General Motors sold more than $20 billion in stock yesterday, the largest IPO ever. The sale is a milestone in the US government’s takeover of GM and Chrysler. Of course, success has many parents, so there is a small debate about who and what is the cause for the, so far, success of the turnaround at GM. Steve Rattner is the private equity guy that Obama put at the head of the bailout. Rattner published his side of the story in a book that came out in September. Malcolm Gladwell, a staff writer for the New Yorker, has a review in the November 1 issue. Gladwell grudgingly concedes some credit to Rattner and his team, but then minimizes it, and ultimately takes his shots at Rattner.
Team Auto was engaged in an act of financial engineering: it used the power of the bankruptcy process to rid G.M. of some of the liabilities that had been holding it back. This was cleverly and swiftly done. It was badly needed. But, at the end of the day, cleaning up a balance sheet is cleaning up a balance sheet. Kristin Dziczek, of the Center for Automotive Research, estimates that the “new” G.M. is roughly eighty-five per cent the product of the work that Wagoner, in concert with the U.A.W., did in his eight years at the company and fifteen per cent the product of Team Auto’s efforts. That seems about right: car companies stand or fall, ultimately, on the strength of their product, and teaching a giant company how to build a quality car again is something that can’t be done on the private-equity timetable. The problem is that no private-equity manager wants to be thought of as a mere financial engineer. The mythology of the business is that the specialists who swoop in from Wall Street are not economic opportunists, buying, stripping, and selling companies in order to extract millions in fees, but architects of rebirth. Rattner wants us to think of this as his G.M. “As we drafted press statements and fact sheets,” he writes, “I would constantly force myself to write that ‘GM’ had done such and such. Just once I would have liked to write ‘we’ instead.”
I doubt that Rattner ever thought of himself as a financial engineer. I don’t recall that term being used in the book. People have been doing restructurings for more than a century. On the other hand, financial engineering is about doing the same things that have been done for centuries, but with the advantage of the greater analytic tools and market instruments now available. So let’s call it financial engineering.
My complaint is with Gladwell’s line that “at the end of the day, cleaning up a balance sheet is cleaning up a balance sheet” and with the desire to parcel credit on a competitive basis: more credit to the financial engineers means less credit to the guys designing the cars and managing operations. A company needs everyone on the team in order to succeed. No amount of financial engineering can create value where there isn’t a product or where there is an inefficient operation. But equally it is the case that a good product and efficient operation combined with a disastrous financial structure can produce failure.
Gladwell’s instinct to pierce the puffed-up mystique surrounding private equity is a good instinct. Private equity specialists should be seen less as wizards or saviors, and more as mechanics. But Gladwell carries it too far when he refers to the “mythology of the business”, implying that the reputation is entirely fabricated. Private equity restructurings can help to create value. They’re just not the only ones who deserve credit for turnarounds. The good thing about credit is that giving some to the financial engineer doesn’t mean you can’t give some to the product engineer or the systems engineer.