Overhaul (26 page)

I watched to see how Ron Bloom, with his long experience in labor negotiations, was reacting to all this; he was attentive and seemed surprisingly unperturbed. Afterward he told me to think of most of what happened that day as posturing—now that it was behind us, the real horse-trading could start.

Fiat and the UAW were now mainly Ron's responsibility. He and Harry and I had divvied up the mountain of work that Team Auto would have to complete in order to meet the President's conditions and deadlines. Harry got General Motors. He was to spend most of April in Detroit, working with executives and squads of consultants to hammer out a turnaround plan—a realistic one, this time, that wouldn't waste taxpayer money. Meanwhile, Ron and I would concentrate on Chrysler, which had to be brought to terms or liquidated by May 1. While Ron took the lead on Fiat and the UAW, my job, besides monitoring everyone's progress, would be dealing with Chrysler's banks and the finance companies of Chrysler and GM. I also needed to recruit two new chairmen and a slew of new directors for both companies.

I entered the byzantine world of the fincos the very next day, April Fool's Day, as it happened. We faced off in a Treasury Department conference room against an imposing lineup of businesspeople: the top management from Chrysler Financial, GMAC, and Chrysler, plus Steve Feinberg and the guys from Cerberus. They all knew more about automotive finance than we did. We were trying to fly solo without having taken flying lessons, I thought, and I hoped we wouldn't crash and burn.

Pretty quickly I discovered that the fincos posed a bigger problem than I'd imagined. Auto finance companies are a lot like banks, but there is one crucial distinction: Banks rely on deposits from consumers and businesses for most of the money they use for loans. Finance companies have no such depositors unless they happen to own a bank; instead they must depend on large borrowings from banks and investors for the cash that they lend to car buyers (known as the retail trade) and auto dealers (known as wholesale or floor-plan borrowers).

I began to understand how the collapse of the financial markets had created havoc for automakers. As a result of the credit crunch, both GMAC and Chrysler Financial had seen their ability to borrow from banks severely curtailed. To raise added funds in recent years, the fincos had also made heavy use of securitizations, in which their loans to consumers and dealers were bundled, sliced up like a layer cake, and sold off in tranches, typically to investment funds. This market, too, had imploded in 2008, cutting off another key source of funds. As a result of all this, the fincos had drastically reduced lending to consumers and dealers, a major factor in the steep falloff of car sales.

GMAC was much larger than Chrysler Financial—$155 billion in assets versus $22 billion—and its problems were greater. In its glory days, armed with a strong credit rating, it had fallen into the same bad habits as other elite financial outfits, such as GE Capital and AIG. Like an occasional smoker who gradually acquires a three-pack-a-day habit, GMAC began to abuse its cheap capital, branching out aggressively into other kinds of lending—in particular, residential real estate at the height of the housing bubble.

For a while this led to McMansion-size profits for GMAC's residential capital unit, ResCap, but by the end of 2007 it was gushing red ink. GMAC had already lost its investment-grade rating and now had to pour in billions to keep ResCap afloat, weakening its ability to make car loans.

Things only got worse. By autumn 2008 GMAC's own survival was in doubt, and it came running to Washington for help. Initial relief took the form of GMAC's being granted 'bank holding company' status by the Federal Reserve. This unorthodox move made the big lender eligible for the same sort of emergency support that Goldman Sachs and Morgan Stanley received when they became bank holding companies. It also paved the way for an injection of $5 billion of
TARP
money. Further, GMAC hoped for access to other support programs, particularly those administered by the Federal Deposit Insurance Corporation.

But the FDIC had wanted no part of the huge auto lender. An independent agency that, like the Federal Reserve, is not under the direct control of any branch of government, the FDIC was established during the Depression chiefly to insure consumers' savings accounts and put an end to 1930s-style bank runs, which it had done. Then came the current crisis, which saw the Bush administration turning to the FDIC for help. In response, the FDIC offered something called the Temporary Liquidity Guarantee Program. I had read about the TLGP but had no idea what it did. I learned that, in return for a fee, it enabled cash-strapped banks to sell bonds and commercial paper backed by an FDIC guarantee, allowing the banks to raise fresh capital at exceptionally low rates.

