Authors@Google: Paul Ingrassia

>>Adam: Hello and welcome to Authors@Google New York. My name is Adam Ingrassia and I'm
here to introduce Paul Ingrassia, my dad, who is an automobile industry journalist with
25, going on what, 30 years of experience in the field. He won a Pulitzer Prize for
his coverage of the GM situation in 1993. "Situation." And won the Gerald Loeb Award
at the time. He's a regular contributor to "The Wall Street Journal," to MSNBC--CNBC--and
has appeared recently on "Meet the Press," "The Daily Show" and other fun outlets, now
including Google's Authors in New York. So, with that, Paul Ingrassia.
[applause]
>>Paul: Oh, well thank you, Adam, for that kind introduction and thanks to all you for
a chance to be here at Google, especially because I'm a shareholder, so I want to speak
quickly and get you guys back to work as soon as possible. The, just a little market test
here, since Adam mentioned "Meet the Press" and "The Daily Show," how many people here
watch "Meet the Press"? How many watch "The Daily Show"? Well, that's sort of interesting.
OK. Yeah. Good. Adam was kind enough to mention the Pulitzer Prize that I won back in 1993
when I worked for the "Wall Street Journal." What he didn't tell you is that one his younger
brothers went to junior high then; went to school the next day and told his teacher his
dad had just won the Pulitzer Surprise, so what can I say? He added about [inaudible].
In thinking about how to address a Google audience about my book, which is called "Crash
Course: The American Automobile Industry's Road from Glory to Disaster," which was published
by Random House in January, I thought this was sort of interesting because you guys are
the ultimate, or the prototypical, new economy company, right? And Detroit, Ford, General
Motors and Chrysler are the prototypical old economy companies, but when you think about
it, it's really pretty interesting. For one thing, cars today have more computers onboard;
each car that mainstream, that mainframe computers had 20 years ago. And the other thing, as
hard as it is to believe, in the mid-20th century, Detroit actually was America's Silicon
Valley; that whole area of southeastern Michigan. Flint, Michigan, Detroit, Michigan. Flint's
about 75 miles north of Detroit, down to Toledo, which made glass and over to Cleveland which
made parts and all that sort of thing. So, it's fully been a remarkable, reversal of
fortune that culminated last year. When you, this book really is built around the historic
events of 2008 and 2009 and just to put those in perspective, they were remarkable events.
In the middle of September, we had the bailout of banks at Wall Street--that's September
2008; couple months later we had the first African-American President of the United States
was elected, and then in the spring of 2009 we had the bankruptcies of General Motors
and Chrysler. So, the way I look at this is there was one historic breakthrough, right?
The President Obama's election and whether you voted for him or not, it was still a breakthrough.
And there were two breakdowns; really the breakdown on Wall Street and the sad bankruptcies
of GM and Chrysler. To put them in perspective, General Motors was really in the mid-20th
century was like Toyota, Google and Microsoft combined. I mean, they had fundamental research
there that invented the artificial heart valve and all that sort of thing. I mean, not just
cars, but a lot of amazing scientists did amazing things at the GM Technical Center.
In 1955, GM became the first company in the history of the planet to earn more than $1
billion in a single year. That doesn't sound like much. I mean, it's probably the quarterly
earnings for you guys, OK? But it just gives you a little perspective about the kind of
power these companies had. The bailout of the banks at Wall Street cost the American
taxpayers about seven or eight times as much as the bailout of Detroit. It was still about
$700 billion to about $100 billion, roughly speaking, but there's a really, a complete
difference in how these things impacted America emotionally. I mean, cars are really part
of America's psyche and America's soul. Back in the 1940s, John Steinbeck wrote a book
called "Cannery Row," and he was describing that period in the early 20th century when
the Model T ruled the roads and he said, "Most babies of the period were conceived in Model
T Fords and not a few were actually born in them." So after the war, after the Second
World War, America really changed very dramatically. Suburbs grew up; really right here in New
York with Levittown, Long Island, being one of the first. The motel industry, the national
motel chains were founded. The first one was called "Holiday Inn," founded by Kemmons Wilson
near Memphis, Tennessee. You had an interstate highway system and of course you had Ray Kroc,
in the 1950s, bought McDonald's and built it into a nationwide, now even a global, powerhouse.
So, the way I look at it in the book was social impact of the automobile really created a
sort of 4H Club, if you will; housing, highways, hamburgers and hotels. Again, banks, no one
ever wrote songs about banks and celebrated them in music and movies and anything like
that; quite the opposite with automobiles. In 1963, the Beach Boys--I'm dating myself
here, I know--the Beach Boys had a hit song called "Shut Down." "Shut Down" was not about
a bank closing, OK? It was about, anybody know? Anybody know? It was about a drag race.
When you won the drag race, you were said to be shutting down your opponent. Three years
later, Wilson Pickett sang "Mustang Sally," OK? It wasn't Mustang Sallie Mae, it was Mustang
Sally. So, there was a real message in that at what cars mean to us emotionally. And so,
in this book I really tried to answer what I consider to be the big questions about happened
in the bailouts and bankruptcies. So, first of all, why did Detroit almost collapse? Was
it inevitable? Was the bailout worth it? And what's going to happen now to this, this industry
that remains an enormous industry in our country? The reasons were simple and complex at the
same time. For decades, really from the 1920s all the way until the early, the mid-1970s,
this industry was dominated by a corporate oligopoly, which was the big three car companies
in Detroit: General Motors, Ford and Chrysler, and a labor monopoly, the United Autoworkers
Union. And they were two very powerful forces and they controlled everything. The UAW organized
every GM, Ford and Chrysler factory, so they really imposed a pattern contract on, on every,
each of those companies no matter which of the companies it was. And these, these powerful
corporations and this powerful union had enormous, unchallenged power. So basically, anytime
that there came to be a union request for more benefits or wages or whatever, the car
companies just said, "OK, we'll give it to 'em because we can pass it through to consumers.
