Overhaul

by Steven Rattner

  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 A very large proportion of its remaining bank credit lines would immediately be withdrawn.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 Sergi
o back in January. They hadn't been impressed by the Sergio show and doubted whether he could rise to the massive challenges of Chrysler.

  Jimmy seemed to understand what I was trying to do and played along, asking to see the projections and business plans that Fiat was developing. "If you want an answer other than no, something like a counteroffer, then we need those new numbers," he said. We agreed. As the meeting drew to a close, Jimmy asked if we could have a word alone. We stepped into the corridor by an elegant open stairwell, looking down five stories to the Treasury basement. "Putting aside the very, very generous offer," he said sarcastically, "I think I can get all the banks to do a deal." Achieving unanimity among the lenders would mean that at least one reason for a bankruptcy filing would be avoided.

  "I don't really think you can," I replied.

  While hardly a bankruptcy expert, I was unaware of any situation in which unanimity had been achieved in a creditor group this big—Chrysler had forty-six lenders, including several aggressive hedge funds that might prefer to fight to the death. We parried for a few more minutes and then Jimmy was on his way back to the Acela.

  Just as Ron viewed the opening clash of Fiat and the UAW as obligatory theater, I discounted what Jimmy had said. And I felt no urgency to reengage him in the coming days. Of all the hurdles we faced, the banks were the smallest. When the time came, either they would agree to something reasonable or they could take over Chrysler. We had agreed to make every effort to save the company, but my ambivalence about its prospects was such that I wasn't all that bothered by the possibility of getting "caught trying."

  Ron, it turned out, had been a bit too sanguine about the Fiat CEO. We really were dealing with a new Sergio, not the urbane charmer who had assured us in March that he saw no impediment to an agreement with the UAW. As the days ticked by toward the April 30 deadline, Dottore Jekyll became Signore Hyde. Yes, there was a charmer in Sergio. But there was also someone else.

  His next negotiating session with Gettelfinger, held at the Chrysler-UAW training center in Detroit, was a disaster. Sergio started lecturing Gettelfinger about the need for the autoworkers to accept a "culture of poverty" instead of a "culture of entitlement," attacking, among other things, retiree health care benefits.

  "Why don't you come and sit with me and tell a seventy-five-year-old widow that she can't have surgery and that you killed her husband?" Gettelfinger snapped. The discussion became more emotional and nastier as Sergio revealed in greater detail the changes he wanted in the UAW contract. "Tweaks," he kept calling them. But a quick, back-of-the-envelope calculation by Bloom showed that Fiat was really demanding what amounted to as much as $5 an hour off the contract. The meeting ended in a shouting match. Sergio went off to shop in an Apple store—he is obsessed with Apple—to cool off.

  Sergio's attitude toward his Chrysler counterparts changed too. "From puppy dog to pit bull" was the way one executive described the transformation. Congenial conversations in March about Fiat-Chrysler technology sharing gave way to tense April talks in which Sergio would demean and swear at the Chrysler officials. "Do you think I am fucking stupid?" he'd ask rhetorically.

  Gettelfinger, the veteran labor negotiator, took all this in stride. He sensed a performance in progress and knew that, despite Sergio's bluster, Fiat really wanted the deal. And Sergio knew that Gettelfinger was a realist. The UAW chief may well have put off Corker and the Republicans, thinking President Obama would offer a better arrangement, but now that Obama had threatened on national TV to liquidate Chrysler unless all parties came to terms, Gettelfinger was cornered. He understood that we needed to be able to tell taxpayers that any new Chrysler contract satisfied the conditions of the TARP loan, including parity with the Japanese transplants. (To that degree, the Bush administration was getting its wish to "rule from the grave.")

  An even bigger motivator was fear. The continuing deterioration in the auto business was terrifying for all of us. More than once, I would think of Rahm Emanuel saying, "Never let a crisis go to waste," as we used the growing economic catastrophe to achieve changes and sacrifices that would have been impossible in another environment. And we had the advantage that for the Obama administration, this was something of a "Nixon goes to China" moment, as Rahm had signaled with his short, crisp dismissal of the UAW in his office a month earlier.

