But that night, Marchionne got a phone call from Rattner, asking for more details on how Fiat proposed to integrate the two companies. Rattner also asked whether the Fiat team might be available to return next week, if the task force wanted more details.
Well, that was encouraging.
The task force was becoming convinced that a Chrysler rescue would probably require a trip through bankruptcy court—hopefully a quick one—but the question was how to get there with a workable restructuring plan. The biggest problem was financial, because Fiat was the high bidder for Chrysler, even though it was bidding niente.
And Chrysler was deeply in debt. Besides the $6.9 billion it owed the banks and other obligations, the company had pledged $10 billion to the VEBA trust fund to provide healthcare to retired workers. This was a big improvement over what Chrysler would have had to spend, without the VEBA, to pay the healthcare costs directly. But by now Chrysler’s finances had deteriorated such that even the $10 billion was too much.
The bottom line was that the company didn’t have enough cash, and wouldn’t be getting any from Fiat or Cerberus, to pay either the VEBA or the banks, much less both. And Jimmy Lee was just as intransigent with the task force as he had been with Fiat. Lee felt confident in the knowledge that his debt was secured, while Chrysler’s debt to the VEBA wasn’t.
Throughout March, Rattner and Lee played hardball with each other. Rattner said that if the banks didn’t renegotiate the debt, they could seize ownership of Chrysler and just run the company themselves. Lee retorted that if the banks did assume ownership of Chrysler, they would liquidate the company—a dare he didn’t think the Obama administration would take.
Meanwhile, as it became clear that the task force was calling the shots, Chrysler executives chafed at being relegated to glorified observers to decisions about their company’s fate. One Chrysler executive, in an e-mail to colleagues, referred to the Treasury Department as “God.” In another, Nardelli himself wrote, “I guess the UST is running it!” The executives could do little more than grumble, however, because without tax dollars, they knew, Chrysler would be dead already.
The hurt feelings didn’t deter Bloom, who was taking the lead for the task force in dealing with Fiat, Chrysler, and the UAW. Even while some of the president’s advisers had been arguing for letting Chrysler die, Bloom was puzzling over how to save the company in the event Obama gave the go-ahead. On Wednesday, March 25, after another round of Fiat presentations to the task force, he approached Horrocks and said, “Can I speak to you alone?”
The two men walked back into the Diplomatic Room, where the ornate furniture had been temporarily replaced by cheap tables and folding chairs to serve as the task force’s interim headquarters. “We’ve been looking at a lot of scenarios,” Bloom said. “In one of them, the union’s VEBA trust could have sizable equity in Chrysler. Maybe even a majority. Would that give you guys a problem?”
Horrocks thought for a minute. “As long as we get management control and a majority of the board,” he replied, “I don’t think it would be a problem for Sergio.”
When Horrocks returned to Fiat’s Washington office, Marchionne wanted to know what Bloom had wanted. When Horrocks explained, the Fiat boss replied that, yes, he could live with that. The very next day, at the momentous meeting in the Roosevelt Room, Obama gave the task force clearance to pursue the Fiat deal. The boats were lining up to take part in the rescue—except for one.
On the last weekend in March, just before the president spoke on television, Lee called Rattner. The banks wouldn’t settle for partial payment of their loans, he reiterated, to help Chrysler reach a Fiat deal. “Pay me in full, and I’ll get out of the way,” he said. He wanted the entire $6.9 billion, he added, “and not a penny less.”
But Lee’s hardline stand wouldn’t last long. On Monday, March 30, after watching Obama tell the nation that Chrysler really would be liquidated without a Fiat deal, Lee began to think the task force wasn’t bluffing and called Rattner back. “We’ve got to talk,” he said. The creditors’ boat, it appeared, might be ready to change course.
On Thursday, April 2—three days after Obama’s speech—Rattner and Bloom convened another meeting in a conference room on the fifth floor of the Treasury. Nearly forty people were there, including Ron Gettelfinger, Sergio Marchionne, Bob Nardelli, and Andrew Horrocks. For the first time they were joined by Jimmy Lee and other creditors.