There's not really any competition here; they gotta buy cars from us. There's nobody else
to buy for but, buy it from." The only other cars you could buy really were these little,
weird things called Beetles, you know, Volkswagen Beetles. And not many people bought those.
So, really this enormous unchallenged concentration of power was something that made billions
of dollars for the car business over decades. But in the process, the industry sowed the
seeds of its own demise.
Let me give you a brief history of the industry because this book is two books in one. It's
sort of a capsule history of the car business and the last third of the book is a blow by
blow of what happened in the White House, in Detroit and other places that produced
the bailout and the bankruptcies of these companies last year. Ford took the lead in
the industry with the Model T, developed, launched in 1908. The Model T--think of it
as the first social networking device, if you will. The, what the Model T did was, it
was an inexpensive and reliable car. It was sort of the Volkswagen Beetle, if you will,
of its day. The Model T Ford freed American farmers from rural peasantry. I mean, they
were isolated before then; all of a sudden they could go into town. There's this great
apocryphal story of a social researcher who goes out to a farmhouse, an isolated farmhouse,
and says to the woman who lives there, says, "I don't get it. You don't even have indoor
plumbing, but you have a Model T Ford sitting out in front of your house. Why is that?"
And she said, "It's pretty simple, buddy. You can't go to town in a bathtub." OK? So
that sort of explains the importance of this. In the late 1920s and '30s, Alfred Sloan,
the CEO of GM, came along with another idea. He said that cars are not just for physical
mobility, but for social mobility. So, in other words, the kind of car you own is gonna
be an expression of your status in life, your status in your community. He created this
hierarchy of brands: Chevrolet, Pontiac, Oldsmobile, Buick and if you were lucky enough and wanna
be in the elite few, you'd drive a Cadillac. And that lead to the old joke about everybody's
last ride in life is a Cadillac because they made hearses of Cadillacs , if you will. In
the 1930s and the 1940s, the UAW organized the industry. There was a series of violent
strikes; Flint, Michigan, and Detroit. But the UAW succeeded in organizing these companies.
And then came the glory years of the Corvette. The Corvette was developed in 1953. Tail fins
came along later on in that decade. Has anybody ever seen those George Jetson tail fin cars
in a museum or online somewhere? I mean, they're stunning. They're gorgeous actually. A little
impractical, but they're great. The early '60s, the Mustang came along and then muscle
cars with the Pontiac GTO and you had these crazy sort of scenes where in Chicago there
was an industrial park where the kids used to gather at night and race their GTOs and
their Chevy SS Super Sports and all that against each other. And the fire department got so
worried about it; they decided to put an end to it. They came in every night and they hosed
down the roads of this area so the kids couldn't race, so. But it was a fascinating time. It
was the peak of the American Detroit automobile industry. Then came the 1970s. Now again,
I'm gonna date myself here. I don't know how many of you were around in the '70s, but the
'70s were not a good date, a good decade for America. We had defeat Vietnam, we had Watergate,
we had two oil crises; 1973 and 1979. We had bell-bottom pants. We had "The Brady Bunch,"
we had Donny and Marie. I mean, all these terrible things were going on, right? And
they were not good for the auto industry, either. In 1970, there was a landmark 67-day
strike at General Motors. The outcome of that was a 30 percent wage increase over three
years. Hey, pretty good for the workers, right? But what they really ended up doing was pricing
themselves out of the market. Even worse, out of the 1970 strike came something called
"30 and out retirement." Thirty and out retirement meant this: that if you were a certain age
and the first age was 58 years old, and you had spent 30 years on the job at a car factory,
you could retire with full pension benefits, medical benefits for the rest of your life.
Full pension and benefits. And that was, additionally, the minimum age was 58, but a couple years
later the minimum age was completely abolished, so think about this. You started at a car
factory at 18; they hire you right out of high school, you work till age 48, you have
your 30 years in. If you lived until age 78, you could collect full pension and benefits
for longer than you actually spent working. And, by the way, medical advances were happening
all the time, so more and more people were living to that age. And all these obligations
just grew and grew over the years. They tried to put out some pretty shabby cars in those
years; the Vega and the Gremlin and the Ford Pinto. I mean, they're all infamous cars in
the history of Detroit. And the Vega was built in a factory in Lordstown, Ohio, where labor
management relationships were so hostile that there was actually deliberate sabotage going
on. One of the favorite things they would do was the workers would, when a car came
off the assembly line, they'd stick the--each car got a key in the trunk, you got a key
in the ignition and an extra key in the trunk--and that little keyhole in the trunk, they'd snap
off the top of the key so you couldn't open the trunk. I mean, it was awful. And then,
of course, people got turned off by these cars. As a result of this, the Japanese got
a toehold in America with the two oil crises in 1973 and 1979. The Japanese cars started
coming in and people bought them because they were they only fuel-efficient cars. But then,
as it turned out, they liked them because they had a lot of quality to them; they lasted.
A few years later, Honda actually decided--Honda was a pipsqueak company in Japan, like the
sixth or seventh largest car company, it was nothing--they only decided to start building
vehicles here out of desperation because they were too small to really prosper and expand
in Japan; it was dominated by Toyota. So they actually started, in 1979, building motorcycles
in Ohio; sort of a test case to see if they could get along with American workers. It
worked beautifully. The American workers, properly managed, were dedicated and productive.
So, a few years later they built a car factory and in November 1982, they started building
cars in America. And it was a landmark in the history of American business and in globalization,
by the way, because it was the first successful car, foreign car, built in America, was the
Honda Accord. A few years later, the UAW tried to organize this Honda factory, which is in
Marysville, Ohio, not far from Columbus, and the workers voted "no." And so what happened
as a result of all this. was the Big Three Oligopoly was broken by the Japanese growing
presence in America and the UAW labor monopoly was broken because all of a sudden there was
a major car factory that wasn't represented by the UAW.
So then came the '80s; sort of a decade of repentance, renewal and relapse in Detroit.
