If you want to know why President Obama fired Rick Wagoner from General Motors, first you should know that it wasn’t because he’s trying to expropriate the business, or inject the government into the process of fixing the largest American carmaker, even though those are the fears that rattled Wall Street instantly after the announcement. No, he fired Rick Wagoner for one reason—because Wagoner’s no Alan Mulally, the man who is about to make Ford into the country’s most important and, ultimately, profitable carmaker. Obama fired the lifetime GM-serving Wagoner, who had run GM into the ground for the last nine years as CEO, because the guy across the street from Wagoner, an outsider who had turned around Boeing earlier in the century, had done everything right while Wagoner did everything wrong. Consider this Gallant-and-Goofus litany:
Back in 2006, when money could still be raised for a potential downturn in the economy, Mulally borrowed $23.4 billion; he saw the hard times coming. Wagoner just went along for the same ride that the insular people running GM have been on for years. This despite a balance sheet saddled with debt that seemed to get weaker by the day. Clearly, Wagoner was banking on the idea that GM was too big to fail and the government would rescue him and his company before bankruptcy was a question.
When higher gasoline prices took a toll on the industry, Ford had a variety of smaller, better, and more-efficient-fuel-burning cars ready, while GM lagged in those forward-looking models.
When labor and debt costs continued to spiral upward as sales plunged, Ford forced its union workers to take big concessions and bought back a huge percentage of its bonds at prices that, while not making the debt holders anywhere near whole, kept them from threatening bankruptcy or to take over the company. Wagoner offered halfhearted buyout attempts for labor and underwhelming offers for underwater bondholders.
Mulally, the outsider, did the unthinkable when it comes to the auto industry. He delivered, even as the demand for vehicles in this country has basically been cut in half in two years. Wagoner apparently just figured things had to get better or the government would throw money at him, so what was the point of proactively reconfiguring the company?
Mulally drove Ford into solvency; Wagoner drove GM to the brink of bankruptcy. So when it came time to ask for federal funds, Mulally said, “No, thank you,” and Wagoner said, “Give us everything you can.” There couldn’t have been a more stark contrast.
After an initial blanching by Wall Street about a presidential power grab, investors and traders recognized the next day that Obama had performed a huge service to GM, and the country, by axing Wagoner. Obama and Treasury Secretary Tim Geithner may have taken a beating for their handling of AIG, but this time they got it right. It was better to shoot Wagoner first and put bankruptcy, once considered unthinkable, right on the table. No more throwing good money after bad management and incompetent boards. GM failed to deliver as a public company, so it was time for the government to take the company from management’s hands. As a safety measure, the Feds guaranteed the warranties for new cars to keep buyers from shunning the brand and put in a caretaker CEO, Fritz Henderson, while the bankruptcy process is sorted out.
The plan was covered with the fingerprints of Steven Rattner, the former investment banker currently running the auto-industry task force for Obama from the Treasury Department. As Rattner said not long after taking the position, “What I bring to this is the advantage of no preconceived notions. I don’t come with an embedded view.” In other words, like Mulally, Rattner’s not from Detroit and doesn’t regard GM, Ford, and their tiny sister, Chrysler, as one big happy family to be nurtured by the government. In the world of a perfectly cutthroat banker like Rattner, what’s good for GM may be bad for the United States, a reversal of 60 years of dogma. Rattner could see that Mulally had gotten it right, that GM had gotten it wrong, and that an also-ran Chrysler, disappearing before his eyes and no longer of consequence, could be left to fail (a fate the Fiat deal may forestall but won’t avert). Rattner saw that GM, unlike AIG, would not bring down the Western financial world if it paid the ultimate price and reorganized under Chapter 11. As someone who excelled in banking, not manufacturing, he had clean hands and no allegiances to any of the car companies. He viewed them as businesses, not wards of the state. Rattner and Geithner also used the plan to send a message to other companies seeking bailouts: If you want government money, you have to accept government demands, even if it means accepting bankruptcy as a way to improve your company’s fortunes.
While it looks on the surface as if the situation with GM is out of control, with bondholders and the UAW worried about how the plan will be executed, the government actually has an incredibly strong hand. With Wagoner gone and bankruptcy looming, the Obama administration has far greater control over what happens next. Instead of forking over the $17 billion GM desperately needs to stay alive through the end of the year and hoping for the best, or allowing the company to go under and trigger another economic shock wave, the administration is now in a position to exert considerable leverage over how GM is restructured. Put simply, the U.S. can save GM the way it wants to save GM and ensure a safe, soft landing.
How, exactly, will Rattner proceed? Let’s consider the constituencies: the U.S., which is already on the hook for $13 billion and likely another $17 billion around the corner; the bondholders, who are owed about $40 billion; the workers, who can claim $20 billion in liabilities; and the lowly common-stock holders, with about $1 billion left to hold on to. Given those players’ relative positions, you might think it’s obvious who will come out ahead. The government will want to recover the taxpayers’ investment as quickly as possible, and bondholders will get a sweetheart deal.
But remember that GM is a giant employment and health-care machine, so in this case, policy might trump profits. If the government were to let the bondholders have their way, they would seize the company, break the onerous contracts, fire scads of workers, reduce GM to a small but profitable carmaker the size of a Honda or a Nissan, and perhaps ship most of the parts-building to Mexico, keeping only a GM assembly presence Stateside for appearances’ sake. Even as that plan rapidly gets the money back to the government (and makes the bondholders as whole as they’re apt to be), it would be a total disaster for the administration, which knows that a near wipeout of GM will cause about a million jobs to vanish, including hundreds of thousands in two of the states that already have more than 10 percent unemployment, Michigan and California. For the administration, it is far better to keep GM alive as a giant Works Progress–style automaker, producing cars that might not sell especially well but employing armies of workers, until things get better. Obama knows that if the nation goes above 10 percent unemployment, a whole new round of foreclosures and credit-card and auto-loan defaults will occur, jeopardizing any nascent recovery. GM must be preserved as a big employer at the expense of both management and debt holders.
Viewed in that light, Rattner is especially well suited for the job. As an auto-industry outsider, he can convey the swagger of a new sheriff in town—“Hey, we fired Wagoner. We are tough guys!” As a banker, he can go to the bondholders and say, “Listen, you vultures, you aren’t going to get this company. The U.S. government is going to control this bankruptcy. We can declare the next $17 billion we give the company as a first mortgage, senior to your claims, force you down to some junior-status bonds, and, if you really play hardball, we will make you take some lowly, worthless common-stock position and then have you share it with labor.” Or, Rattner will say to the shareholders, you can play ball and take some sort of government-guaranteed piece of paper that’s worth less than what the Ford holders got, but that sure beats the alternatives, and get them out of the way, permanently improving GM’s balance sheet, without workers taking much of a hit at all.
In fact, under the plan I see Rattner offering, the current common stock would be wiped out or massively diluted, and the workers would be given that equity, in exchange for moderate work reforms and cheaper, less-generous health care. That’s right, it’s possible that the workers will own GM. Obama would be rewarding the most important portion of the coalition that elected him, the unions. He would also be sending a strong message to executives around the country: Align your companies with labor, or you might end up working for it.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. E-mail: [email protected]. To discuss or read previous columns, go to James J. Cramer’s page at nymag.com/cramer. Get all of James J. Cramer’s stock picks via e-mail, before he makes the trades, by subscribing to Action Alert Plus. A two-week trial subscription is available at thestreet.com/aaplus.