Overhaul (20 page)

Austan and his team had concluded that Chrysler's product line overlapped much more with those of GM and Ford than with those of foreign-owned companies. In their view, most would-be Chrysler buyers would likely turn to other domestically produced brands. Thus Chrysler's demise would actually
boost
GM's and Ford's odds of surviving the current Great Recession.

We all knew that Chrysler's liquidation would immediately vaporize nearly 300,000 jobs—40,000 at Chrysler and the balance among its suppliers and dealers. But Austan argued passionately that once other automakers raced into the gap, the net loss would be a fraction of that, perhaps a small fraction. The Chrysler skeptics had other strong arguments for letting the company die. It was the weak number three among the U.S. automakers. Continuing to bail it out would send the wrong signal about the Obama administration's inclination to make hard decisions when confronted by corporate sob stories.

Harry took the economic analysis and translated it into financial implications for GM. Goolsbee believed that GM would capture more than a quarter of Chrysler's customers, or about 300,000 additional cars sold per year. That would strengthen its business and reduce the amount of taxpayer capital it would need. Harry's quick calculations showed that if Chrysler went away, GM's pretax profit could be increased by about $2.4 billion a year. That could add more than $10 billion to GM's market value, a meaningful increment for whoever ended up owning shares.

No one challenged the accuracy of Harry's figures or those of the Council of Economic Advisers. The case for saving Chrysler was based more on political and social reality. For example, while the net job loss might ultimately be as low as the CEA suggested, on day one of Chrysler's liquidation, those 300,000 jobs would disappear. Moreover, the job loss would be directly associated with an Obama decision, while the jobs regained would be invisible.

In addition, the government would still face huge costs in letting Chrysler fail—for instance, Michigan's state unemployment insurance fund might go broke and need bailing out. Deese offered an argument that resonated with Larry: Given the uncertainty in our economy, it was better to invest $6 billion for a meaningful chance that Chrysler would survive than to invest several billion dollars in its funeral. (The hole in this argument was that we could invest $6 billion and still have to pay for the exact same funeral.) He and other defenders also extolled the potential benefits of the Fiat alliance and of preserving "optionality" for later moves, such as an eventual merger with GM.

Back and forth the arguments flew. For Austan Goolsbee and Alan Krueger, the CEA's analysis was compelling. Harry, meanwhile, was particularly emphatic about the positive effect Chrysler's demise would have on GM. Goolsbee and Wilson were also concerned about Chrysler's weak product line and its ability to turn the corner, even under Sergio's strong leadership, before its cash ran out. Diana, taking the perspective of a management consultant, wondered rhetorically why the government would be in the business of saving losing companies.

On the pro-Chrysler side, Gene reminded us that liquidation would shatter entire communities. Ron emphasized the need to preserve as many jobs as possible. Brian asked why, from a policy and political perspective, we would let Chrysler go if we had reasonable confidence that it could be saved. I saw the sense in all these diverse views and felt torn.

Larry pressed us to attach probabilities to our recommendations and countered with odds of his own. Like Bob Rubin, with whom the concept is most closely associated, Larry is an enthusiast for "probabilistic decisionmaking," a method for weighing uncertainties. He asked how likely we thought it was that federal money would keep Chrysler alive for eighteen months (essentially past the midterm elections) and for five years (potentially through another business cycle).

At one point, he confessed that as we gave our answers, he was discounting our probabilities based on what he thought we would say. For example, knowing that Ron was in favor of saving Chrysler, Larry lowered the probability Ron assigned to the success of the alliance with Fiat. The opposite for Harry. Plainly, Larry was loving this debate.

I was truly undecided. The economic and financial analysis for letting Chrysler go seemed compelling to me, as did Diana's logic. But I knew I was expected to form an opinion based on all of the factors, not just the numbers. Finally, Larry turned to me and said, "I know where everyone else is on this. What I'm trying to figure out is where you are." I continued to wiggle. Deese, whose judgment I respected enormously, was looking at me across the table as if to say, "Are you out of your mind? If we have a way to support Chrysler as a viable business, we can't let it go down in this economic mess."