Chrysler had a brush with bankruptcy and was bailed out by the government. That was our
first government bailout, by the way. So they launched the K-cars, a new kind of vehicle
called the minivan. Adam probably doesn't remember, but we had a minivan when he was
six years old and his twin brothers were four. It was the perfect vehicle for a family with
three kids because the kids could sit apart. There was a demilitarized zone between them.
It was great. General Motors launched Saturn as an attempt to reinvent itself and to really
get along with labor. And if you read the Saturn memorandum, understanding between the
union and the company, it's pretty moving. I mean, the words are up there; you can read
them yourself. But it was a very moving ennobling document. The problem was, that as the decade
went on and they started making really record profits again in the '80s, they went astray
again because they started diversifying; they bought banks and savings and loans and computer
companies and all this kind of stuff they really didn't have any business being in.
And they also started something called the Jobs Bank. The Jobs Bank was something that
was initially had very modest goals. If you were a worker and you were laid off because
they put new robots in the plant, you would get paid anyway for up to a year, up to a
total capital of about a billion dollar outlay by the company or something like that, to
give you a chance to basically hang around until you could get another job when it opened
up when another factory opened. The problem was, within a few years, all those rules and
restrictions went away. So if you got laid off for any reason, no matter what the reason
was, the company had to pay you indefinitely for not working, OK? We'll get back to the
Jobs Bank a little bit later because it got even worse than that. So anyway, as a result
of all this, they went from record losses in the early '80s to record profits in the
early '80s, back to record losses again in the early '90s. It was really a roller coaster
ride.
And then comes the '90s, OK? And they were saved. And they were saved by something called
the SUV. The SUV became very popular in the early '90s and it was like--I'm writing a
new book about cars that helped shape the culture and the Jeep and the SUV were one
of them. And the chapter that is titled, "How to Look like You're Going Rock Climbing When
You're Really Going to Nordstrom's," OK? So, that explains the appeal of the SUV, OK? I'll
just leave it at that. The Japanese, being very logical people couldn't understand these
inscrutable Westerners that would actually buy these off-road vehicles and drive them
to the shopping mall. I mean, it was kind of nutty. At the same time, Honda had a major
kickback scheme going on inside its U.S. sales organization, where basically, if you were
a dealer and you wanted an extra allocation of cars because they couldn't produce enough
cars--the Americans wanted Hondas--you'd have to pay off the guys, the Americans, in the
senior sales ranks of Honda's U.S. sales operation. In fact, the ringleader in all this was a
man called Jim Cardiges and the Honda dealers nicknamed him "Carjesus," right, because all
he had to do was put a few dollars into the collection plate and miracles would happen.
So basically, you this second lead, the big three companies were having lots of troubles,
but the SUVs gave them a new lease on life. Record earnings, Daimler-Benz in Germany acquired
Chrysler, so all these three companies had, in 1987, they paid $30 billion, the Germans
did for Chrysler. I think 37 billion. Ford and GM had record earnings, but at the same
time this renewal of prosperity in the business sort of led to renewed pathologies, if you
will. GM and the union undermined Saturn; each for their own reasons. The union didn't
want the Saturn system in which workers were paid according to productivity and profits
and quality. They didn't want that to spread. They just, that was heresy to the UAW orthodoxy.
And GM meanwhile, didn't have enough money to develop new cars for all this division,
so theybasically let Saturn go a whole decade without getting a new product. I mean, can
you imagine going a decade around here without a new product release? Right, get it, OK,
it's death and that's what happened to Saturn.
Then comes the new millennium. Ford returned to red ink. There was a lot of infighting
at DaimlerChrysler with two sides just clashed over everything. One of the classics was the
Germans were shocked that the Chrysler people would have their corporate logo printed on
little paper cocktail napkins and people would wipe their mouths on these napkins and toss
them in the garbage. And it was desecrating the corporate logo. And the Chrysler people
thought it was normal. I mean, all these kind of crazy fights broke out. GM bet big on SUVs,
but also they decided to diversify into a new market around 2004. And guess what? As
if on cue, it was sub-prime mortgages, right? But still, SUVs were making lots and lots
of money. The problem was is that by this time they're cost structures were so bloated
that the only vehicles they were making money on were big pickup trucks and SUVs. They weren't
making money on ordinary cars. They were like a one-legged stool, and guess what happened?
2005, Hurricane Katrina hits New Orleans and the stool collapses. General Motors lost $10-1/2
billion in 2005. Let me put that in perspective. The U.S. economy was booming then, car sales
were just shy--industry wide sales--were just shy of an all-time record. The next year,
car sales were a little softer, but not much; still very close to an all-time record. So,
Ford lost 12.6 billion. At that time, Ford decided to make a radical course correction
and they brought in a new CEO who said, "Look, we're gonna get rid of brands we can't support.
We're gonna get rid of Jaguar and Land Rover," which they owned. Daimler, the Germans made
a radical course correction. They dumped Chrysler; they sold it to a New York private equity
firm here in town called Cerberus. Out in Detroit, they're nicknamed "clueless," OK,
because they had no idea what they were buying. General Motors sadly stayed the course, though.
They stuck with their CEO; they stuck with their strategy and all that right until the
bitter end. And the bitter end would be bitter, indeed.
