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Steering Detroit Straight

Obama and Geithner got it right: What’s good for GM is not necessarily what’s good for America.

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Illustration by Bob Gill  

If you want to know why President Obama fired Rick Wagoner from General Motors, first you should know that it wasn’t because he’s trying to expropriate the business, or inject the government into the process of fixing the largest American carmaker, even though those are the fears that rattled Wall Street instantly after the announcement. No, he fired Rick Wagoner for one reason—because Wagoner’s no Alan Mulally, the man who is about to make Ford into the country’s most important and, ultimately, profitable carmaker. Obama fired the lifetime GM-serving Wagoner, who had run GM into the ground for the last nine years as CEO, because the guy across the street from Wagoner, an outsider who had turned around Boeing earlier in the century, had done everything right while Wagoner did everything wrong. Consider this Gallant-and-Goofus litany:

Back in 2006, when money could still be raised for a potential downturn in the economy, Mulally borrowed $23.4 billion; he saw the hard times coming. Wagoner just went along for the same ride that the insular people running GM have been on for years. This despite a balance sheet saddled with debt that seemed to get weaker by the day. Clearly, Wagoner was banking on the idea that GM was too big to fail and the government would rescue him and his company before bankruptcy was a question.

When higher gasoline prices took a toll on the industry, Ford had a variety of smaller, better, and more-efficient-fuel-burning cars ready, while GM lagged in those forward-looking models.

When labor and debt costs continued to spiral upward as sales plunged, Ford forced its union workers to take big concessions and bought back a huge percentage of its bonds at prices that, while not making the debt holders anywhere near whole, kept them from threatening bankruptcy or to take over the company. Wagoner offered halfhearted buyout attempts for labor and underwhelming offers for underwater bondholders.

Mulally, the outsider, did the unthinkable when it comes to the auto industry. He delivered, even as the demand for vehicles in this country has basically been cut in half in two years. Wagoner apparently just figured things had to get better or the government would throw money at him, so what was the point of proactively reconfiguring the company?

Mulally drove Ford into solvency; Wagoner drove GM to the brink of bankruptcy. So when it came time to ask for federal funds, Mulally said, “No, thank you,” and Wagoner said, “Give us everything you can.” There couldn’t have been a more stark contrast.

After an initial blanching by Wall Street about a presidential power grab, investors and traders recognized the next day that Obama had performed a huge service to GM, and the country, by axing Wagoner. Obama and Treasury Secretary Tim Geithner may have taken a beating for their handling of AIG, but this time they got it right. It was better to shoot Wagoner first and put bankruptcy, once considered unthinkable, right on the table. No more throwing good money after bad management and incompetent boards. GM failed to deliver as a public company, so it was time for the government to take the company from management’s hands. As a safety measure, the Feds guaranteed the warranties for new cars to keep buyers from shunning the brand and put in a caretaker CEO, Fritz Henderson, while the bankruptcy process is sorted out.

The plan was covered with the fingerprints of Steven Rattner, the former investment banker currently running the auto-industry task force for Obama from the Treasury Department. As Rattner said not long after taking the position, “What I bring to this is the advantage of no preconceived notions. I don’t come with an embedded view.” In other words, like Mulally, Rattner’s not from Detroit and doesn’t regard GM, Ford, and their tiny sister, Chrysler, as one big happy family to be nurtured by the government. In the world of a perfectly cutthroat banker like Rattner, what’s good for GM may be bad for the United States, a reversal of 60 years of dogma. Rattner could see that Mulally had gotten it right, that GM had gotten it wrong, and that an also-ran Chrysler, disappearing before his eyes and no longer of consequence, could be left to fail (a fate the Fiat deal may forestall but won’t avert). Rattner saw that GM, unlike AIG, would not bring down the Western financial world if it paid the ultimate price and reorganized under Chapter 11. As someone who excelled in banking, not manufacturing, he had clean hands and no allegiances to any of the car companies. He viewed them as businesses, not wards of the state. Rattner and Geithner also used the plan to send a message to other companies seeking bailouts: If you want government money, you have to accept government demands, even if it means accepting bankruptcy as a way to improve your company’s fortunes.


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