skeptical of industrial policy generally, and you seem particularly worried about the push on electric batteries, which was part of the Recovery Act. I’ve certainly seen some projections that suggest we’ll end up with a glut of batteries for electric cars in a few years, because the government subsidized all this production but there aren’t enough cars to actually use them. And, as you say, the Chevrolet Volt gets a lot of press but it’s unlikely to be a huge seller. So do you think the whole approach of trying to subsidize the electric car market is a bad idea? Or are you simply skeptical of the way this particular initiative has been implemented?
SR: I recognize that, in an effort to revive the economy, we engaged in a massive spending program. I get why we did it, and I agree that we needed to do it. But nobody should kid themselves into thinking that the government can invest in something like electric cars as well as the private sector can. When Congress allocates X billion dollars for electric cars, or for batteries, or for windfarms, the money ends up in the hands of some government agency which has to decide how to invest it. And I candidly don’t believe that government is the best allocator of resources, especially within a compressed time frame.
JC: Let’s talk about the White House and how this president makes decisions—and the balance between policy and politics.
SR: This was really a policy debate—it was about an economic impact that we felt the economy could withstand at that point in time. It wasn’t a debate about whether letting Chrysler go would be politically more palatable than saving it. As I note in the book, the polls all opposed these bailouts. It was very clear that the country did not want the auto companies bailed out, and in fact, more recent polls suggest they are even less happy about the fact that they were bailed out—which I find very odd. So this was clearly a decision in which policy trumped politics, and the president made some very tough decisions in favor of what his advisers thought was right.
I can’t speak to the other issues. I’ve read the same things you’ve read about health care and whether Rahm Emanuel wanted a lesser bill or this or that. But I was, very broadly speaking—compared to what I expected to find when I went to work, or was at least engaging with the White House—I found this White House very disciplined, very collegial in the sense that there were many disagreements, but there was no sort of backstabbing or trying to go behind people’s backs and this and that. The debates were all very out in front and everyone could express their opinion. And I found the president, who had no particular credentials on this, to be a really, really great CEO. He knew how to run a staff. He knew how to run a meeting. He knew how to run the government. So again, from my own vantage point on the auto thing, we presented him with a series of tough decisions—he didn’t walk away from them, he didn’t make snap judgments, but he also didn’t become frozen in terror. He just went about his business in a very calm and clear-headed way, and I was genuinely impressed.
JC: What about the diversity of advice he got? It seems like in this case you did get a fair [amount] of diversity. But this has been more broadly, one of the criticisms you hear about the economic team. They represent a fairly narrow slice of the world-view. They don’t go that far to the left. If you’re a liberal you would say they are firmly center-left, but no further. And they don’t go that far to the right, either. What do you feel about that? Is that a problem? Is their a narrow spectrum there, or do you feel he’s able to get diversity of opinion?
SR: Well first of all, I think there is diversity among the economic team. Look at somebody like Jared Bernstein, who’s a very thoughtful guy, but comes out of the more liberal end of the Democratic Party. He’s a participant in many if not most of these kinds of decisions. So I think there is a diversity of opinion within the administration.
I don’t think the idea of having strong conservatives there, as you imply, makes any sense. The people elected this president—not the other guy—they in effect endorsed his views. I honestly believe the president picked the very, very best people for these jobs. I think to arrive in office facing the issues he faced without Tim Geithner, without Larry Summers, would have been kind of unimaginable. These are the most qualified guys in the country to address these kinds of problems.
It’s easy for people to call plays from the grandstands, and so you hear a lot of people saying, well, they should’ve done this or they should’ve done that, or they should’ve nationalized the banks. Frankly, I think in retrospect, virtually every ‘theme’ that I heard people saying about what they should do instead of what they were doing, I think just turned out was wrong—it was wrong. They turned out to have gotten their policy choices about as right as you possibly can, recognizing the tumultuous times and recognizing the fact that you have to deal with Congress—and they ultimately have the say.