So, here we come to 2008, the fateful year. A landmark year in the history of the automobile
business in America. I mean, someone some years from now is gonna talk about the 100th
anniversary of the founding of Google as a landmark year. But 2008 was the 100th anniversary
of both the Model T Ford and of the founding of General Motors. But in the middle of September,
Wall Street collapsed. Wall Street collapsed, Merrill Lynch was sold, Lehman Brothers went
out of business. Car sales collapsed, too. In fact, for the first nine months of that
year, car sales were running along at about 14 million annual sales pace, which is not
great, but not a disaster. Right over that weekend, car sales collapsed to a ten million
annual pace, which is a disaster. In fact, no single event-not the JFK assassination,
not the Gulf War, not anything else in America--has caused such an overnight sudden collapse in
automobile sales. So, the Big Three CEOs then decided they needed money. They flew down
to Washington in their corporate jets to ask for bailouts. I mean, where were the PR guys,
OK? I mean, how stupid was that? Ford reversed course on that. They said, "Look, we borrowed
enough money to get through this crisis. We're not gonna need government money." But General
Motors and Chrysler said, "We're gonna run out of money by the end of this year without
government help." Congress said, "No, we're not gonna put money down to sinkholes." Because
they, they had these hearings in front of Congress and the whole Jobs Bank issue came
up. What didn't come up was a really perverse extension of the Jobs Bank called Inverse
Layoffs. Anybody here know what an inverse layoff is? OK, hold on to your seat for just
a minute. An inverse layoff works just like this: in an industrial setting, in a factory
or something, layoffs are determined by seniority, right? So if a layoff comes, production cut
comes and there's a layoff, the senior people stay on the job and the junior people get
laid off. But getting 95 percent of your pay indefinitely in the Jobs Bank for being laid
off made being laid off very attractive. So, the union actually won the right for its senior
members to bump themselves into unemployment and bump the junior guys back onto the assembly
line. I mean, this is wacko. But that's what happens. So no wonder Congress said no. Bush
knows, in the waning days in office, says, "Look, I'm not gonna let this Detroit thing
collapse on my watch." He diverted enough money from the bank bailout to keep them in
business for a couple months. Said, "I'm getting out of Dodge. I'm handing this problem off
to Barack Obama." That's what happened. Obama comes in; February and March he formed an
Automotive Task Force. Most of these people had no experience with the automobile industry.
They were private equity folks here in New York, but that was actually turned out--frankly,
I was very skeptical at the beginning. It turned out to be a good thing, though, because
these people were not captive to Detroit's conventional wisdom. They had common sense.
They saw the Jobs Bank was crazy and they didn't have this ingrained knowledge of things
we can't do. There were no sacred cows. Nothing was untouchable. On April 1st, President Obama
gave a speech and Rick Wagoner, the CEO of General Motors, was replaced. He had been
CEO since 2000 and had produced $50 or $60 billion of losses on his watch. I'm not so
sure how long a CEO who did that at Google would last, but it was a long time. It was
long time for him to go, long since passed the time for him to go. On April 30th, Chrysler
filed for Chapter 11. The government brokered a deal with Fiat would get 20 percent of it.
UAW ended up owning 55 percent of the company. Interestingly enough, by the way, the UAW
didn't want to own Chrysler, control Chrysler. They wanted to be paid in cash for the money
that was owed to their retiree medical care fund. They didn't want to be paid in Chrysler
stock. I mean, they weren't nuts. They didn't know that the stock had ended up being worth
anything. They really would have rather milked the company instead of own the company. But
the government insisted on this. On June 1--there's a typo there, I'm sorry--but on June 1st,
General Motors filed for Chapter 11. Sixty-two percent and a half percent ended up being
owned by the U.S. government; another 10 to 12 percent by the Canadians. The nickname
"government motors" was born. A lot of pain in all this. Bankruptcy is an ugly thing,
folks. A lot of pain in all this. Dealers lost their franchises, workers lost their
jobs, managers lost their jobs at executives, shareholders got wiped out, bondholders took
big haircuts and of course, taxpayers paid dearly. Now some of the sacrifices might sound
sort of comical, but I mean, Chrysler retiring Vice Presidents used to get two free lease
cars every year for life. That's gone, OK? UAW members used to get free Viagra as part
of their healthcare plan; that's gone, OK? But there was a lot of real pain that went
on here as a result of this.
So what, so what are the myths of the bailout? One is that Detroit was a victim of the economic
collapse; just not true. I mean, how do explain the fact that GM and Ford and Chrysler were
losing billions in 2005 and 2006 when the economy was strong? They were victims of their
own mismanagement, frankly, and in this own perverse, longstanding warfare between the
union and management. It was pretty awful. Another myth: the collapse was inevitable.
Then how do you explain Ford and Ford's survival? They were the only Detroit car company that
didn't file for bankruptcy and the reason is, beginning in 2006, they made a radical
correction. They brought in a new CEO from outside the company, Alan Mulally from Boeing,
he replaced Bill Ford, Jr. I mean, Bill Ford, the Ford family controls 40 percent of the
voting stock at Ford. Bill Ford decided to fire himself; that's what he did. And frankly,
it took a lot of courage and humility for him to do that. He's really one of the heroes
of this book. When Alan Mulally came in, he said, "We're gonna borrow everything up to
the hill." They even mortgaged--you know, the blue orange logo that Ford has--they mortgaged
everything to raise money to finance a turnaround and it's working, by the way. And they also,
they didn't go out and need government money. They sold brands they couldn't afford to support.
They sold Jaguar, they sold Land Rover, they sold Aston Martin and the latest sale that
was just completed by the way, I think yesterday, was the sale of Volvo to a Chinese firm called
Geely Automobile.
Another myth is that President Obama overstepped his bounds in ousting Rick Wagoner as the
CEO of General Motors. Again, it's not true. I mean, look at the facts here. Any time that
a company is going into bankruptcy and gets restructured, the lenders, the people who
provide the debtor in possession financing, they call the shots. I mean, they're controlling
the company now. And any lender, any private industry lender that came in, any private
sector lender, would've insisted on new management at General Motors. Basically, the President
did exactly the same thing as any private sector lender would have done.
Another myth of the bailout: Chrysler secured creditors going on about 28 cents on the dollar
on their debt, even though their debt was supposedly secured. Secured means you get
paid off at the top of the line; 100 cents on the dollar in the event of a corporate
collapse. But the truth is these guys got more money, far more money in the settlement
that the government took to the bankruptcy courts than they would've gotten if Chrysler
had simply liquidated. They would've gotten virtually nothing if Chrysler had been liquidated.
The fact the government helped reorganize Chrysler gave them about 28 cents on the dollar,
which is far better than they would have done. And don't forget, bankruptcy judges in the
U.S. Supreme Court approved this settlement. So, obviously it conformed to American rule
of law.
