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Rattner: 'GM and Chrysler deserved to go bankrupt'

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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

By Ezra Klein  | October 13, 2010; 3:05 PM ET
Categories:  Financial Crisis, Interviews  
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Comments

"$787 billion under [Bill] Clinton"? To what is this referring?

Posted by: MosBen | October 13, 2010 3:23 PM | Report abuse

"I'm a free-market guy. I'm a centrist. But when markets fail, that's what governments are for."

A company failing does not mean markets are failing... His example of Ford contradicts his own conclusion.

Posted by: cdosquared5 | October 13, 2010 3:31 PM | Report abuse

"A company failing does not mean markets are failing... His example of Ford contradicts his own conclusion."

The failure of the markets is an allusion to this sentence:

"ut 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."

Posted by: y2josh_us | October 13, 2010 4:04 PM | Report abuse

@cdosquared5,

Did you even read the rest of that paragraph?

Posted by: genericOnlineID | October 13, 2010 4:07 PM | Report abuse

The UAW was owed about 32 Billion from GM for its VEBA.
It received 6.5 Billion in PreStock with a 9% coupon.
It received a Note for 2.5 Billion with a 9% coupon.

It received warrants for 2.5% of New GM stock.
It received about 18% of New GM stock
It also had the money in the VEBA fund transferred to it.
The UAW took no hair cut. GM has stated it will pay off the 2.5 Billion Note plus interest soon and has moved the Note to short-term Debt. Its PreStock is worth at least par as it has a 9% coupon and GM is cash heavy. Ford which has a similar credit rating Prefer are selling over par.
If the UAW holds most of its GM stock until the SAAR goes over 13+ Billion they will get more than 33 Billion in total, with the transferred money from New GM VEBA (10 Billion in Jan). Bondholders 30 cents on the dollar, UAW VEBA 100 cents plus on the dollar. The UAW is very smart, they are in no rush to sell their New GM shares for low IPO prices. Instead they will hold the New GM shares for fair value and receive a 100% plus return. Thanks

Posted by: henry15 | October 13, 2010 4:25 PM | Report abuse

"If it sends checks to dead people, I don't think it's such a good idea."

Took him seriously, until that.

Posted by: Hieronymous | October 13, 2010 4:35 PM | Report abuse

MosBen,

That must be a typo for Obama, tho who would fix the [Bill] part and not notice?

Posted by: rjewett | October 13, 2010 4:44 PM | Report abuse

I'm with Hieronymous -- anyone who can make a crack like that is just off the rails.

Posted by: AZProgressive | October 13, 2010 5:09 PM | Report abuse

Of course they should have gone under. This is round two for Chrysler being bailed out by the taxpayer. Why should the gov't force citizens to buy stock in failing companies?

Posted by: illogicbuster | October 13, 2010 5:39 PM | Report abuse

@illogicbuster

As was explained in the interview you apparently didn't read before commenting on, the government bought stock in those failing companies because their failing and the chain reaction that would have resulted from their failing would have resulted in a vastly greater net loss for the country and the taxpayers. It's illogical (busted!) for the "gov't" to look at decisions in a vacuum as you seem to insist they should.

Posted by: genericOnlineID | October 13, 2010 6:35 PM | Report abuse

"MosBen,

That must be a typo for Obama, tho who would fix the [Bill] part and not notice?"

I don't think so. I think he was referring to earlier stimulus packages and that there was a lot of resistance to them. I don't recall a Clinton stimulus package, but that was a long time ago. I think he's talking about the history of stimulus and that the historical reaction to them played into the decisions made in the much more recent Obama stimulus. That's what I understood it to be saying.

Posted by: kmgunder | October 13, 2010 6:42 PM | Report abuse

anyone who knows anything about corporate restructuring and chapter 11 would know that the use of a 363 sale expressly (though legally) circumvented ch 11 protections of creditors in order to pay off UAW.

see, e.g, Bankruptcy Reorganizations and the Troubling Legacy of Chrysler and GM
University of Illinois Law Review, Vol. 2010, No. 5, pp. 1375-1410

critical readers shouldn't simply accept rattner's opinion here w/o reflecting what really went on...