All the banks had received TARP bailout money from the government, but that leverage had to remain unspoken because Rattner was under strict orders not to mention it. Still, he presided over the meeting with the confidence of a man who held the high cards.
“We want to give all of you an update,” he began. “Here’s how we see what a Fiat-Chrysler deal would look like.” Lee interrupted to ask for cash-flow projections—he seemed accustomed to controlling the agenda of meetings—but Rattner cut him off.
In a Fiat-Chrysler alliance, he resumed, the UAW’s VEBA trust would get 55 percent ownership of Chrysler in lieu of half the money owed to the VEBA. Fiat would get 20 percent ownership, with a chance to increase that to 35 percent, in return for contributing its product plans and technology—but without paying any cash. Nardelli and Marchionne made presentations, and then Rattner turned to the banks’ claim for $6.9 billion.
“We have in mind for you a much lower number,” he said. He paused and added: “$1 billion.” The task force actually was prepared to pay more, but there was no use in leading with its best offer.
“What about equity?” Lee asked.
Rattner replied, “We didn’t have that in mind.”
Lee: “No equity?”
Rattner: “No.”
Lee was stunned. “How can you justify an unsecured creditor getting more than 50 percent of the company,” he asked, referring to the UAW, “while the secured creditors get nothing?”
“We’re giving you the equivalent of what you would get in a liquidation” of Chrysler, Rattner replied. “That was your position, so you should be indifferent.” Chrysler debt was trading at only eighteen cents on the dollar, Rattner added; $1 billion was nearly equivalent to that, so the banks would be getting market value.
“Why us?” Lee asked, in a newly plaintive tone. “The government has pumped billions into the banks to make them stronger, so why are you trying to hurt us?”
“Jimmy, when we asked you to participate in this, you said no,” Rattner replied. “You said you would liquidate if you had to. We took you at your word.”
Lee: “Well, something has changed since then.”
Rattner: “How? What has changed?”
Lee: “The … White … House!”
Everyone sat silent for a moment, because Lee had just acknowledged that the president had called his bluff. But Rattner wouldn’t budge on his offer, at least not then and there.
Jimmy Lee wasn’t exactly a sympathetic character. Still, American law is supposed to protect unpopular people, even arrogant fat cats who wear suspenders. By law, when it came to getting paid, Lee and the other “senior secured” lenders stood in line ahead of the UAW and certainly ahead of Fiat, which wasn’t a creditor at all.
That’s the way it would come out in the news reports, but it really wasn’t that simple. The loans the banks had made to Chrysler two years earlier had been reckless—analogous, say, to a neighborhood bank making a $100,000 “senior secured” loan on a three-year-old Dodge. The papers might say “senior secured,” but the underlying value of the asset meant otherwise. As Bloom later would put it, standing up to the banks showed that “Uncle Sam wasn’t going to be Uncle Sucker.”
What’s more, the UAW supplied Chrysler with a critical component, labor, that the company needed to keep building cars. Stiffing the UAW’s claim, in Bloom’s view, would be like refusing to pay a company that supplied Chrysler with steering wheels. No steering wheels, no cars. Likewise, no workers, no cars. Bloom believed a bankruptcy judge would approve payment to workers, and to th
e VEBA for retired workers, just like a payment to a steering-wheel maker.
Meanwhile, he had another problem. Ironically, behind the scenes, the UAW wasn’t much happier than the banks.
Ron Gettelfinger didn’t want 55 percent of Chrysler in lieu of $5 billion for the VEBA, any more than he had wanted to entertain Kerkorian’s offer of Chrysler shares two years earlier. Chrysler stock, the UAW knew, might prove worthless, or at least might be valued so low that the VEBA would have to slash medical benefits to retirees. Just like Jimmy Lee, Gettelfinger wanted cash—cash that Chrysler didn’t have.
On April 10, Good Friday, Fiat and the union arrived at the Treasury to hash it out. Bloom proceeded to squeeze the union as Rattner had the banks, only more politely. “Your VEBA claim is with a hopelessly insolvent company,” he told Gettelfinger. “Getting stock is a good outcome for you.”