And finally, another myth of the bailout is that UAW won and again, they didn't want control
of Chrysler, they wanted hard cold cash. The government forced them to take control of
Chrysler for their healthcare fund. So, I think there's a lot of myths that need to
be cleared up about this whole situation.
Now for the big question. Will it work? Look, frankly, a year later it's working better
than anybody ever expected. Ford is now profitable; GM and Chrysler are now modestly profitable,
right around break even. GM is gonna do an IPO probably later this year and the government
will be able to sell some of its shares at initial public stock offerings and that'll
allow the taxpayers to begin getting repaid. The GM IPO and the Chrysler IPO are gonna
be classic, by the way. And do you know what this means? This means the Wall Street banks
that went broke are gonna take public the car companies that went broke. Is this a great
country, or what? So, but that's gonna happen and that'll be the beginning of us getting
repaid; we taxpayers. And it's our money. And you guys work pretty hard; so do I. I
mean, I don't want my money going to people who can't manage a business right.
The future structure of this industry, there's not gonna be a Big Three anymore. There's
gonna be a Medium Six. I mean, Ford, GM, Toyota, Honda, Nissan, maybe Fiat-Chrysler, maybe
Hyundai or even Volkswagen; they all have between 10 and 20 percent of the U.S. market,
unlike the glory days of the auto industry in the '50s and '60s when GM had more than
half the market and everybody else divided the rest. Those days are gone.
This is a story, I think, filled with lessons and if I can maybe be a little provocative:
you guys are one of the greatest companies on Earth, but so was General Motors a half
a century ago. And you saw what arrogance and hubris did to GM and to Chrysler and almost
did to Ford. And arrogance and hubris, by the way, do not know industry bounds; they
do not know national bounds. I mean, the latest company that fell victim to it--well, a couple
companies really--Toyota, all those, the quality began to deteriorate really about five or
six years ago before all these, this uproar happened over sudden acceleration. So, it's
just a good lesson in human behavior, really, to be wary of. The other thing is, look, I'm
gonna make a confession here, I'm a Republican, I'm a free market guy. I didn't vote for Obama.
I think he did the right thing on this. I think if he would have let General Motors
and Ford simply collapse in the middle of the economic crisis last year, the, I don't
think we'd be seeing the bottom yet of the recession. Just think of all car dealers across
the country would have gone out of business, advertising agencies here in New York, the
accountants that deal with the car dealers and the ad agencies and the doctors that provide
healthcare to all these people who were employed by the dealers and the accountants and all
this sort of stuff. The ripple effects would have been just catastrophic. So, the bone
of battle, I'm a conservative guy, but I'm a journalist first and really gotta keep your
mind open when you're going to look into a situation. And the President and his people
did the right thing here. That being said, here's what worries me. I mean, we're a country
that is running unsustainable federal deficits; a trillion dollars or more in the last couple
years. America came in and bailed out Detroit, so the worry in the future is look, if we
keep relying on the Chinese government to buy U.S. debt that, because we're running
deficits, because we're spending more than our means, I'm not sure that there's anybody
in the future that's going to step up and bail out America. That's a good lesson to
keep in mind, too, if you will. So, with that, I just want to say thanks for being a great
audience and I'll be glad to duck or answer any questions if I can.
[applause]
Yes, sir.
>>audience male #1: How are you going to tell the workers still in charge of [inaudible]
Jobs Bank [inaudible]?
>>Paul: Good question. The Jobs Bank was abolished. The [inaudible] of Automotive Task Force imposed
some severe conditions, reforms, I'd call them reforms, on the union company relationships.
And one of those reforms is the Jobs Bank is abolished; end of story, it's gone. They
also insisted on abolishing most of the very restrictive and [further abating] work rules
that the companies had with their unions. For example, there were hundreds and hundreds
of different job classifications that said, "Well, if a machine breaks down, OK? I'm Paul
and I'm standing right next to the machine and I know how to fix it, but wait a minute.
It's not listed as my job responsibility to fix it. That's Suzie's job responsibility
and she's on her lunch hour, OK? And she's on, or on break. She'll be here in a half
hour so you gotta wait for her for the machine to get fixed." So the whole darn factory shuts
down for a half hour. All that stuff, most of that stuff, is gone. So the task force
did insist on that. There's a no-strike provision imposed on both General Motors and Chrysler
until 2015, so the UAW can't strike those two companies. That's what the union had to
agree to as a condition, as the government's condition, for getting government funds. One
of the more fascinating things in my research for this book, if you will, Kay Clugston here
is a native of Detroit, so she'll relate to this; I went to, spent a lot of time in Detroit.
I went to the Walter Reuther Labor Library on the campus of Wayne State University. Walter
Reuther was the legendary president of the UAW in the '50s and the '60s. And in the third
floor of that Labor Library, on the back at the archives, on the back shelf there's a
copy of every UAW contract between the 1940s and today. And decades ago, those contracts
were like little pamphlets, right? Now, they're bigger than phonebooks with rules and regulations
and this's and that's; 16 pages on seniority alone. I mean, it would be impossible for
anyone to manage under into those conditions. A lot of that stuff was stripped away as a
condition of these companies getting government aid.
Yeah, I'm sorry, yes.
>>audience male #2: Hi. I was just wondering what your thoughts were on, as GMsort of comes
back? There's a recent story of them buying, I think, AmeriCreditÉ
>>Paul: Yep.
>>audience male #2: É and focusing on subprime loans again.
>>Paul: Right. A little worrisome, isn't it?
[Paul laughs]
Yeah, exactly. Good question. The answer to that question is, look, I think you have to
let them manage the business. I think that subprime lending has always been a part of
the automobile financing. A lot of people with subprime credit buy cars. Now, the trick
is you gotta price for it correctly and you gotta be, you can't just pass out money to
everyone so it really depends on how well they manage this business once they get a
hold of it. But, as part of their restructuring, actually, the old General Motors, before they
went into bankruptcy, sold off control of GM--it was then called GMAC, which was its
credit arm, the one that went into subprime housing lending and so that's now known as
Allied Bank. And Allied Bank is regaining profitability. They just reported earnings
this morning, when I was taking the train in as a matter of fact, but they haven't repaid
us taxpayers, either, OK? So, I think that the new General Motors is making some smart
moves. One of the most interesting things to me is that of the top 15 executives, only
one of them is in the same job there and even still with the company as is, as was before
the bankruptcy. And half of the top 15 people are now under the age of 50, which, by the
way, makes them older than the average Cadillac and Buick driver, but that's another problem.
