STANFORD GRADUATE SCHOOL OF BUSINESS — Believers in free market capitalism were appalled when the U.S. government spent $82 billion to bail out General Motors and Chrysler. But the money was well spent, saving an important U.S. industry and averting a national economic catastrophe, asserted the Obama administration’s former auto czar.
Steven Rattner, the Wall Street financier who led the 2009 emergency rescue, said the Obama administration had little choice but to save GM and Chrysler from collapse. “It would have been an economic calamity. You would have had a couple million people out of work. We just felt it was an unacceptable risk to take,” said Rattner.
He spoke on March 9 at Stanford’s Graduate School of Business about his five-month stint leading the Obama administration’s task force on restructuring the auto industry.
Rattner had made his mark far from Detroit — as an investment banker and private equity investor doing deals in media and communications. He was a top executive of Lazard Frères before leaving in 2000 to cofound a private equity firm, the Quadrangle Group. The former journalist and longtime Democratic supporter was appointed by a fledgling Obama administration to shepherd the auto task force in early 2009, when the U.S. economy was mired in a recession and financial crisis.
The 14-member task force followed 2 major principles, Rattner said. The government would inject money into the troubled companies only if they could be fundamentally restructured to become viable. And there would have to be “shared sacrifice” among all stakeholders.
The rescue team put GM and Chrysler into bankruptcy, overhauling operations and finances with money from the Troubled Asset Relief Program, or TARP, which Congress had approved to rescue the financial sector. “Team Auto” slashed the carmakers’ costs and debt by shutting plants and laying off workers, eliminating dealers, shedding brands, and negotiating concessions from creditors and the United Autoworkers Union. Dumping GM’s CEO, the team whisked the big auto maker through bankruptcy in 39 days. Chrysler emerged from bankruptcy after 42 days and agreed to be run by the CEO of Italian car maker Fiat.
Without government intervention, GM and Chrysler would have shut down and liquidated, said Rattner. This would have devastated a web of workers, suppliers, and communities, especially in the Midwest. GM was “too big, too important” to let collapse, he said. The toughest decision Obama had to make during the crisis, Rattner added, was to also save Chrysler, which had narrower product lines and markets than GM.
Rattner said that the auto bailout should not set a precedent for government overriding free markets. “We really did not want to set a precedent for government intervening in the private sector. We hated that idea,” he said. The Obama administration viewed government — and taxpayers — as “investors of last resort,” he added. “This was not the long hand of government. This was not creeping socialism, not Obama Motors.”
One audience member challenged Rattner’s assertion that GM and Chrysler would have closed their doors without a government bailout. But Rattner insisted that the two companies would have run out of money by the end of March 2009.
Another member of the audience asked why the troubled car makers hadn’t been restructured or taken over earlier via private market mechanisms. Rattner replied, “I’m a private sector guy. I respect markets, but I also think markets don’t always work.”
Rattner said that one “takeaway” he gained was that management matters. “The jockey is as important as the horse,” he said. That’s why, in his view, the Obama administration was justified in ousting Rick Wagoner as head of GM and in handing the top job at Chrysler to Sergio Marchionne, the CEO of Fiat who was later named Chrysler CEO. Rattner noted that GM, Chrysler, and Ford are now all run by executives from outside the car industry. “Having fresh blood in this industry was the right decision,” he said.
The lightning-fast auto rescue was possible only because of the existence of TARP, which Rattner called the “single, most important piece of economic legislation probably in my lifetime.” Overall, the auto crisis provided “a real eye-opener to how difficult working with Congress can be,” he said.
Rattner also gained an understanding of the importance — and precariousness — of American manufacturing in a globalized economy. “I came away very much appreciating and even scared about the state of our manufacturing sector,” he said.
Rattner provided the audience with a “scorecard on our adventures in Autoland.” Of the $82 billion spent by both the Bush and Obama administrations, taxpayers today could recover roughly 85% of the money, chiefly through renewed equity values of Chrysler, GM, and GM’s financing arm, according to Rattner. (GM did an initial public offering in November, and last year recorded its first annual profit since 2004.) Ultimately, taxpayers could lose $10 billion or so, he estimated. But “the $10 billion was money well spent to save this sector,” he concluded.
Rattner’s book, Overhaul, was released in September and gives an account of the auto industry rescue. The GSB talk was sponsored by the school’s Center for Leadership Development and Research, Public Management Program, and Stanford’s Rock Center for Corporate Governance. — Maria Shao
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