Overhaul (3 page)

On the Monday before Thanksgiving, Obama announced the key members of his economic team. Timothy Geithner's appointment as Treasury secretary made him my most likely new boss, so I sent him a congratulatory e-mail noting my willingness to serve. The cryptic phone call from Larry Summers as I was leaving to see
Speed-the-Plow
came the next day. After that, I sat back to wait. While Josh was discreet, I knew he would alert me if there was some action he thought I should take.

Tim was still president of the New York Federal Reserve Bank—a more-than-full-time job as the financial crisis accelerated. I could not imagine how he could manage it and prepare to run the Treasury at the same time. So I was excited to get an e-mail from his assistant, asking me to meet with him on December 18 at 8:30
A.M.

Having allowed plenty of time in case of rush-hour delays, I arrived early at the gray, fortresslike Federal Reserve building on Liberty Street in downtown Manhattan. Ushered into a small sitting room, I waited until Tim, in his customary blue suit and white shirt, rushed in, dropped his BlackBerry and phone on a side table, and began my first job interview in years.

Speaking in his usual concise, focused fashion, Tim explained that Treasury's traditional organization was unsuited to the current economic problems: there were more crises than there were formal jobs. And yet, he explained, it was hard to create new senior positions without congressional approval. So Tim was thinking in terms of tasks rather than positions, implying that he'd get to the specifics of positions and titles later. He mentioned four issues that might be appropriate for me to work on: housing, the immediate banking problems, longer-term financial policy, and autos.

I said that I was open to discussing any of the possibilities and didn't want to make his impossible life more difficult by being finicky. Less than fifteen minutes into our scheduled forty-five-minute meeting, an assistant came to summon him to another meeting, and Tim stood to leave.

"Do you have any questions for me?" I asked, disconcerted by this abrupt turn in my job interview.

"No," he replied and was gone.

Later, it struck me that the jobs Geithner had listed were like a four-point checklist of the financial and economic calamities facing the new President. With the collapse of the subprime mortgage market and the unprecedented fall in property values, homeownership had gone from the American dream to a debt nightmare for millions of families. The nation's biggest banks and investment houses were mostly crippled, threatening to paralyze the entire economy. Financial policy had clearly failed to guard against this, and once the emergencies were resolved, the question would be how to fix the system. And the auto industry, the once proud symbol of America's industrial might and still the employer of millions, was near ruin. If any one of these missions became mine, I thought ruefully, I certainly would not have to worry about being stuck in some purely honorary job.

Like most Wall Street denizens, I had watched closely as these crises cascaded through the financial markets and undermined the broader economy. Our private equity investments were mainly in media and communications, sectors somewhat removed from the financial industry collapse. Nor did we engage in derivatives or subprime or risky lending in our other principal business: serving as the investment arm for Mayor Michael Bloomberg's personal and philanthropic wealth. So we did not feel the same sense of imminent peril that many of my friends experienced. At first the crisis was simply unnerving—also fascinating in a morbid sort of way.

I followed the daily developments closely. As a private equity investor and mergers and acquisitions veteran, I was only vaguely familiar with the new lingo of Wall Street—special investment vehicles, collateralized loan obligations, super senior tranches, conduits and securitizations. Now I did my best to learn, often entreating friends who were closer to the action to explain to me the new alphabet soup of CLOs, SIVs, MBSs, and so on. Writing helped me collect and focus my thoughts. In 2007, I warned in the
Wall Street Journal
of a "coming credit meltdown." As the crisis developed, I contributed opeds on housing, on the likely emergence of better-capitalized banks, on what to do with Fannie Mae and Freddie Mac, on the future of private equity, and on the state of the economy (about which I was way too optimistic).