So, guardedly they're doing well; they're not out of the woods yet, though. Yes, sir.
>>audience male #3: Hi. If I understand your thesis, it was basically that this didn't
have to happen and they said it did to GM and Chrysler; it was because of bad decisions
and bad manager made at a very upper level.
>>Paul: Right.
>>audience male #3: Now, the traditional thought on that is that this is not supposed to happen
because the owners, i.e., the stock market, the investors, are going to manage the managers.
That they're going to fire underperforming bad managers, especially if they underperform
and lose billions over a period of multiple years. Clearly, this didn't happen here. What's
supposed to be the check on this process failed. Is there something unusual about these two
companies or is the conventional wisdom that we can rely on the stock market and stockowners
to manage the top-level executives flawed? And if so, are we; is every other large company
over a large period of time potentially at risk for this sort of problem?
>>Paul: You know, that is a great question and the answer to all those sub questions
is yes. I mean, I'm a student of corporate governance. I must say that this topic is
about as exciting as dental floss, right? But it's critical because it's how organizations
like Google and Microsoft and GM and IBM are run. And unfortunately, what has been a consistent
problem in American boardrooms is that the directors who are supposed to represent the
shareholders frankly fall in the position of becoming defenders of management at all
costs because they're all buddies and the CEO put you on the board and all that sort
of thing, as opposed to really insisting on corporate performance. Is it better than it
used to be? Yeah, but there's been some big slip-ups. I am shocked, by the way, shocked,
that the members of the General Motors board of directors who presided over this demise--I
mean, the company ran out of cash--I'm shocked that they haven't been sued. OK? There's gotta
be some lawyer out there somewhere who probably wanted to do this, but American law gives
great judgment, gives directors great latitude in their judgment. It's something called the
"business judgment rule." It's hard to win those suits, which probably explains it. Here's
the other fascinating thing. I pointed out the difference between Ford and General Motors,
right? Ford's corporate governance system on paper is a disaster. The Ford family has
about two or three percent of the stock, they control 40 percent of the votes. Their elections
are about as democratic as elections in North Korea. I don't think anybody calls Bill Ford,
Jr. ,"Dear Leader," but it's the same idea, right? OK? But, you had a group of people
with a significant financial and emotional stake in the company that came together and
made tough decisions in the nick of time and saved that company. In General Motors, nobody
on that board has any significant financial or emotional investment in that company and
they just let it go down the tubes and it's terrible. And at General Motors, the people
should be ashamed of themselves, absolutely ashamed at themselves. Yes, sir.
>>audience male #4: Hi. I'm wondering how much political activity GM and Chrysler are
still engaging in and whether you think it's a problem that they would use taxpayer money
for political lobbying?
>>Paul: Well, it's a good question. I have a problem with the whole lobbying system anyway.
I mean, buying influence, if you will. But nonetheless, people have the right and organizations
have the right to petition their government. If the UAW can do it, why can't companies
do it? There are certain ethical lines you certainly don't want to draw. I think, by
and large, they are staying away from overt political activity, but of course they're
owned, General Motors is owned by the government. So they, I will say this though, the government,
as far as I know, is really staying out of the daily management of these companies. Now
that doesn't mean like when AmeriCredit was purchased a few days ago, there's a "no surprises"
rule and GM gave the Treasury Department a heads-up, said we're gonna do it, and the
Treasury said it's your call and that sort of thing. So, you gotta let these people run
their business. Do you remember about a month ago when that Tiger pitcher threw that almost-perfect
game out in Detroit and got robbed by the bad call by the ump and the ump with a lot
of class came, said, "I made a mistake."? GM gave that pitcher a Corvette and there
were people around the country who said, "You know it's terrible using our tax dollars to
give away the Corvette. I mean, that's ridiculous." I'm sorry, it was great marketing. It was
a brilliant marketing move. You gotta let them run the business. Yes.
>>audience male #5: So, you liked the bailout--
>>Paul: I didn't say I liked it, I'd say it's, I mean, my analogy, frankly, it's like changing
a diaper. There's some dirty jobs that you just gotta do.
>>audience male #6: Yeah, but I sort of worry, I mean, first of all, I know you say this
is all bad management, but the history of industry is an awful lot of them go downhill.
Let's look at the companies that were in the Dow Jones Industrial Average when they started,
there were people like National Leathery that no one's ever heard of for decades and the
reason I am asking is I'm sort of worried someone at the FDC floated a proposal recently
that, "Well, we should save the newspaper business by putting a $5 a month fee or tax,
that you choose to call it, on all internet service or maybe on all mobile phone service.
And I'm looking at this saying, "Yeah, I've got an emotional attachment to the "New York
Times.'" I've read it every day for 50 years, but is this really the way we want the economy
to work that we're always putting our money into old industries rather than new ones?
>>Paul: That's a great question and the answer is I think it would be a disaster for newspapers
to get tax subsidies of any form. The real danger here is that we take this emergency
action that, again, in my judgment and in the judgment of a lot of other people, was
necessary to prevent an economic crisis from becoming an economic collapse in the country.
And we set all kinds of bad precedents there and it's up to the American people to resist
that kind of nonsense, frankly. Governments shouldn't be picking winners and losers. I
have less of an emotional attachment to the "New York Times" having worked for the "Wall
Street Journal," but--
[laughter]
my brother, Adam's uncle, is one of the senior editors at "The Times," so it makes for some
really interesting Thanksgiving dinner conversations.
