Rattner’s Overhaul

By Felix Salmon
October 31, 2010
Overhaul, and I'm also a fan of Malcom Gladwell's very tough review of it.

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I’m a fan of Steve Rattner’s book about the auto bailout, Overhaul, and I’m also a fan of Malcom Gladwell’s very tough review of it.

There are lots of reasons to read the book: it’s a surprisingly candid and open account of life in the early days of Obama’s White House, and Rattner is happy going public with a lot of information that the White House officials in question simply assumed was tacitly off the record. He’s also happy being very rude about lots of people who rubbed him the wrong way, from Sheila Bair to former GM CFO Ray Young.

Gladwell’s main problem with the book is Rattner’s view of former GM CEO Rick Wagoner. That view is pretty simple: Wagoner had overseen the decline of GM to the point at which the only choices were bankruptcy, bailout, or both. He therefore had to go. Gladwell, by contrast, is much more charitable: he sees Wagoner as a man who fundamentally transformed GM into a competitive powerhouse, and who, in doing so, did a certain amount of unfortunate collateral damage to GM’s balance sheet.

Gladwell’s view understates the financial nightmare that was GM pre-bailout: at one point its book value was negative to the tune of $98 per share. Wagoner caused billions of dollars in unnecessary bankruptcy costs by refusing to consider or prepare for any kind of bankruptcy at all, despite the fact that his quarterly SEC statements had been showing that GM was insolvent since 2006.

On the other hand, Rattner is comically out-of-touch when it comes to running companies: finance is all that he cares about, and it’s a very narrow view of what corporate finance can and should be, too. Let’s see if you can detect a pattern here.

On Ron Bloom: “Unlike most aspiring labor activists, he went to Harvard Business School”

On Rick Wagoner: “By most accounts, he had been a golden boy at GM. After graduating from Duke University and Harvard Business School, he’d begun as an analyst”

On Harry Wilson: “Harry had been the first in his family to earn a college degree, from Harvard, and he’d gone on to earn an MBA at Harvard Business School.”

On Sadiq Malik: “a skinny, intense Pakistani American who had graduated near the top of his class at Dartmouth, taken a Harvard MBA, and worked at the Blackstone Group”

On Bob Lutz: “Harry had admired Lutz ever since hearing him speak at Harvard Business School”

On Rob Fraser: “resumed his position at his private equity firm and then matriculated at Harvard Business School”

No other institution gets this kind of obeisance in the book: Harvard gets 17 citations in an Amazon search, while Princeton and Yale get precisely one between them. And it seems that what Rattner loves about HBS — and his own Team Auto taskforce more generally — is the way that everything can be reduced to clever questions about capital structure, and decisions can then be made in an incredibly dispassionate and pseudoacademic way. For instance, the bailout of Chrysler was a very close-run thing, and the company could easily have been left to die. Here’s how it was saved:

Larry pressed us to attach probabilities to our recommendations and countered with odds of his own… he confessed that as we gave our answers, he was discounting our probabilities based on what he thought we would say… Plainly, Larry was loving this debate…

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?”

This says volumes about Larry Summers: how he acts, how he thinks, how he operates politically. And it’s clear from this book that it was Summers, rather than Rattner, who ultimately made the decisions which would then be presented to the president for sign-off. (Geithner was nominally involved too, but let Summers take the wheel when it came to Team Auto.)

The fact is that neither Rattner nor Summers nor just about anybody else in Team Auto knew anything much about Detroit, about car manufacturing, or about running industrial companies. They did know that GM’s treasury was a shambolic organization which could require weeks to find out how much money it had — so they judged the treasury operation, because they were good at doing that, and then they damned the whole company by association.

There’s another fact, too, though — which is that Team Auto did wonders for the future health and sustainability of GM by forcing it into bankruptcy and extinguishing large chunks of its actual and contingent liabilities. Gladwell is far too grudging here:

Team Auto was engaged in an act of financial engineering: it used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back. This was cleverly and swiftly done. It was badly needed. But, at the end of the day, cleaning up a balance sheet is cleaning up a balance sheet.

In fact, it’s not remotely as easy as that, and the restructuring needed some very inventive bankruptcy lawyers, some extremely hard-nosed negotiators, the jettisoning of a lot of conventional wisdom about the abilities of automakers to withstand bankruptcy — and, of course, many billions of taxpayer dollars.

That Rattner’s team managed not one but two insanely complex bankruptcies in a hitherto unimaginably short timeframe is a real and noteworthy achievement of the Obama administration. Rattner is right about that. But Gladwell’s got a good point too. This kind of biz-school restructuring is easy to show off about. What’s hard is making millions of cars which are so good that the picky US consumer will buy them rather than the incredibly well-made competition — and making a profit by doing so. Eliminating GM’s monstrous debt burden by sending it through bankruptcy was a necessary step in getting there. But it’s not at heart what managing a company like GM is or should be about.

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