Larry called for a show of hands. His question was precise: "If you assume that the probability is 50 percent or greater that Chrysler would survive for five years, would you save it?"

Diana was unhappy with the phrasing, because she thought Larry was stacking the deck—forcing those who believed Chrysler's chances were actually slim to assume a higher probability. She had suspected that he wanted to save Chrysler and now was sure of it. While she recognized that under Larry's formulation she should be voting to save Chrysler, she voted against it anyway, as a kind of protest. Austan felt sandbagged too—he thought that if Christy had been present to vote, and if Deese, a junior staffer, had been barred from voting, a further bailout for Chrysler would have stood no chance.

As it was, the vote was 4 to 3 against a further Chrysler bailout (with Bloom, Deese, and Sperling in favor) when Larry turned to me again. I was still unwilling to commit. Frustrated, he asked, "If you were President, what would you do?" This was an effective reminder that the man I'd signed on to serve did not have the luxury of sitting on the fence. I could not duck the question put this way, so finally, reluctantly, I cast a "51-49" vote in favor of the bailout. With that, the tally was tied, so Larry's became the deciding vote. He approached the question from a seemingly simple standpoint: Which would be the bigger mistake, saving Chrysler, which would keep a very fragile competitor to GM alive? Or letting it go, which might decimate the U.S. economy?

Larry listened closely to the "two good companies instead of three" argument that the opponents made and also worried about giving Fiat a "free option." But in the end, for him, this calculus was simpler than his courses at Harvard had been: once he was convinced that Chrysler could get through at least a couple of years, he believed the risks of letting it go represented more of a gamble than the economy should be subjected to at this critical time. As he later described it, "You could think of it as a cheap form of stimulus at a time when the economy clearly needed stimulus." We had all come a long way from the dark days of early March when, having concluded that Chrysler was not viable as a standalone company, we would have guessed that liquidation was the most likely outcome.

When the meeting ended, as we filed out of the office, Larry pulled Krueger aside. Quietly he told him, "I hope you understand that it's different being the decisionmaker than being an economic adviser. There are other factors I have to consider." He knew how strong the case was that Alan and Austan had made, and didn't want his star student to think he'd gone all wobbly.

Larry recognized that Chrysler was a close enough call that the President needed to be briefed, and asked us to craft a short memo. The CEA, worried that its views wouldn't be fully represented, wanted to send its own memo of dissent. But Larry vetoed that, declaring that there would be only one memo to the President, and it would fairly portray both sides of the debate. Our memo to Obama was "litigated" extensively with Larry before being dispatched the following week.

The memo was still being worked on and Chrysler was still on Austan's mind as he prepared for a President's Daily Brief in the Oval Office on March 18. Neither he nor Alan Krueger had heard anything further about Chrysler since the vote in Larry's office five days earlier and assumed the decision had been made to save the company. They feared that they would not be told until the last minute to avoid more disputation.

The topic for Obama that morning was an update on Wall Street, and Austan was present on behalf of the President's Economic Recovery Advisory Board
(PERAB)—
nongovernmental advisers, led by Paul Volcker, whose job was to give Obama a "ground-level sense" of the economy outside what he called the echo chamber of the Washington bureaucracy. Access to the President's Daily Briefs was, of course, restricted and generally didn't include Austan. In this case, Christy had told Austan, "You can go, but only to observe on matters affecting
PERAB,
and you're not allowed to say anything."

The briefing was uneventful until the end, when Austan was startled to hear Summers describe to Obama our decision to move up the announcement of a $5 billion receivables guarantee program for auto suppliers to the very next day. We'd wanted to hold off until the end of March, so that the President could announce the program with his other auto industry decisions. But the supplier crisis was real and urgent, and the pressure to respond was enormous, so we'd sped up the launch even though the mechanics of implementing the program were still far from complete. "Okay," said the President, taking it in. "That sounds sensible."