[Paul laughs]
>>audience male #7: Keeping that the UAWs perverse set of incentives were a good chunk
of what got things down and it seemed to me that making them take a big chunk of Chrysler
was a good idea, why didn't they get a big chunk of GM, too, so that they would have,
their incentives would be better aligned there as well?
>>Paul: They do have a big chunk of GM; it's just not as big. They have, I think, about
20 percent of General Motors. It's just not as big and basically, because GM was so much
bigger that the value of what GM owed the union for its pension fund for such a large
company wasn't nearly as much of the company as it was for Chrysler. So, it's really a
mathematical equation if you boil down to it. Good question, though.
>>audience male #8: You said you were a free market guy and I was wondering what your view
was for the Cash for Clunkers program, whether you think it was as big a success as it was
being touted?
>>Paul: I think it was a disaster. It was overreach. I can think of a story, one of
my neighbors down in Florida, where I live in the winter, he took advantage of a loophole
in this program to get a new golf cart on Cash for Clunkers. He doesn't know whether
to be embarrassed about it or proud of it, to be honest with you. No, it was overreach.
I think the danger in all these sort of things is you don't know where to stop and that was
a bad thing to do.
>>audience male #9: You touched on it briefly before, but the '80s bailout of Chrysler É
>>Paul: Yep.
>>audience male #10: É would you say that worked out well? Was that a good idea if you
were Ronald Reagan in 1982 or whatever? Or not a fan? Or É
>>Paul: It's a great question, the 1980 bailout of Chrysler, it was actually started under
the Carter Administration and then when Reagan won the White House, he basically was, had
to figure out, "Hey, do we continue on this road or not?" And they decided to do it. Again,
strict conditions were imposed on Chrysler. Here's the remarkable thing about that. The
U.S. taxpayers actually made money on that deal. We made, we as a nation, made about
$400 million on that Chrysler bailout and the reason is, is at that time, the government
got--the government, in that case, did not provide any direct loans to Chrysler provided
guarantees of loans made by private banks and private lenders. But in return for those
guarantees, the government got warrants to buy Chrysler stock. When the K car came out,
Plymouth, Aries, Dodge, Reliant and then the minivans came out, Chrysler stock went from
like, two to sixty. Sort of like Google, you know? In the early days at least. Let's hope
again. But the government made a lot of money on those warrants. Actually, one of the most
outrageous things though, was that Lee Iacocca, the CEO of Chrysler, thought the government
was making obscene profits on Chrysler stock, even though the government had saved the company,
so he called the Secretary of the Treasury and said, "You ought to not exercise those
warrants. You outta just let them lapse." They got in a shouting match and said some
words that I can't say on TV, even Google internal TV, but anyway, we made money on
that deal.
>>audience male #11: A question I always had about the financial bailouts, I think it applies
to the cars as well as--is there anything that can be done to make sure we don't get
in a position where the government has to bailout? I also agree that maybe it was the
right thing to do, but what can be done to just put rules in place now so that this situation
could never arise again?
>>Paul: That's another great question, but the problem is, I don't think they even, there's
no guarantees in life, OK? There's no guarantee that I'm gonna walk out and get home safely.
I think that what you have to do, what they had done is--you've heard the term probably
if you've read it somewhere, called "moral hazard," and that, basically, is when you
bailout people from their own reckless behavior, they'll just do it over and over again and
you encourage that. I think what the government did right here, even though there was a bailout,
was a lot of pain inflicted by these people on everyone involved. I mean, dealers lost
franchises, workers lost jobs; one of the workers in my book is a really nice guy out
in Belvedere, Illinois, a town near Rockford. Previously, he would've gone to the Jobs Bank
and gotten paid indefinitely. When that was abolished, he left the company, got a buyout
and he's really struggling. He's out of money and things are going tough. I went onto his
Facebook page the other day and it was very poignant. He said, "So why does the bottom
have to be so far down?" So, I think the answer to your question is we can never prevent it
from happening again, but we can make it so painful that we can encourage people to act
responsibly. In the end, to have everyone act responsibly all the time is a pretty tough
order.
[Paul laughs]
>>audience male #12: One of the questions I have wasn't in the list of the reasons for
the failure, but I've heard on a previous book written on a similar topic, and I don't
know how far that's true, that at Ford at some point in the past they decided they wanted
to make a new car and they got together in a room and they decided what they wanted to
do and looked around and they found that there was no engineer there. Everybody had an MBA,
but they couldn't ask technical questions. My question is, I mean, is, do you think that
a lack of focus on the actual engineering of the cars was also one of the reasons for
the failures, besides the other things?
>>Paul: Yeah, I do. Over a period of time, basically, the Detroit companies came to be
dominated by MBAs and marketing types and especially by financial types and technological
expertise as an advancement really--the whole idea was you can sell the sizzle, the styling
and the tail fins and all that kind of stuff, but what the Japanese came in with, they made
these wonderful, little cars that had engines that were, they had, they hummed like sewing
machines. They were precision instruments. And I do think the demise of our engineering
expertise or the lack of status, I mean, look, Google's a great company, but I think the
engineers here have status and clout, right? I mean, gosh, they run the company. And maybe
that's the way it should have been in Detroit for a long time. As a matter of fact, Adam
Mulally of Ford is an engineer. Yes, sir.
>>audience male #13: I just wanna ask how much do you think the future success of companies
depends on alternative fuels? And investing in hybrids and all that?
>>Paul: Yeah, I think in the long term it will. How long does it take to get there?
