Chrysler and GM survived because of the President’s willingness to let them go bankrupt.
In a speech today at the National Press Club, Steven Rattner defended the Administration’s decision to intervene in the auto industry and was harshly critical of the insular culture at General Motors, and years of mismanagement and leveraged debt at Chrysler.
Failure to act, however, was not an option in the Task Force’s view since it would mean the immediate loss or elimination of more than two-thirds of American-owned auto manufacturing capability, cost more than a million jobs in the short run, dramatically deepen and prolong the nationwide recession, and push unemployment rates in several states above 20%.
The question was how to act effectively, and not just buy time for the failed companies.
The Auto Task Force, of which Rattner was a key member, was just being formed when both Chrysler Corporation and General Motors Corporation submitted mandated “viability plans” on February 17. These plans were required when Congress declined to act on behalf of the failing companies before Christmas, and President Bush decided in late December to provide $17.4 billion of TARP funding to GM and Chrysler and kick the problem down the road to the incoming administration.
“Those plans evinced a state of denial as to the magnitude of their problems, the necessary changes and the conditions under which the Administration might provide further assistance,” Rattner said, in a speech sponsored by the Brookings Institute.
It was clear to him that both companies needed massive reductions in their costs and liabilities, including their legacy health care obligations, their labor costs, and their manufacturing footprints.
The government as piggy bank
“The President and his senior advisers were of one mind: No more money except in the context of shared sacrifice and restructurings to become truly viable.”
The next set of surprises came as the Task Force began meeting with various stakeholders at the failing companies. Rattner said the Task Force was startled when bondholders, labor unions, and senior management presented “asks” from the government.
“We had foolishly assumed that stakeholders eager to help would come with gives,” he said.