It wasn't hard to see why the FDIC and GMAC were at loggerheads. The FDIC had thousands and thousands of conservatively financed community banks as its members and looked with distaste on the gargantuan, messy octopus of GMAC. If it extended loan guarantees to GMAC and then the finance company collapsed, the FDIC could well be on the hook for billions of dollars of debt. In addition, even before becoming a bank holding company, GMAC had made itself a pariah in the industry as the owner of a small, fast-growing online bank, now known as Ally Bank, which had been using the Internet to aggressively market certificates of deposit with high interest rates. The FDIC's members hated this competition. The FDIC sympathetically took the view that the high interest rates offered by online banks (there were others besides Ally) jeopardized the bricks-and-mortar banking system by squeezing profit margins. It had stepped in to limit the total deposits that Ally Bank could accept—a stricture from which GMAC now sought relief.

As I sat listening to our visitors, I was seized by the enormity of the finco problem. Chrysler Financial was the immediate headache. Its $22 billion balance sheet wasn't large by bank standards, but unlike GMAC, it had no bank and no depositors. In early January 2009, Chrysler Financial had also been given a slug of
TARP
money—$1.5 billion—to enable it to keep making consumer loans. But that money was running out.

Then we learned, to my horror, that putting Chrysler into any form of bankruptcy would have severe consequences for Chrysler Financial. A very large proportion of its remaining bank credit lines would immediately be withdrawn. In order to keep Chrysler Financial in business, we might have to replace all of its $22 billion of borrowing facilities with taxpayer money. But there was more: we would face very much the same problem with GMAC, which was six times larger than Chrysler Financial.

The Cerberus delegation arrived on a damp, cloudy spring day hoping for a merger with GMAC and Chrysler Financial, lubricated by
TARP
money. Cerberus owned 40 percent of GMAC and 80 percent of Chrysler Financial, and saw this as a gambit to salvage whatever equity value remained, particularly in Chrysler Financial. I could imagine the tactic helping Cerberus. What I did not see was how merging two cash-strapped institutions into one even larger cash-strapped institution could help the taxpayer or revive automobile financing. I found myself adopting the same rationale that Rick Wagoner had invoked in opposing a GM-Chrysler tie-up.

I was profoundly worried that the story would end right here. A company that I hadn't even known our team was responsible for might well cause Chrysler's demise. I was dwelling on this when I heard Al de Molina, the CEO of GMAC, throw out an idea: Why not let GMAC take on the job of financing new purchases of Chrysler vehicles, at both the consumer and the dealer level? Under this scenario, Chrysler Financial would go into "runoff mode," continuing to hold the loans that it had made but not making new ones. It wouldn't need new capital. Best of all, the fine print of its credit agreements would permit such a step—even if Chrysler itself went into Chapter 11.

De Molina of course had his own agenda. The big, assertive Cuban-born banker envisioned that such a combination would cement GMAC as too big to fail and force the FDIC to help. A former Bank of America executive, de Molina made no secret of his ambition to make GMAC a banking giant. Almost from the start, he had clashed with the man who was effectively his boss—Cerberus's soft-spoken and seemingly tentative Steve Feinberg, who now sat fidgeting as de Molina made his case. Feinberg didn't care whether GMAC was large or small; he just wanted to make Cerberus's investment multiply. The only way he saw to preserve that investment, given the reality of the financial and economic crisis, was to cut, not expand. The consequence was palpable tension between Feinberg and de Molina, whom people within Cerberus had taken to referring to mockingly as Ricky Ricardo.

I think of myself as pragmatic and solution-oriented. The wisdom of de Molina's idea—never mind what I thought of the two men—was immediately apparent to me. Walking out of the meeting with Ron Bloom, I pulled aside de Molina and said, "This looks like a possible path." My despair had faded a bit, at least for the moment. Having GMAC take over lending for both firms might solve the finco problem. If the numbers worked, the FDIC and the Federal Reserve would still have to agree, of course, but I naively assumed that that would be the easy part.

