I traveled to the Motor City to hear what Steven Rattner had to say at a conference presentation entitled “How and Why We Saved Detroit.”
Rattner is a former counselor to the Secretary of Treasury and a member of the government automotive task force overseeing General Motors and Chrysler Group LLC's post-bankruptcy plans.
He worked closely on the rescue mission with a couple of cohorts, Ron Bloom and Steve Girsky, whom many people consider the father of the dealer terminations.
Girsky is now on the GM Board of Directors, representing a United Auto Workers' trust that owns 17.5% of GM stock.
He is also a special advisor to GM CEO Ed Whitacre. According to the Detroit Free Press, Girsky is tasked with keeping Mr. Whitacre from embarrassing himself, explaining terminology like “residual value” and “throughput.”
Rattner's presentation included a jesting reference to “Obama the socialist,” because the administration's bail-out of GM and Chrysler.
But Rattner says the government ownership stake in GM and Chrysler was taken, not out of a socialist bent, but to avoid a crushing blow to the free-market system.
I expect proof of the correctness of that decision will be shown when GM stages a successful IPO. Brief government ownership or an unviable debt structure? Or let the industry burn down and rebuild itself? We'll never know what might have happened if different decisions were made.
Rattner says the task force expected the constituent parties to come to the task force and ask, “What can we do to help?”
Instead, the affected parties took a hard line and made demands as if they were negotiating from a position of strength. The worst were the bondholders, he says.
They were not able to come together so the task force could deal with one entity. This failure to present a united front and their intransigence probably led them to do worse in the final settlement than they otherwise might have done.
The task force was made up of people with precious little auto business experience. It still isn't clear how they were selected. The lack of auto business experience undoubtedly led to both good and bad policies.
A good result might be that they had no loyalty to a particular set of industry culture which might have helped put the car companies were in the predicament they got into to the point that they needed a government bailout to stay afloat.
Some of the things the Task Force did were brilliant. Some were mistakes.
Let's take the dealer terminations. Rattner says a task-force priority was to be sensitive to political perceptions. They felt it was important for the public to perceive that the various constituent parties each made sacrifices.
They failed to understand that dealers were not a constituent party, but are in fact the auto maker's only customers. End users are the customers of the dealers.
But the Task Force set out to deliver a “haircut” to dealers as if they were a true constituent group. This seems to be entirely due to a fundamental misunderstanding of how the auto market works and a desire to satisfy perceived political considerations.
In fact, it was a hugely counter productive move.
Pre-bankruptcy, auto maker-dealer relations were tenuous at best. Now they are worse. Whitacre seems to embrace some dealer reinstatements. Why wouldn't he? Each dealer buys vehicles and parts from GM.
I asked Rattner if Girsky were the driver of the dealer terminations, as many believe. He replied that Girsky was a private citizen when the decision was made to terminate the dealers.
He then launched into a defense of why dealers were terminated, which didn't seem to convince anyone in the room, or at least not me. This was after he had just explained the concern about political perceptions.
Rattner and the task force were especially surprised at the backlash associated with the forced resignation of GM CEO Rick Wagoner.
The President and the Task Force couldn't justify entrusting additional billions more of taxpayer money to a CEO with a “practically unblemished record of failure.”
The losses in Wagoner's last four years at GM topped $80 billion. He presided over a drop in market share from 33% to 18%. But the “firing” played into the groundswell of right-wing media hype already branding President Obama as a socialist.
Rattner says the task force seriously entertained the idea of letting Chrysler liquidate. They couldn't see a compelling business case for its survival. The company had been gutted, first by Daimler and then Cerberus.
It was thought that Jeep alone might survive and would be snapped up by another company. It was also considered that a Chrysler shut down would help GM.
It took Fiat CEO Sergio Marchionne and his seemingly wild scheme to hook up Fiat with Chrysler that saved that American auto company.
Another surprise was that so many consumers continued to buy vehicles from bankrupt auto makers. The task force's projections were much less optimistic.
Rattner expressed shock and surprise at the political weight wielded by auto dealers.
He greatly resents that Congress ordered arbitration opportunities for terminated dealers. But he says “a few hundred dealers, more or less, won't make a big difference in the big scheme of things.”
The next day I attended an economic conference in Chicago. Dealer Tammy Darvish was there and I had an opportunity to question her.
Darvish helped spearhead the arbitration legislation Rattner deeply resents. She has been a burr under the saddle of the task force and the administration. But she's right and they are wrong on this issue.
GM and Chrysler absolutely had the right to terminate dealers. But terminating dealers was counterproductive to saving GM and Chrysler, legal or not.
It has, and will, cost the two restructured auto makers significant sales. It has saved them no money. It has helped their competitors.
But GM and Chrysler will survive. They both reported recent quarterly profits. Most of the taxpayer investment, if not all, is expected to be recouped. In fact, the taxpayers could make a profit.
Darvish calls the dealer terminations, or at least the way they were done, “un-American.”
She and Rattner clearly dislike each other. She referred to him, Girsky and Bloom as “purely awful and mean people.”
Rattner and Darvish in the same week. What more could I ask for?
Former auto dealer David Ruggles is active with CyberCalc Arbitrage and Advanced Concepts & Techniques. He is at [email protected].