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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Maybe the US is better at banking than manufacturing. A Switzerland with wheat and software. If software includes video games and movies.

But ordinary chocolate (Hershey’s) and no cuckoo clocks to speak of.

Posted by AreaMan | Report as abusive

I’ll give two thumbs down to both the book and the review.

In his review, Gladwell glorifies private equity as “activists” who “fix” companies. Not all of the companies PE firms acquire are in need of fixing. There are many that are very profitable but undervalued, and PE firms acquire them with cheap debt, pay themselves undeserved, unwarranted, and unaffordable divdends to allow themsleves to pay off the debt, and then watch as the remains of the once profitable company they acquired falls into bankruptcy. They usually blame the failures on the economy, and never on the fact they over-leveraged the company they effectively got for free, but hey, it’s not their money.

Rattner also defends Wagoner, which is incomprehensible. Waggoner was intimately responsible for GM’s situation, where he had been a senior executive for many years, long before he took over as CEO in 2000. He should have been fired years ago, but boards of publicly traded companies in the US just do not act that responsibly. There is no defense for Waggoner, and keeping him as CEO after an incredibly unpopular bailout would reinforce the public belief that there is no accountability anywhere. If he shouldn’t be fired, then who?

But firing Waggoner was not an example of Rattner’s competence, it was only a political maneuver. He followed that move up by hiring Whitacre to run GM, which made absolutely no sense. Whitacre, as Gladwell pointed out, never ran a company that built things, but more importantly, only ran a monopoly, which is the opposite of the intensely competitive and over-capacity filled auto industry. Whitacre was just another guy who could add, but had no idea what cars to design, how to build them, or how to sell them. Hiring Whitacre was either cynicism or gross incompetence, take your pick.

Gladwell should stick to misusing statistics, and there’s no way I would want to pay for Rattner’s tales of gossip and ego-stroking, let alone spend the time to read it.

Posted by OnTheTimes | Report as abusive

I am no car expert but it seemed obvious for many years that GM needed to cut severely its enormous selection of lines and models, as a trivial management decision.

Most other car companies had a much smaller selection of models that they honed carefully while GM somehow always fielded an enormous lineup. This pulled down its average quality ratings, its average profitability and average coolness even as some of its cars were real winners.

Then why didn’t they cut?

I think the failure to cut bad cars was not mere incompetence. GM was saddled with enormous legacy costs and needed to do enormous volume. Lean and mean was not an option, pre-bankruptcy. They may have been almost destined to fail because the ordinary path to health (cutting weak cars) would actually spread retiree costs among fewer sales.

Posted by DanHess | Report as abusive

Comparative mentions: (1) Princeton and Yale don’t get mentioned for good reason: Princeton doe not have a business school; Yale SOM became a business school only in 1994, and did not grant an MBA until that year; previously, it granted an MPPM (master’s degree in public and private management); (2)Harvard Business School is not Harvard; “Harvard” means Harvard College. You have to be smart to get into Harvard College.

Posted by maynardGkeynes | Report as abusive

With the greatest respect to Justin and Barbara, can we please have a feed of stuff just by Felix?

Posted by JohnBarrdear | Report as abusive

I would qualify maynardGkeynes’s comment: You have to be _more_ smart to get into Harvard College.

As events of recent years (not just Obama) have proved, the principal requirement for Harvard College, Law or Business School is being a money-grubbing sycophant. Harvard’s Wall Street, Obama, Clinton and Bush alumni prove this all too well.

Posted by HughSansom | Report as abusive

Your criticism of financial engineering must be accompanied by similar criticism of the Detroit auto manufacturing culture you appear to admire. This is the same cast of characters that considered letting your car fall apart after four years so you would have to buy a new one to be a viable business model. Perhaps because you don’t own a car and rarely drive you may not realize how much untold pain they inflicted on the consumer over the years.

Even after financial engineering that left winners (auto workers) and losers (equity and debt holders), and perhaps marginally higher quality, it’s not at all clear that we did the right thing here.

Posted by Curmudgeon | Report as abusive

@AreaMan: I think that the past three years have demonstrated that the banking and auto sectors in the US are more alike than different. My guess is that the MBS investors are going to end up viewing the banks’ products as simlar to the auto products discussed by @Curmudgeon – they fall apart after four years so you have to buy a new one.

If companies like GM and prodcuts like MBs’s and CDS’s are the product of Harvard Business School grads, can we get a law passed dismantling Harvard Business School using national security and solvency as the reason?

Posted by ErnieD | Report as abusive

“I think that the past three years have demonstrated that the banking and auto sectors in the US are more alike than different. My guess is that the MBS investors are going to end up viewing the banks’ products as similar to the auto products discussed by @Curmudgeon – they fall apart after four years so you have to buy a new one.”

Brilliant! :)

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