For many months, Wall Street was in a muddle about what it wanted Washington to do. In March 2008, when the Fed saved Bear Stearns, many in the financial community were dismayed. "Moral hazard!" they cried. "Poorly run institutions must be allowed to fail!" For the next few months, markets continued to erode only gradually, with the acute pain confined to those in the subprime mortgage arena. But then came the crisis of September 2008. "The Street" wanted the government to let Lehman go—a notch in the moral-hazard belt—and the Federal Reserve and the Bush administration obliged. But from that horrible Monday morning when we awoke to Lehman's bankruptcy—the firm at which I enjoyed beginning my Wall Street career and at which I still had many friends—it was clear that things would never be the same.

I had experienced market crises, but nothing like this. The 1987 stock market crash—unnerving as it was on another Black Monday, October 19—had proved short-lived. The Asian crisis in 1998 had been messier and protracted, but Asia was on the other side of the globe. This meltdown was right here in Manhattan, where we saw friends lose their jobs and much of their net worth. Financial markets began to seize up. Being a private equity guy was no longer a sheltered cove; we had portfolio companies that needed financing and none was available. Meanwhile, the recession that we now know officially began in December 2007 started to affect some of our companies' results, particularly those with substantial advertising revenues. We plunged into intensive reviews of each company, intent on cutting expenses and stretching liquidity as far as possible. The Bloomberg portfolio, conservatively invested, performed better than most of its peers, but the declines still stung. Above all, the sense that no one knew where the bottom was created more widespread terror than I had ever experienced in my Wall Street career. (As determined investors, we tried to find exciting opportunities amid the carnage, but it was hard to summon the courage to run into a burning building.)

I wasn't shocked—maybe I should have been—that Tim would have mentioned four very diverse jobs. For one thing, government has always placed more confidence in the transferability of skills than the private sector. Perhaps more importantly, all four issues had finance at their core, and all would benefit from a fresh look by people who were not wedded to past models and outmoded approaches. Even solving the auto crisis, I understood, would not be a management assignment like running a corporation; it would be a combination of restructuring exercise (cleaning up the mess) and private equity task (investing new capital). While the Wall Street community includes many who are more expert at both tasks than I, after twenty-six years in finance I felt that my "major" and my "minor" had converged.

Josh hinted a few days later that I was likely to be offered autos. My first reaction was to think, "But I live in New York!"—as a Manhattanite, I neither knew nor cared much about cars. (I'm a pilot, more interested in planes.) But Josh encouraged me, arguing that I could help prevent the devastation of this iconic industry. Among his many roles, he'd been named the transition team's senior auto adviser and had been scrambling to get up to speed on the ills of Detroit.

The same week as my job interview with Geithner, the Bush administration committed $17 billion of federal funds to General Motors and Chrysler, putting them on financial life support. The money came with a hodgepodge of conditions, including a mid-February deadline, when the automakers had to submit "viability plans," and another at the end of March, when the new Obama administration would revisit the whole issue. By then the automakers would again be almost out of cash.

Josh described this state of affairs as "challenging and interesting," perhaps in part because he was eager to hand it off. Another close friend, Senator Chuck Schumer, gave me a different take when we talked at dinner not long after I'd met with Tim. "Autos is a no-win," the senator bluntly declared. "The situation is probably unsalvageable. You'll run up against the unions and get eviscerated by your own party. Work on housing—it's a big, important issue, it affects everybody, it has to get resolved, and the politics are easier."

A week went by and the holidays came. On December 26, I took my family to Spain for a week of sightseeing ("history trips," our kids called these annual expeditions). But Tim's office interrupted our vacation on the thirtieth, asking to schedule a call for the following day. When my cell phone rang on New Year's Eve, Tim offered me the auto assignment, reporting to both him and Larry. I was very positively inclined, I said, but needed to discuss it with Maureen and a few others. Other than his telling me I would be a counselor to the Treasury secretary, there was no talk of terms or responsibilities, and the call ended in less than five minutes.

A few hours later, as we were about to go to dinner, the phone rang again; this time it was Larry, calling from vacation in Jamaica. "I know you talked to Tim," he began. "It would be great if you did this." He was surprised to discover I was in Barcelona and said, "It's a good thing I didn't call much later." Never one to stay up late, even on New Year's Eve, I replied, "My phone would have been off." I gave him the same response I had given Tim and went to join my family.

