"The Economic Equivalent of an Atomic Bomb"

If American taxpayers hadn't spent $82 billion to save the auto industry from economic collapse, "it’s almost impossible to imagine how big the devastation would have been."
  • Transcript


Question: Why save the auto companies?

Steven Rattner:  Not to over-dramatize, but also not to mince words, it would have been the economic equivalent of an atomic bomb for the Midwest.  You would have seen a million jobs disappear almost immediately; you would have had ripple effects all through service providers and other kinds of businesses that depend on the auto sector for their income.  You would have had massive unemployment; you would have had insolvency in states.  It’s almost impossible to imagine how big the devastation would have been.

Question: Were auto unions the problem?

Steven Rattner:  The union, the UAW, was part of the problem, but it was not all of the problem.  Remember that labor is only 7% of the cost of making a car, so even if you reduce 7% to 6%, you’re not dramatically changing the profit equation.  Of course, there are the famous healthcare benefits for the retirees and other costs that come with the UAW, but the UAW was not the only problem. 

Having said that, the UAW was part of the problem. And we had very direct conversations in which we pointed out that having a system where you got overtime if you worked more than eight hours in a day, even if you work six hours a day for the rest of the week, was not where the world was at today.  Having a holiday system where at General Motors, you not only got the 4th of July off, you got the whole week of the 4th of July off, was not where the world was.  Having 300 separate job classifications at these companies so that someone who was in charge of turning one screw couldn’t turn another screw, was not where the world was.  And to its credit, the UAW understood that.  They came in not rolling over for us, not willing to do anything we said, but they understood that their contract was outmoded and needed to be revisited.

Question: Where will the auto industry be in five years?

Steven Rattner:  One of the things about automobiles that I did figure out early on, and it gave me some courage about this whole thing, was the fact that nobody’s invented a substitute for the automobile—unlike perhaps newspapers or some other things that we do every day.  Automobiles are still going to be bought and you still need to sell something like 15 million cars a year just to keep the fleet from aging.  Right now we’re selling between 11 1/2 and 12 million cars a year.  At its peak, it was 17, at it’s depth it was 9 1/2.  My point is that, car sales are certain to go back to a normalized level of 15, 16, 17 million cars a year.  So there’s going to be a vibrant car business in the United States.  The question is: "Who’s providing those cars?"  Is it the “Detroit Three” as they’re known, is it the Japanese transplants or are the cars going to be imported?  And I think we’ve put GM and Chrysler in a position where they can be competitive for that market, and I think Ford is competitive for that market.  So five years from now my prediction would be that the Detroit companies still have a very significant share of the market and are doing quite well.

Question: Should the government support the auto industry now?

Steven Rattner:  I think by and large, the market should rule.  I think government should only intervene in the private sector under extraordinary circumstances.  And the reason Rahm Emanuel and the President and Tim Giethner and Larry Summers supported our intervention a year-and-a-half ago we because the private market had failed.  There was no capital available to support these companies, even in a bankruptcy.  There was just no private financing.  And so that’s an appropriate time for government to intervene.  But it was made very clear to us by Larry Summers and others that once the restructuring was over, the government needed to get out of the way.  And I think that’s the right principle.  This country really should remain true to its market principles and I think this was an extraordinary exception to that rule.

Question: Will America get back the $82 billion from automakers?

Steven Rattner: Yes. I believe that the American people will get back the vast preponderance of the $82 billion whether they’ll get back every penny or not, nobody can know.  But without getting into the sort of the weeds on this, if you... there are various metrics that you can use to value each piece of the government’s investment in these different companies.  And when you add it all up, it gets you very close to $82 billion at the moment.  The companies are doing quite well, there are related businesses that we put money into like, GMAC, which is now called Ally, are doing quite well and I believe the government will get, if not every penny of it, very close to all of it back.

Recorded September 23, 2010
Interviewed by Victoria Brown