General Motors’ revival under federally financed and controlled restructuring has been surprisingly successful. GM is still employing a lot of Americans, and it is building some models that are apparently good enough to hold their own in an ultra-competitive global car market. What’s more, GM’s rebirth was managed without dumping tens of billions in GM pension obligations on the taxpayers. Why it’s even likely that Uncle Sam will get back a significant chunk of its investment.
Those accomplishments are celebrated in the new book Overhaul by the “car czar,” investment banker Steven Rattner. After all, the failure of this intervention, widely predicted by those who watched GM sleepwalk through much of the last four decades, was supposed to illustrate all that is wrong with liberal policies that just can’t leave free markets well enough alone.
But in the latest issue of The New Yorker, Malcolm Gladwell takes a closer, more skeptical look at the celebration of the bailout. Rattner’s inside story, he suggests, inadvertently illustrates the yawning gap between Wall Street and Main Street, between financial capitalism and the business of making things. And it ought to add to doubts about the benefits of the government takeover of a huge, long-ailing private enterprise.
Wall Street is about transactions — facilitating asset exchanges, making markets, restructuring risk – and typically, in this fee-based biz, the faster the better. And, contrary to popular opinion (post-2008, anyway), modern financial markets can and often do generate beaucoup value. Indeed, without financial innovation, the cost of capital for all but blue chip companies would have been much higher in the post-war years and most of us would be a lot less productive. But the investment bankers’ modus operandi doesn’t always play well in the world where engineering and marketing take precedence. Gladwell captures the clash of these two cultures in Rattner’s decision to replace GM’s CEO (and veteran car guy), Rick Wagoner, after a single meeting and replace him with a telecom executive who knew about as much about the auto industry as we do.
Would Wagoner have eventually been pushed into a conventional Chapter 11 bankruptcy? Probably, though it is hard to blame him for most of what went wrong at GM. But the change in management would have reflected the perceived interests of the stakeholders, not the snap judgment of an investment banker operating on behalf of the government on a schedule partly determined by politics.
OK; there were plausible reasons in this case to vest Rattner with a lot of power. Among others, a truly ponderous restructuring of GM that required near-consensus among stockholders, creditors, unions and government bean-counters might have driven away enough customers to force the liquidation of this icon of American manufacturing. And while GM’s failure wouldn’t have created the sort of systematic risk that the failure of, say, a Citicorp or a Goldman might have, the psychological blow would have been pretty scary in the midst of the worst recession since 1937.
So, where are we left with all this? We’re not Grinches: after the fact, it’s nice to see that GM is still in business. But GM’s rise from the ashes is a problematic model for how the roll-up-your-sleeves-and-plunge culture of investment banking can put the juice back in the real economy. Nor should the apparent success of this intervention serve as a precedent in an economy that still needs to accept an occasional high-profile business failure to distinguish it from the Big Brother capitalism of a Japan or a South Korea.
(This post was also published on Forbes.com.)