Whoa, thought Austan. "Mr. President," he interrupted, "just be aware that the second we announce we're going to save the suppliers, everybody is going to assume we're saving the auto companies too. Have we really decided that? If not, we've got to figure out how we're going to message this thing."

"Of course," Summers said curtly, and the meeting moved on. As soon as the session adjourned, he cornered Goolsbee outside in the corridor and exploded, "You
do not
relitigate in front of the President!"

"I was not litigating in front of the President," Austan shot back. "He hasn't seen that program and it has nothing to do with the financial rescue." Larry felt that the freewheeling Austan was off base. The CEA had been aware of the plans to help the suppliers, and there wasn't anything about the program that mandated a rescue of any or all auto companies. The President would still have a free hand when that larger issue reached his desk.

To make matters worse, Austan inadvertently was never informed that the carefully balanced Chrysler memo was about to be delivered to the President at almost that very moment, as Larry had promised. Austan continued to boil based on his impression that the views of the dissenters were not being reflected, a concern that would only grow in the coming days.

Now that it was clear that Larry wanted the Chrysler rescue to proceed, I worked hard to make sure he understood how much was still left to do on the matter and how much uncertainty remained. We had issues to resolve with Fiat, had not begun to negotiate with the UAW, and of course Jimmy Lee and the creditors were still demanding 100 cents on the dollar. We had carried out so little due diligence on Chrysler as a business that to invest now would be, by private equity standards, negligent. As smart as Larry was about so many things, I wasn't sure private-sector dealmaking was his strong suit.

The Fiat negotiations were not going well. Although Chrysler had unveiled the alliance with great fanfare on January 20, we viewed that announcement as a beginning rather than an end. In particular, we remained concerned that Fiat was putting no money into the deal. This was bad business and bad politics. The agreement called for the Italian automaker to get an initial 35 percent ownership stake in return for providing Chrysler with technology and management expertise. I worried about the potential backlash from billions of dollars of U.S. taxpayer money going to an automaker that would be managed and partly owned by a foreign company. Worse, for Fiat the deal was risk-free—if the alliance didn't work, it could walk away with no penalty.

We struggled to persuade Sergio to put up some cash. But as much as the ambitious CEO wanted Chrysler, that was where he drew the line, at least in part because Fiat was facing its own financial challenges. Eventually, after hard bargaining, Ron succeeded in carving back Fiat's initial ownership stake to 20 percent, requiring the company to meet meaningful milestones before receiving additional shares and limiting its ownership to no more than 49 percent until the entire Treasury investment had been repaid. All in all, I felt it was a fair deal, and nothing that has transpired since then has changed my mind.

The launch of the $5 billion receivables guarantee program for suppliers on March 19 would be the first pronouncement from the Auto Task Force, so I wanted to be sure that we put our best foot forward. Our team worked hard to be sure we had all the mechanics right; Mara McNeill, a Treasury lawyer, became our unsung hero on these critical issues. We wrote a public fact sheet, rehearsed questions and answers for calls with reporters, and helped Tim's staff craft an announcement that made it seem as if we had our act together. His statement hit all the right notes. "The Supplier Support Program will help stabilize a critical component of the American auto industry during the difficult period of restructuring that lies ahead," it read. "The program will provide supply companies with much-needed access to liquidity to assist them in meeting payrolls and covering their expenses, while giving the domestic auto companies reliable access to the parts they need."

This unveiling was received better than I would have predicted, even in the heartland. Senator Carl Levin, crusty as he was, called the program "good news." Governor Granholm announced, "Today's action will minimize unnecessary job losses."

Meanwhile, I was pleasantly surprised to see a quote from David E. Cole, chairman of the Center for Automotive Research, in the next day's
New York Times.
"I am convinced they have decided that a major bankruptcy in this industry is not going to happen if they can help it," Cole said. Only ten days from the President's March 30 speech, and the industry's closest observers did not know what had, for all practical purposes, already been decided.