Posted by: stantheman21 | October 13, 2010 7:35 PM | Report abuse

I'm not horribly upset with Rattner for helping out the UAW. Its workers put years of their lives into working there, and it's a rare deal anymore when a company restructures itself WITHOUT shafting its longtime workers or looting their pensions.

What interests me is that Rattner saved the industry through tough love. He slapped everybody into line by telling them (honestly) that they screwed up, and had to clean their own house. Too bad the Obama administration did not deal with the financial industry the same way. Banking is still full of whiny screw ups who feel put upon by the government that rescued them. They should have had somebody acquaint them with reality.

Posted by: ciocia1 | October 13, 2010 8:26 PM | Report abuse

"Its workers put years of their lives into working there, and it's a rare deal anymore when a company restructures itself WITHOUT shafting its longtime workers or looting their pensions."

umm, at least in the GM case, this somewhat ignores the whole idea of cost of capital reductions through various payout waterfalls, no? (beyond PBGC insurance of course).

rewarding "longtime workers" at the cost of debtholders is bad ex ante for future business (raising the cost of credit) and bad directly for savers such as the indiana pension fund (one of the main objectors to the 363 sale). indeed, it's precisely because ch 11 allows for a somewhat certain order of payments that our bankruptcy system is so successful...

moreover, the potential wipeout/haircut of private union benefits is a check on labor pressure (lacking in public unions) and this check contains economic value in itself.

just saying "rewarding longterm workers" seems to me to be taking a naive empathetic position instead of a broader economic/legal viewpoint, but too each his/her own...

Posted by: stantheman21 | October 13, 2010 9:01 PM | Report abuse

*to

Posted by: stantheman21 | October 13, 2010 9:09 PM | Report abuse

SR: "If you were economic god, and you knew then what we know now, you would've used more monetary and fiscal stimulus earlier".

Many, many, thoughtful economists were calling for more stimulus and said at the time conditions were quite poor. This was no surprise. V.P. Biden is on the record that we got what politically would pass. So we didn't get enough to do the job, but enough to get the masses to think they tried and it failed. Ridiculous.

I really wish Mr. Klein had challenged Mr. Rattner on this point.

Posted by: LucasLazor | October 14, 2010 12:38 AM | Report abuse

The recent New York Times report (by Louise Story & Peter Lattman) regarding Steven Rattner is a useful companion to Klein's interview. The full report is available at http://www.nytimes.com/2010/10/14/business/14rattner.htm

According to the report, Rattner has accepted a multi-year ban from the security industry as partial punishment for his involvement in a pension fund kickback scam. By accepting the punishment, the report suggests that he might avoid criminal charges of perjury related to a separate charge of illegally benefiting a public official. The report concludes by mentioning the $5 million (or more) fine which Rattner will pay from his multi-hundred-million-dollar net worth.

Posted by: rmgregory | October 14, 2010 12:46 AM | Report abuse

"moreover, the potential wipeout/haircut of private union benefits is a check on labor pressure (lacking in public unions) and this check contains economic value in itself."

A "check on labor pressure" is hardly what has been needed in the last 30 years. Workers have been "checked" by the desire/ability of employers to pull up and leave and cut work forces. On the other hand, there is hardly any pressure to cut management salaries and bonuses. The "economic value" is rarely felt by consumers, and maybe sometimes by investors, but since most of the people in America get their money from their paycheck, not investments, the "value" of squeezing employees and their benefits has been a net loss for those in the lower 90% of income levels.

Posted by: ciocia1 | October 14, 2010 6:21 AM | Report abuse

Ezra, it might be time to retract your lament about how much Rattner spent in legal costs to get vetted, now that it's clear that Rattner was spending all that money on lawyers in order to avoid indictment and debarment over his corrupt dealings.

Posted by: tomtildrum | October 14, 2010 6:06 PM | Report abuse

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