In a question-and-answer interview with Christina Rogers of The Wall Street Journal on Tuesday, Steven Rattner discussed how to apply the lessons learned from the financial crisis rescue operations to the current challenges.
Steven Rattner on Coronavirus Stimulus: ‘Better to Go Too Quickly and Too Heavily’
Architect of financial-crisis autos bailout discusses moves government should make, missteps to avoid in current crisis
Originally published in the The Wall Street Journal
By Christina Rogers
Steven Rattner is a longtime Wall Street financier who served as the Obama administration’s “car czar” during the financial crisis. A former investment banker, Mr. Rattner was the chief architect of the General Motors Co. and Chrysler bailouts at that time. He also led the president’s auto task force, where he was charged with restructuring the car industry.
Mr. Rattner is now chairman and CEO of Willett Advisors LLC, which invests former New York Mayor Michael Bloomberg’s personal and philanthropic assets. The Wall Street Journal spoke with him about the current coronavirus crisis, the federal aid packages under consideration and the lessons learned from the 2007-09 recession at the end of the last decade. Here are highlights, edited for clarity.
For business, how does this crisis differ from the last recession?
We’ve never had a public health crisis of this magnitude. We’ve never had an economic downturn that was this quick and this vicious, that seems to reach into virtually every corner of our economy. The 2008-2009 crisis certainly hurt many companies and many industries, but it was heavily centered on the financial sector, on housing and on autos.
Are there similarities?
We should be able to use many of the lessons learned in 2008–-2009 to mitigate the effects of this. So for example, the Federal Reserve has already launched a number of liquidity programs, very similar if not identical to ones that were developed in 2008 and 2009.
The legislation that Congress is hopefully on the verge of passing draws heavily on some of the ideas also developed in the last recession, for how to provide liquidity and support for companies in trouble. What we learned in the Great Recession was that, as distasteful as it may be, we need to keep the business sector functioning when private markets are unable to do so.
What mistakes do we want to avoid repeating?
It is better to go too quickly and too heavily than to go too slowly and too tentatively. And in retrospect, in 2008 we were a bit late to the party.
The second lesson we should take away: While saving businesses is critical to our economy, we have to recognize the public backlash that occurred to the so-called bailouts in the Great Recession. And so this time, you will see more conditionality around things like stock buybacks, executive compensation, retention of employees and so forth. That may or may not be exactly the right policy, but it is a political requirement in the current climate.
For the federal aid going specifically to businesses, what should those deals look like?
I’m not happy with the idea of creating special assistance for the airlines. I don’t see why they should be treated differently than any other industry, where many companies have had similarly difficult problems. Beyond that, the most important priority here is to make sure the taxpayer money is loaned or invested prudently and commercially.
There needs to be caretaking that we’re not throwing money down a rat hole, so to speak, into companies that just aren’t going to make it, for whatever set of reasons. For companies that are going to make it, the government should act like a private-sector lender, which is what we did in the auto situation.
It should evaluate the companies for their credit quality, and it should make loans on commercial terms. If a company doesn’t have sufficient collateral or security to offer, the government should consider taking equity. Not taking over companies, or exercising control over companies, but being compensated like a private-sector lender would.
In the last recession, the government actually made a profit on diverse balance and rescue plans. The ultimate goal here should be to do the same.
What kinds of strings should be attached to such packages?
As a matter of both fairness and political reality, there have to be conditions around things like executive pay, stock buybacks, dividend increases and so forth. There shouldn’t be conditions around specific kinds of operating decisions like, for example, the idea that airlines should be required to maintain service to certain cities. That said, there is no question there has to be some provisions around maintaining the workforce.
There already is a long line of companies and industries requesting assistance. How should the government prioritize and ensure it is a fair process?
Deciding who to help and who not to help are really tough decisions. We made a decision to save the major auto companies and the finance companies. But we concluded we could not save every supplier that was out there.
The best that can be done here is to put some set of guardrails around how this money gets allocated. Those will have to be more in the nature of principles than very specific rules, because it’s just not practical for Congress to in effect try to decide exactly where this money goes. It has to be in the hands of executive-branch personnel who have the freedom to move without going to the floor of two chambers of Congress to get a vote.
How bad do you think the economic fallout will be from this crisis, and how long might it last?
The honest answer is nobody knows. There is no precedent in our economic history for an event like this.
That said, the second quarter of this year, we will have a recession that will be of enormous magnitude. It could easily be much larger in one quarter than the entire 2008-2009 decline, and we will very likely have unemployment above 10%. There are people who believe it could even go above 30%, which would put it above the Great Depression. All of that is possible, but it ultimately turns on decisions that are being made about public health, when people are told they should go back to work, go back to shopping, go back to traveling and so forth. That’s what will determine the end of this recession, not some economists’ forecasts.
The airline industry is requesting $50 billion in federal assistance. Will that be enough?
It is an enormous number. We put $82 billion into the auto industry, which was effectively bankrupt. With all these programs, you want to go big and you want to go early. And then you want to be prepared to do more. No one should assume or believe that this package will be the last rescue package. You start with $50 billion and see where it goes.
In requesting aid, are businesses opening the door for more regulation that could end up hurting them longer-term?
Yes, my general fear about what happens when Congress starts mucking around in these kinds of programs is that they attach a bunch of conditions that create economic inefficiencies and artificial requirements. There are certainly going to be some requirements, appropriately. But for Congress to start micromanaging and saying airlines have to maintain this kind of service to this kind of places, this number of flights, would be absolutely terrible.
Might we start to see some big companies collapse, as happened during the last recession?
It’s highly likely that you’re going to see some bankruptcies here. Some of them may be necessary, because as I said, they may not be able to access these programs, or may choose not to. Or they may simply decide that even with government help, a path back is too steep and too difficult, and better to just shut the doors—which is in effect the same thing as declaring bankruptcy. We’re going to see a lot of disruption, which is why you want to bring the full arsenal of artillery to bear on the problem.
The auto industry bailouts figured prominently in the last recession. This time around, we haven’t really seen them advocating for federal assistance in a big way—at least at this point.
Happily, the auto sector is still in pretty good shape. The car companies and the suppliers have long enough memories that they remember what happened 12 years ago. And the big companies certainly have maintained very prudent levels of debt and cash. So auto sales are certainly going to be ugly for a while—a good while. I think the car companies are reasonably well positioned to ride this out without a lot of help.
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