Administration 'Shocked' By GM & Chrysler's Condition Last Spring

Administration Shocked By GM & Chryslers Condition Last Spring

The Obama administration last spring was shocked by the weak condition of struggling automakers General Motors and Chrysler, the former head of the administration's auto task force said in a new first-person account published today.

"We were shocked, even beyond our low expectations, by the poor state of both GM and Chrysler," Steve Rattner wrote in Fortune magazine. "Looking just at the condition of GM's finances and Chrysler's new-car pipeline, the case for a bailout was weak."

"But on the other hand, as we surveyed the interconnected web of finance companies, suppliers, and related businesses, the potential impact of the likely alternative – liquidation – stunned us. We imagined that the collapse of the automakers could devastate the Midwest beyond imagination."

In March, a handful of task force members traveled to Detroit to see first-hand the situation there. What they found, Rattner said, was stunning.

"Everyone knew Detroit's reputation for insular, slow-moving cultures," he said. "Even by that low standard, I was shocked by the stunningly poor management that we found, particularly at GM, where we encountered, among other things, perhaps the weakest finance operation any of us had ever seen in a major company."

The absence of sound analysis to justify the automaker's major expenditures, Rattner said, left the group "appalled." The cultural divide at the company, he said, was "stunning." Rick Wagoner, GM's CEO at the time, conveyed a tone of "friendly arrogance." Sweeping changes had to be made.

"It seemed completely obvious to us that any management team that had burned through $21 billion of cash in a year and another $13 billion in the first quarter of 2009 could not be allowed to continue," Rattner said.

"If ever a board of directors needed shuffling, it was GM's, which had been utterly docile in the face of mounting evidence of looming disaster."

Wagoner, for one, believed he had a few years left at the helm of the automaker, but the administration had other ideas. One of Wagoner's deputies, Fritz Henderson, exuded "more energy and openness to change," Rattner said. Out went Wagoner, in came Henderson.

Meanwhile, Chrysler's situation also presented the administration with a dilemma. When the task force met in March to decide whether to offer Chrysler government financing, "the group was torn," he said.

"At one point the vote was four to four," Rattner recalled, noting that he himself was unsure what to do, as were Treasury Secretary Tim Geithner and National Economic Council director Larry Summers.

The group marveled, Rattner said, at the fact that Chrysler did not have a single car recommended by Consumer Reports. Under former owner Cerberus Capital Management, Rattner said the automaker "never had a chance."

"We intuited from a theoretical point of view, the correct decision could well be to let Chrysler go," Rattner said. "But this was not an academic exercise."

"The short-term effect of a Chrysler shutdown could be 300,000 more unemployed, similar to what was lost across the entire economy in the month of July. And with the memory of Lehman's collapse still fresh, we imagined the potential for other systemic risk."

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