Rattner: 'GM and Chrysler deserved to go bankrupt'
America's auto industry seems healthy today. Sales are up, and so are profits. GM is readying an IPO. "An apology is due to Barack Obama," wrote the Economist, which opposed the government's intervention into the automobile market. "His takeover of GM could have gone horribly wrong, but it has not."
Some of the credit for that goes to Steve Rattner, the private-equity specialist whom President Obama tapped as "auto czar." Ratner's new book, "Overhaul," reconstructs those frenzied months and provides the first insider perspective on the administration's policymaking process. This transcript -- which focuses on the auto bailout and related financial-rescue policies -- is the second of a two-part interview. Part 1, which came out yesterday, focused more specifically on how the government was working amid the chaos of the financial crisis. The transcript has been lightly edited.
Ezra Klein: Let's go back to what you said about the government stepping in when the market failed. How do you apportion blame for what happened here? How much was the auto industry managing itself poorly and how much was a once-in-a-generation economic crisis that froze the credit markets?
SR: It's a bit of both. The best argument for why it was their own fault is Ford. They faced all the same pressures: competition from Japan, UAW contract, gasoline prices, and they got through it. Why? Better management. It's not that complicated. GM and Chrysler deserved to go bankrupt. They ran their company poorly in the case of GM, they were over-leveraged in the case of Chrysler. But in a normal environment, there would have been financing to get them through bankruptcy; everyone would have lost some money, but the companies would have survived.
But this was also a hundred-year storm, so it tested everybody. In this environment, there was no financing. If we had not provided capital, those companies would have shut their doors and liquidated and you would've had a million people out of work for no really good reason, just because the capital markets stopped functioning. So nobody got bailed out here. Everybody took pain in the auto sector. Shareholders were wiped out. Lenders got about 30 cents on the dollar. The UAW made significant concessions for both current workers and retirees.
EK: Was the pain equally shared? People say the auto bailout was just a giveaway to the UAW, that they got special treatment.
SR: Honestly, it was. If we were doing this purely in the private sector, maybe everyone would've taken more pain. Was the government going to try to break the UAW or J.P. Morgan? No. But I think we got a very fair deal out of all of them. You can debate who did better and who did worse, but there was a lot of precedent in the steel bankruptcies for different people being treated differently. Everybody likes to talk about the UAW here, but if you were a warranty holder, you were at the same place in the capital structure as the UAW, and you got 100 cents on the dollar and the UAW took a haircut. A lot of Americans got treated better than the UAW, a lot of suppliers got treated better than the UAW. We did what we felt was right for each constituency in order to have a functioning company going forward.
EK: What would have happened if you'd done nothing?
SR: There's no doubt. Look at [George W.] Bush. He was under enormous pressure from the Cheney wing to do nothing. And [then-Treasury Secretary Henry] Paulson and Joel Kaplan went in and said, c'mon, this is insane. The car companies would have run out of money, closed their doors, and all the employees would've be gone. Then all the suppliers would have shut down. Then Ford and the Japanese transplants would have shut down because they couldn't get parts from their suppliers. And you would've had well over a million people, or maybe 2 million people, out of work in a week or two. I'm a free-market guy. I'm a centrist. But when markets fail, that's what governments are for.
EK: Has there been much reaction from the Obama administration to the book?
SR: Some. I was disappointed, and I'm sure they were disappointed, that some of the human moments were pulled out of context. But both Rahm [Emanual] and [David] Axelrod have touted it to people as something to read to see how the administration works.
EK: You said you're a market guy. You often hear the Obama administration critiqued for not having a CEO. Do they need more private-sector perspectives internally?
SR: I believe business people have something to contribute. But it is absolutely a reflection of the vetting process that there aren't more. Many wouldn't go through it, and others, I happen to know, were considered and couldn't get through. They wanted more business people in the administration.
But having said that, Tim [Geithner] and Larry [Summers] may not have been CEOs or worked at an investment bank, but they've been around the private sector. Tim was at the New York Fed, Larry worked at a hedge fund. I don't really believe the outputs would've been that different with more business people in prominent positions. And I think history will tell you that the experience of business people, particularly CEOs, going into government is generally not a happy one. They generally have very little appreciation for the differences between business and the public sector. So I think it's great if they find someone who can do it, but I don't think it's necessary.
EK: When you look at TARP, at the auto bailout, there's an expert consensus that a lot of these policies were helpful, and a public consensus that they were terrible. When you look back at your time and the economic response you were part of, what do you regret?
SR: I want to be careful because I think you have to truly be sympathetic to the pressure these people were under, particularly in the Bush years, of making a decision about the fate of a major institution every weekend, on the fly. I hate it when people second-guess little things we might have done differently that were done under enormous pressure, and I don't like to do it to others.
But having said that, as you look back on it, one of the things I would've done differently is that I think the financial institutions that we rescued were undercharged for the privilege. We gave them cheap money. Giving Goldman and Morgan Stanley bank holding status was giving them unbelievably cheap money. I think that part of the public anger about why Goldman Sachs stock is still at $145 is because I don't think we charged them enough. We should've charged them a billion dollars. Maybe if we would've charged more, people would've felt it wasn't such a bad deal for them. That's probably the biggest thing.
When you look at some of the more detailed things, TARP was originally supposed to buy troubled assets and then that proved impractical and so it became direct investment, I can't criticize that. These decisions are hard on the fly. Maybe they could've asked for more management changes at these companies, like we did with the auto companies. But these banks were more complicated than the auto companies. There aren't a lot of people in the world who could've run them. So I don't really get the public's attitude. I don't get what they think would've happened or should've happened. I think the two administrations saved the financial system and the economy. You can criticize the Bush people for being a step behind until the fall of 2008. Either Tim or Larry have a saying that when markets overreact, government has to overreact, too, and I don't think the Bush people really got that until Lehman went down.
EK: The conventional answer to why the public is upset is that there is 10 percent unemployment. You're a markets guy. Do you think anything we could've done would've brought unemployment down by a substantial amount?
SR: If you were economic god, and you knew then what we know now, you would've used more monetary and fiscal stimulus earlier. But remember that there were two stimulus programs, the $160 billion under Bush and the $787 billion under Obama, and there was enormous resistance to both of them. This administration was operating within the private market's consensus, and it just turned out to be a worse recession than most people thought.
EK: Is there anything more you think should be done now?
SR: I am nervous about more stimulus because I'm not sure we can afford it and I'm not sure it's well spent. If you told me the next round of stimulus would go for investments with a return on them, like the tunnel under the Hudson River, I'd say great. If it sends checks to dead people, I don't think it's such a good idea. As for monetary policy, I'm almost there on quantitative easing. It makes me nervous because we're monetizing the debt and raising the prospect of inflation, but there's no inflation visible, so it's not clear there's much downside to it. And maybe it'll help.
Photo credit: Jay Mallin/Bloomberg News
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