The second day of April brought another crew of financial heavyweights, Chrysler's banks, led by the inimitable Jimmy Lee, fresh off the Acela and another breakfast burrito. Today was our day to talk—Ron Bloom, Matt Feldman (our veteran bankruptcy lawyer), and I were to lay out the terms we wanted from Chrysler's creditors if the company was to get further federal aid. Jimmy, representing the bankers, and I faced each other across the table, our colleagues flanking us like mobsters protecting their bosses. The airy, brick-walled conference room where we gathered had once been part of the Treasury's attic. Jimmy had brought high-level representatives of Citibank, Goldman Sachs, Morgan Stanley, and Elliott Associates to hear firsthand what we had to say. Before coming to the Treasury building, they had gathered in JPMorgan's Washington office and agreed to spend the afternoon in "listen mode."

Fiat and Chrysler were on hand too—the bankers needed to understand the projections and business prospects of Chrysler in its new alliance with Fiat in order to analyze any proposal we might make. So we first gave the floor to Sergio, who sat at the far end of the table in his black sweater. He launched into a disquisition, filled with hyperbole and flourishes, about his unique ability to turn around Chrysler. No specifics about how he intended to do that were offered. Instead he painted, in considerable detail, all that he perceived had gone wrong under Bob Nardelli, who sat at the other end of the table looking dyspeptic. Although Bob was still the CEO of Chrysler, it was understood that he and his lieutenants would leave as part of a Fiat alliance. He had come to view Sergio as a bullying egomaniac, but he put great store in self-discipline. He had been pleased at the kind words that the President included about him and his team in his March 30 remarks and had resolved to soldier on through this ugly process as quietly and with as much dignity as possible.

Jimmy Lee felt vindicated for not having tried harder to negotiate an earlier resolution with Chrysler. "There is no management," he thought. "It's Sergio and the government. We saved ourselves a lot of blood, sweat, and tears, and now we're finally dealing with the owners of the company."

I said nothing until we turned to the central question, the $6.9 billion of debt for which Jimmy had been demanding full repayment.

"We had in mind for you a much lower number, $1 billion," I told him, explaining that this was equal to the amount the banks would likely receive if Chrysler were to liquidate. The money would be in the form of loans owed to the banks by the restructured Chrysler.

Jimmy seemed genuinely stunned. He turned bright red. For many seconds there was silence in the crowded room. Even the Fiat delegation was shocked. We had not shared our proposal with them, and they had been assuming the loan would be negotiated down to $2 billion to $2.5 billion.

"What about equity?" he finally asked. In the usual restructuring, senior lenders who are not going to get all of their money back receive a big helping of equity as part of their consideration.

"We have other plans for that," I replied.

This information made our already stingy offer seem worse. Jimmy became apoplectic. He demanded to know why, if the government thought banks important enough to give them tens of billions in
TARP
money, it wanted to squeeze them on this deal. He also demanded to know why the UAW should get any consideration, since it was well below the banks on the priority list of who would get paid in a bankruptcy.

Ron responded to that, bluntly telling him, "I need workers to make cars, but I don't need lenders." Matt then chimed in, emphasizing that from the Treasury's perspective, the bankers had little negotiating power. "If you don't like our proposal," he said, "you can credit-bid," meaning they could foreclose on their loans, seize Chrysler, and operate or liquidate it themselves—costly, messy, politically charged options that we believed these lenders would never seriously consider.

Finally Jimmy resorted to a threat. "I've got one of the toughest bosses on the Street," he said, meaning Jamie Dimon, the JPMorgan CEO. "He may want to call the President!"

"Feel free to have him call," I said, unperturbed.

Behind the dramatics, Jimmy must have been recalculating fast. He had assumed that by my asking Sergio to extol the Fiat-Chrysler combination, we were talking up the value of Chrysler equity—yet now we were offering none. In fact, I had not ruled out the possibility of ultimately offering the banks some equity to get the deal done. But that could be negotiated. Most important, beyond the particulars of equity or the terms of the loan was building their enthusiasm for the prospects of Chrysler under Sergio's leadership. That's why I'd wanted Sergio to make the presentation.

What I didn't know at the time was that Jimmy and his boss Jamie had met with Sergio back in January. They hadn't been impressed by the Sergio show and doubted whether he could rise to the massive challenges of Chrysler.