If Gettelfinger blocked the Fiat deal, Bloom added, the alternative would be Chrysler’s liquidation, which the UAW chief wanted to avoid even more than the banks did. The negotiations went back and forth for hours, during which Horrocks, the UBS banker, stepped outside for air, only to find that he couldn’t get security clearance to reenter. Maybe the future of Chrysler was at stake, but the Treasury Department’s security guards weren’t about to bend. Bloom had to fetch him back inside.
Finally, at eight P.M., the UAW agreed to take Chrysler stock—nonvoting shares—in lieu of half the VEBA debt. Work rules and wages remained sticking points, but Horrocks was beginning to believe that his client’s unlikely—well, brazen—bid for Chrysler might actually succeed.
He walked over to Gettelfinger and, referring to Marchionne, said: “If Sergio was here, he would want to shake your hand personally. Would you shake mine as his proxy?”
“I hope Sergio will come to Detroit one day,” Gettelfinger replied, his voice tinged with emotion, “and see what it is like for ordinary folks who are losing their homes.” Horrocks feared he had committed a faux pas and mentioned the incident later to Bloom. “You’ll have to forgive Ron,” Bloom explained. “That handshake you asked for was the undoing of seventy years of UAW bargaining.”
He was right.
Since the 1937 Sit-down Strike at the GM factories in Flint, the United Auto Workers had successfully pursued the dream of achieving middle-class lifestyles for working-class people. That noble aspiration had lifted living standards for all Americans, provided healthcare for millions, and created college opportunities for working-class kids who otherwise would never have had the chance.
The dream had suffered temporary setbacks, such as the concessions the UAW had granted the car companies in the dark days of the early 1980s. But no days were darker than the ones of 2009. The UAW’s dream was coming undone, a victim of the union’s own excesses over the years, and of a global economy that was undermining the value of unskilled labor.
Gettelfinger, despite his penchant for prickliness, had represented the dream with more realism than any UAW president in the preceding quarter century. Partly that was because he had little choice; nonetheless he had risked his political position within the union to take courageous stands when necessary. And now, in his waning years of leading the UAW, he was making the tough decisions that his predecessors had ducked. He had a right not to celebrate.
Meanwhile the task force had more bargaining to do, because even some minor issues could become major hang-ups. The week before Easter, when Bloom was dealing with the UAW in Washington, two junior task force members flew out to Auburn Hills. They had to “diligence” the separate Chrysler and Fiat business plans to reconcile, among other things, the companies’ different assumptions about the cost of rebates.
They convened in the Chrysler boardroom, the same place where Dieter Zetsche had decided to sell the company two years before. Fiat executives sat on one side of the table and Chrysler execs on the other, with the two young task force members at the head. They were at least twenty years younger than almost everybody else in the room. But they were in charge, and they admitted to themselves that they loved it!
When the young men returned to their hotel around two-thirty A.M., one of them promptly fell ill with food poisoning. But work resumed the next day anyway, because the clock was still ticking. Eventually the two companies’ plans were reconciled, with a compromise projection that Chrysler’s rebates would be $4,000 per car.
Kids running meetings. Late-night negotiations. Food poisoning. Compromises. Exhaustion. And still more work to do. The meetings in Auburn Hills captured virtually all the twists and turns of the quixotic effort to keep Chrysler alive.
And all the while new problems kept surfacing. After studying Chrysler Financial, the task force concluded that rescuing it would be far too expensive. Yet Chrysler needed the financial company—or some other financial company—to survive as an automaker. Some task force members began to question anew whether Chrysler could, or should, be saved.
Others too were having second thoughts. On April 14 one of Chrysler’s outside advisers sent an e-mail urging the task force to ditch Fiat and reconsider General Motors as the prospective best owner for Chrysler. “We continue to believe that revisiting the combination/alliance discussion with GM … is the best alternative for all parties,” he wrote. But the task force again decided that GM had enough problems of its own without taking on Chrysler’s. That week, back in Washington, the UAW and Fiat reached agreement on wages and work rules. The union agreed that workers wouldn’t get overtime until they worked forty hours in a week. That was considered normal in most of America, if not in Detroit.