How long does it take for us to get to alternative fuels? I think the Chevy Volt, there was an
article in the "New York Times" that said, "Hey, this thing is probably gonna be a disaster
because it's overpriced and it requires tax credits of $7,500 to get it down to the mid-$30,000
range and it's still not gonna do much more than a Prius will do." But I think a hybrid,
I'm very skeptical about all electric cars. I mean, I wouldn't buy one; I'm afraid it's
gonna run out of juice at the wrong time. Gas-electric hybrids are different. They have
a real future and they're gonna get, there's gonna be more and more of those. The price
is gonna come down. Tesla's doing some interesting stuff out in Silicon Valley, but those are,
let's face it, that's a $100,000 electric hot rods. I mean, not many people are gonna
buy those. One of the GM factories that was closed as a result of the bankruptcy and restructuring
is down in Delaware and that's been sold to Fiskar, which is doing high-tech hybrid sports
cars. So, these things are really on the agenda and it really all depends on the price of
gasoline. I think that the government really wanted--look, there's only three times in
the history of the U.S. car industry that people have moved from big cars to smaller
ones. 1973, the first Arab oil embargo; 1979, the Iranian oil crisis; in 2008, when oil
went $170 a barrel or whatever, people respond to market incentives. So if the government
really wanted to do this right, what they would do was raise gasoline taxes; and by
the way, simultaneously, cut income taxes, so you'd be taxing consumption, and you'd
be reducing taxes on production. But that's just politically unpopular. They're not gonna
do it.
>>audience male #14: One problem that looks to be for my father worked as an engineer
at Ford was that the line workers are not listened to. I mean, if you read the articles
about Toyota, Toyota plants, they make about two thousand changes a year based on line
worker things. My dad, from talking to line workers, he said that people said they quit
making suggestions because they were ignored because the management said that you guys
are a bunch of morons and we know all. Is that being fixed?
>>Paul: It's better than it used to be. Is it as good as it needs to be? No. Now, it's
fascinating. When, I remember when Honda, I mentioned in my presentation here that when
Honda opened its factory in 1982, and people like me, journalists trouped down there and
said, "Where's the magic bullet? This thing is working. Where's all the robots and the
gizmos?" And there were no robots and gizmos; I mean, there were a few, but that wasn't
it. The secret was that the Japanese figured out how to use the brains of these people
as well as their bodies, OK? And this, again, back in history, this clash between the UAW
and the managements of these companies, more in the 1930s and '40s, and the violent strikes
that gave birth to the UAW and all that, a lot of that has never went away. I remember
when I was out in Detroit, GM asked me to visit some of their factories and I went up
to one engine factory in Buffalo, New York, just outside Buffalo called Tonawanda, and
I got this great two-hour dog-and-pony show about everybody's getting along well and we're
all doing great and then I said--I was gonna get a plane back to Detroit--and I said, "Look,
before I head to the airport, I gotta go to the boy's room. Can you show me where it is?"
So I walk around the corner and there's the salary men's restroom and hourly men's restroom
[laughter] right next to each other. That said it all. What can I say? It's in the book,
by the way. Yes, sir.
>>audience male #15: So a couple weeks ago, we had the author of the "War of the Wall
Street Journal" come in and I was wondering, given your extensive experience or if you
had any comment on the fate of Dow Jones and the "Wall Street Journal" and possibly also,
how the fate of that family-owned company compares with the fate of Ford, which seems
to be doing much better and is also family owned.
>>Paul: Yeah, that's a good question. I mean, look, I worked there 31 years and left at
the end of 2007. I think the acquisition really had to happen. I think what happened there
is that the company was a small company; it wasn't big enough to survive in this multi-media
world. Everybody knows what's happened in the news and especially the newspaper business.
It's like a lot of companies that was sort of a master of its world in one environment;
it really never was able to master this new high-tech world of the news business. The
family brought in new leadership in the last couple years to try to try to change it, but
unlike the Ford's, they got the wrong guy instead of the right guy. It's pretty simple.
There was no assurance, by the way, that Alan Mulally was gonna work out. The difference
was that Rupert Murdoch came along and said the stock's at 35 and I'll pay you 60. For
me that was a pretty good deal, to be honest with you. That's why I can write books instead
of go to an office every day. But I think it had to happen. The paper, I can't say it's
better or worse now. It's certainly not a business newspaper anymore; it's much more
of a general interest newspaper. Rupert Murdoch said from the beginning he wanted to make
it a direct competitive for the "New York Times" and so he's doing it. And how well
is that gonna, what's that gonna do? Will that expand its appeal or will that turn off
the loyal people who really want a business-focused newspaper? Will it create a new opportunity
for the "Financial Times," which remains a business-focused newspaper? All those questions
are yet to be answered, so we'll see.
>>audience male #16: I have two quick follow-up questions. One is--
>>Paul: I like your shirt, by the way,
>>audience male #16: Oh, thank you. I didn't plan this. I, my wife's from Detroit and we
go there often.
>>Paul: Oh, great.
>>audience male #16: Yeah, there's no rush hour in Detroit anymore, by the way.
>>Paul: Yeah, sadly, yeah.
>>audience member #16: Yeah. One is, I wonder if, there's a wonderful book on what it's
like to work on the line, "Rivethead" by Ben Hamper.
>>Paul: Right.
>>audience male#16: Do, do you know him? Have you--
>>Paul: I don't know him, but it's a great book.
>>audience male#16: Yeah.
>>Paul: Yeah.
>>audience male #16: And the other is that if you could just comment on the phenomenon
of peak oil, which seems to be pretty much going along as predicted.
>>Paul: Sorry.
>>audience male#16: Peak oil: the world oil production is getting set to, maybe has, nosed
over.
>>Paul: Oh, that's right. Yeah, I'm not an oil expert, but I do know that, look, I mean,
again it's, the marketplace responds to economic messages, right? So, I mean, there's oil,
I think there's lots of oil out there. The question is how much does it cost to produce
it? I mean, how much does it take to all those tar sands up in Canada? Can you dig up all
that oil containing sand and squeeze, like a big ringer, squeeze the oil out of it and
all that? But it's a high--that's a lot more expensive than it is to pumping oil out of
Oklahoma or Saudi Arabia, so that's why I think that over time, hybrids will, hybrids
and other less oil-dependant vehicles will be important, but it's gonna awhile because
right now the cost is still, the advantage is still going to the Shell station.
>>Kay: Thank you for coming today. We really appreciate it.
>>Paul: Oh, well, thank you, Kay. A lot of fun. Good questions.
[applause]