I lay awake for a while that night as 2009 began, sensing I was on the verge of the experience of a lifetime. I was being given a chance to play a central role in the largest industrial restructuring in history from within the most powerful institution in the world—the United States government. I would come to the job thinking I knew a lot about business and a reasonable amount about Washington. I didn't realize that my eyes would be opened to harsh new perspectives on both worlds. I would learn of both the devastation across our manufacturing sector—in part, collateral damage from our sound commitment to free trade and
NAFTA—
and the intimidating challenge of reversing the trend or even just halting the decline. I would discover that the struggles of GM and Chrysler were as much a failure of management as a consequence of globalization, oil prices, and organized labor. I certainly understood the importance of management to the small companies in which my firm invested; what would astound me was how important one or two individuals could be to the fortunes of businesses that were among the largest on the planet. And I would witness the dysfunction of Congress, its inability to rise above deep partisan divides and narrow parochial interests and produce legislative action to address in a thoughtful manner the many challenges that we face. I would conclude that if sunshine is indeed the best disinfectant, as Justice Brandeis once said, we need to find the most powerful lenses available to focus the sun's rays on the U.S. Congress and, particularly, the Senate.

In the end, the auto rescue would prove to be not just the story of two iconic automakers. It would exemplify many of the challenges that confront Americans in the twenty-first century—from our struggling manufacturing base to our declining middle class—and illustrate how difficult it is in the hothouse of Washington, so deeply divided along partisan lines, to take the desperately needed swift actions. I believe firmly in President Obama's efforts to restore our economy, yet because of such obstacles, the auto rescue remains one of the few actions taken by the administration that, at least in my opinion, can be pronounced an unambiguous success. Detroit should count itself lucky.

***

It had taken America's automakers my entire lifetime to come to the crisis they were in. I grew up during Detroit's heyday, the fifties and sixties, when the Big Three were just that. General Motors, Ford, and Chrysler controlled 90 percent of the U.S. car market, by far the world's largest. GM sold half the vehicles purchased annually in America, coming in year after year in the number one spot on the Fortune 500 list of America's largest industrial companies. Driveways and garages up and down the street in my parents' affluent Long Island suburb were filled with Ford Country Squires, Lincolns, Cadillacs, and the like.

In those upbeat days, Detroit's offerings echoed the optimism of the space age, drowning in chrome and sporting glamorous-sounding names like Galaxie, Starliner, Thunderbird, and Barracuda. My best friend in high school got a Camaro convertible as a graduation present from his parents, and we all thought it was about the coolest thing around. It was perhaps a precursor of things to come when in 1966 my mother abandoned our family's preference for Fords and bought herself a small Mercedes, and our family became among the first I knew to own a foreign car.

I was a college junior when gasoline prices first soared to shocking levels, which ended Detroit's hegemony and opened the floodgates for small, inexpensive, fuel-efficient Japanese imports. Competition, high gas prices, and stagflation squeezed the U.S. carmakers hard in the 1970s, ending with Chrysler nearly bankrupt and Ford and GM deep in red ink. At the
New York Times
I helped cover Chrysler's pleas for a government bailout. In one story I described the debate as a "first-rank political and economic controversy over whether it is obligatory, or even desirable, for the Federal Government to come to the rescue of a large, ailing corporation." That question, it turned out, would trail me.

On highways and streets, imports—Corollas, Civics, Datsuns, and Volkswagens—became as popular as American cars. I'd shared the use of a Ford Pinto in college (one of the worst cars ever built), but when I got to pick my own car, I chose a sporty Datsun 260Z. Volvos competed with U.S. station wagons, and Mercedes and BMWs displaced Cadillacs and Lincolns at the luxury end. In 1982 came the first successful "transplant"—a Honda factory opened in Marysville, Ohio, where non-union American workers turned out Accords just as efficiently as workers in Japan. Such plants enabled Detroit's rivals to avoid import restrictions and lessened the effects of currency swings, increasing the pressure on the Big Three.