Fiat also wanted workers’ pay tied partly to Chrysler’s performance, which the union stoutly resisted. The Italians settled for just a 5 percent performance component, hoping to increase that percentage over time. The union agreed to cut workers’ breaks from forty-six minutes a shift to just forty, to suspend the paid Monday-after-Easter holidays and the cost-of-living allowances, and to dump, at long last, the Jobs Bank.
The task force, meanwhile, kept squeezing everyone and knocking off issues one by one. Cerberus agreed to hand back the deed to Chrysler’s headquarters. Daimler willingly agreed to surrender its 19.9 percent stake in Chrysler and less willingly to pay $600 million in cash (yeah, cash) to the VEBA.
The Canadian Auto Workers consented to contract changes worth nearly $200 million in annual savings. Fiat acceded to performance measures—including selling Chrysler vehicles overseas and building a high-mileage car in the United States—as conditions for boosting its Chrysler stake to 35 percent over time.
The Italians also accepted the requirement that Chrysler repay its new government loans before Fiat could take majority control of the company. The U.S. and Canadian governments would get the 10 percent of Chrysler not owned by the VEBA or Fiat, at least until they could sell the shares.
Meanwhile, the big banks, including JPMorgan Chase, were losing their resolve. On April 20 Lee made a counteroffer to the task force. The creditors wanted a cash payment of $4.5 billion and would exchange their remaining $2.4 billion of debt for 40 percent ownership of Chrysler.
A similar offer two months earlier almost surely would have been accepted, or at least negotiated, but by now the task force wasn’t about to give the banks the Chrysler stock that it already had earmarked for the UAW or Fiat. Lee’s initial strategy of keeping his distance had backfired. A week later Rattner countered Lee’s counteroffer, offering no equity but a sweetened pile of cash. “It’s $2 billion.” Rattner said. “Take it or leave it.” It was, in fact, the amount the task force had intended to offer all along.
Just a day before Obama’s April 30 deadline, Lee begged for another $250 million as a goodwill gesture. It was a last-ditch effort, he said, to get all the creditors to approve and to give Chrysler a chance to avoid bankruptcy.
Rattner reluctantly agreed but wanted an answer by six P.M. A flurry of frantic phone calls ensued, and Rattner extended the deadline till seven P.M. But more than a dozen smaller creditors—most
ly hedge funds who had hoped to make a killing on Chrysler debt—still held out. They were used to scraping for pennies on the dollar, and that wasn’t about to change. When the deadline passed, Chrysler’s lawyers put the final touches on the bankruptcy filing. It was inevitable now.
There remained one last-minute issue that could scuttle everything—the fate of Chrysler Financial. The task force’s solution was to fold Chrysler Financial into GMAC, which then would finance both GM and Chrysler dealers and their customers.
It seemed a reasonable solution, but by now nothing was simple. GMAC had itself been bailed out by the government by becoming a bank holding company. It couldn’t swallow Chrysler Financial without separate agreements among Cerberus, Chrysler, Fiat, General Motors, GMAC itself, the task force, and—new to the party—the Federal Reserve Board and the Federal Deposit Insurance Corporation, which regulated the nation’s banks. The FDIC, which was getting stuck with insurance expenses for a lot of failing banks, was especially reluctant. But eventually it relented.
It was after eight P.M. on Wednesday, April 29, before all the faxes with all the right signatures rolled into the task force offices. The final information was transmitted to the president, with a text of his speech for the next day.
On the morning of April 30 Chrysler’s attorneys filed a Chapter 11 petition with federal bankruptcy court in Manhattan, listing $39 billion of assets but $55 billion of liabilities. The documents described Chrysler’s failed attempts to sell itself to Nissan, General Motors, and almost any other car company, and it portrayed Fiat as the company’s last hope.
“Chrysler is seeking approval from this Court to consummate the only sale transaction that preserves some portion of its business as a going concern and averts a liquidation of historic proportions,” the petition stated. “Liquidation would mean the end of an iconic, 83-year-old American car company … [and] would have impacts on the nation’s economy and Chrysler’s stakeholders that are grim.”
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