  By the time the labor negotiation moved back to Washington, I had begun to think of the Treasury building as Uncle Sam's Fix-It Garage. Although we were still facing potentially insurmountable problems, the task force seemed increasingly like an actual entity and our jobs like actual positions. Down in the basement, we settled into the "skunk works," as Ron called it. My partner Josh Steiner had told me that status in Washington had much to do with offices and staff. While I had worked hard to build our team, I couldn't have cared less about my office. I was very comfortable in my basement lair. In the anteroom of my office, cubicles had been built for the "partners" (Ron, Harry, and Matt) and for Haley. A few doors away, two other sizable rooms had also been carved into cubicles for our more junior colleagues. And we had nice government-issue signs outside our doors: "Auto Task Force" they announced. From my desk I could gaze through barred windows onto the Washington Monument and the Mall and, in the other direction, to the small parking lot where Tim Geithner's gold Suburban pulled up by his private entrance. For security reasons, he took his SUV even to go across the street to the White House. I would often see him come and go several times a day, cell phone invariably clamped to his ear.

  I was on the phone plenty myself, fielding calls from a dizzying array of interested parties, led, of course, by the Michigan politicians. Like many other stakeholders, they had been unnerved by the President's tough March 30 speech and particularly his use of the B word. As clear as Obama had been, the delegation chose to concentrate on the possibility of avoiding bankruptcy rather than the prospect of entering it. Our running joke was that the Michigan politicians were progressing through Elisabeth Kubler-Ross's five stages of grief—denial, anger, bargaining, depression, and acceptance. Except that just when we thought we had nudged them to the next step of understanding the need for bankruptcy, they would fall back a stage.

  Ron Bloom decided to tackle the most visible labor issue first: so-called legacy costs. The UAW was notorious for its "Cadillac" retiree benefit plans, which in essence guaranteed free medical and dental care and prescriptions for life. (Such plans had made General Motors the largest purchaser of Viagra in the world.) In casual conversations after I took the auto job, my friends would often ask, "What are you going to do about the medical benefits?"

  Happily, we had a road map. In 2007, Chrysler had taken a major step when the UAW agreed to create a trust—a Voluntary Employee Beneficiary Association, or VEBA— to assume responsibility for retiree health care benefits. This relieved the company of the uncertainty of this huge, ever-growing, and unknowable expense. Under the plan Chrysler was committed to make an additional one-time contribution of $8.8 billion to the VEBA, and in return would have no further obligation. All future benefits would be paid by the VEBA. If the $8.8 billion proved insufficient, that would be the problem of the VEBA, the UAW, and the workers.

  The Corker amendments would have taken the arrangement one step further and required that the UAW agree to convert $4.25 billion of this debt into Chrysler equity. In the December negotiations, the UAW had signaled its willingness to say yes (it had reached a similar accommodation with Ford in February 2009), but the collapse of the legislation ended the discussion. Until now.

  Starting with VEBA enabled Ron Bloom to sidestep Sergio to a large degree. Fiat had already agreed to accept a 20 percent ownership of Chrysler with the opportunity to earn another 15 percentage points. Of the 65 percent of equity not yet allocated, we—the U.S. government—wanted no more than a nominal percentage. Some might well go to the creditors, but we knew that the banks' appetite for Chrysler equity was small, because the shares of a restructured Chrysler would have little immediate valu
e. So most of the equity was actually unspoken for, and Tim and Larry readily acquiesced in giving 55 percent ownership to the VEBA. (As Bloom designed the deal, "giving" was a relative term; in the unlikely event of excess profits on the VEBA'S equity, this overage would revert to the Treasury.)

  We expected headlines blaring "UAW in Chrysler Driver's Seat." In fact, we'd made sure to do everything we could not to have the UAW control Chrysler. For starters, the VEBA equity was held by the health care trust, not the UAW. And the stock had no voting rights. All we gave the VEBA was the right to designate a single Chrysler board member with the approval of the UAW. Negotiating these terms was easy. Neither the UAW nor the VEBA had any interest in controlling or owning the struggling automaker; rather, they wanted to sell their equity as quickly as possible.

  Structuring a note to satisfy the other half of the VEBA'S approximately $8.8 billion total claim was more complicated. Given the restructured Chrysler's heavy liabilities (even after bankruptcy), Ron felt that payments had to be back-loaded. And they were. Chrysler's annual payments to VEBA would rise from $300 million in 2010 to a staggering $823 million in 2019. Ron reasoned that by that date Chrysler would either be healthy enough to make the payments or be liquidated. If the latter transpired, the UAW's retirees would have lost their health care anyway.

  With all components of the VEBA package valued fairly, we calculated that the UAW was taking a significant cut on its health care claim, at least 40 percent. Indeed, for the retirees, the shared sacrifice called for by President Obama had arrived without delay. Large reductions in benefits would start in July 2009, including the elimination of vision and dental plans.