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

WASHINGTON, Oct. 21, 2009— -- 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."

At an Oval Office meeting with President Obama on March 26, officials on opposing sides made their cases. Austan Goolsbee, a member of the Council of Economic Advisers, led the case against Chrysler. Gene Sperling, a Treasury official and Michigan native, defended the case for government help. The president's political advisers, Rattner said, were equally torn.

After the meeting had gone on for an hour, the president stated, "I've decided. I'm prepared to support Chrysler if we can get the Fiat alliance done on terms that make sense to us."

"I want you to be tough," the president told the task force, "and I want you to be commercial."

Rattner found the president's actions "consistent with his 'No drama Obama' image.

"He was cordial without being effusive and decisive when his advisers were divided."

Ultimately, the administration pushed the automakers into speedy bankruptcies with billions of dollars in government aid. But without the $700 billion financial bailout that provided government funds for immediate disposal, at least one of the automakers would have faced certain liquidation, Rattner said.

"If we hadn't had TARP money available and had had to seek congressional approval, I am convinced that one or both of our two automakers would have been forced to liquidate," Rattner said.

Rattner stepped down as head of the task force in July, "satisfied that we had given these companies the best possible chance to succeed."

However, Rattner warned, "like any patient that undergoes major surgery, a successful recovery is far from assured."

But now Rattner can rest up. The exhausting six-month stretch had clearly taken its toll on the task force. At one of the president's final speeches on the automakers' predicament, one of Rattner's colleagues fainted from lack of sleep. In the White House infirmary, the staffer ran into the president himself, in search of some Tylenol.