Overhaul

  I reckoned that the odds were on our side. For one thing, we'd held back $5.6 billion of the $13.1 billion earmarked for GMAC—additional capital that both de Molina and Bair wanted to see invested in the auto lender. Even if the GMAC arrangements fell through and we had to liquidate Chrysler in another two weeks, the consequences of having waited would not be severe. Keeping Chrysler on the dole for the extra days would cost taxpayers perhaps $500 million—a mere rounding error in the context of TARP'S $700 billion. And people who bought Chryslers in the interim would be protected—we had a warranty guarantee program already in place.

  Above all, I was banking on Bair's self-interest. Being obstructionist had worked for her up to now. But as soon as she realized she was in danger of becoming the visible face of GMAC's paralysis and Chrysler's demise—as well as of the potential collapse of GM because it, too, depended on GMAC—I hoped that the hostages would be released.

  Jimmy Lee phoned so often that I got to know the voice of his assistant, Sylvia, who always placed his calls. And, with the President's speech and Chrysler's Chapter 11 filing just days away, I heard from Sylvia a lot. We'd kept tightening the screws on JPMorgan and the other creditors. At Matt's good suggestion, we'd ordered Chrysler to fund its day-to-day operating deficit, as much as possible, using its cash on hand rather than TARP money. Normally, as a company nears bankruptcy, its board reserves "cash collateral" to cover wind-down expenses. But we wanted Chrysler running on empty so that the lenders would realize they would have to put up money if they forced the automaker to liquidate.

  A week after we delivered the joint Fiat-Chrysler business projections, Jimmy and his lawyer called with the creditors' counterproposal to my offer of $1 billion. It was ridiculously high: a mix of new debt and other securities that represented only a small haircut from the $6.9 billion face value of their claim. I rejected it out of hand, causing Jimmy to squirm. The Chrysler debt was a matter of huge consequence for JPMorgan. Every morning for months, Jimmy had a standing meeting with his team to strategize and plan their next move.

  With me, he became even more relentless, issuing frequent reminders that JPMorgan had not caused the financial crisis; on the contrary, it had bought Bear Stearns at the government's urging to try to help. Tim had instructed me not to be taken in but to maintain strict neutrality. I was not to demand anything of JPMorgan just because it had received an infusion of TARP money; nor was I to show it favor because of Bear Stearns or anything else. I just kept reciting my arguments about liquidation value, the lenders' freedom to seize Chrysler if they wanted, and so on. Matt kept a back-channel dialogue going with Jimmy's lawyer, Peter Pantaleo, inching toward the settlement that I always believed was inevitable.

  By all accounts, the politics within the lender syndicate were fierce. Dozens of smaller creditors were suspicious of the four lead banks (which they dubbed the "TARP banks"), fearing that their obligations to the government would prompt them to make unusual concessions. Little did they realize that the big banks, which together held 70 percent of Chrysler's debt, were squabbling among themselves. JPMorgan had the most to lose—$2.7 billion in loans. Citi, by contrast, had been selling off its Chrysler position since mid-2008, dumping more than $1 billion worth to hedge funds and others at around 65 cents on the dollar. Goldman Sachs had been selling too. Back in August 2008, when GM and Chrysler discussed a merger, three of the four had expressed a willingness to accept 60 to 80 cents on the dollar for their Chrysler debt. The sole holdout was JPMorgan. This led the others to suspect—incorrectly—that JPMorgan had put off marking down the loans and recording its losses.

  Bankers from Goldman and Citi had advised Jimmy Lee to make the best of a bad situation. Privately they felt his brinksmanship was embarrassing and potentially costly. Citi especially wanted to avoid a liquidation. Its analysis showed it would recover no more than 20 cents on the dollar in that instance. Citi also feared losing business in its branches in states like Michigan and Ohio, where consumers might blame it for Chrysler's demise. (In late 2008, Citibank CEO Vikram Pandit had met with Sergio to tell him, in essence, that Citi was willing to cut a generous deal to help keep Chrysler afloat.)

  With a week to go before the President's speech, I decided it was time to try to close the deal with Jimmy. On April 23, I bumped our offer to $1.5 billion; almost instantly Jimmy came back at $2.5 billion. I responded with the final offer that Tim and Larry had signed off on: "Two billion, take it or leave it."

  "If it's cash, I'll take it," Jimmy said.

  This was out of the ordinary. In the usual restructuring, Chrysler's lenders would receive their $2 billion as new loans. But Matt had learned through his back channel that cash would be high on Jimmy's wish list, and we had cleared that with Tim and Larry too. Even so, I decided to play hard to get.

  "Cash isn't normal," I told him. "You should be getting new paper." This triggered a diatribe from Jimmy about the dangers of government involvement in the private sector. He got so pumped up that he announced that "in the future, we are going to think twice about doing business with a company under the government's wing. We are going to review all our dealings with companies that could come under government control or have big unions." (That "review" would last until July, when he realized that GM would likely be an abundant source of banking business in the future and called to ask my advice about soliciting it.)

  Finally I relented and agreed to Jimmy's cash request.

  I could foresee how the game would play out. Jimmy would go back and try to sell our terms—roughly 29 cents cash on the dollar—to the other forty-five lenders in the two days that remained. While some would not agree, most would, and we would have a strong sign of support from the lender group to help sway the bankruptcy court judge.

  The next morning, the last day before the President's speech, I got my first look at the text. I tried to offer as few comments as possible, as I remembered Peggy Noonan, in her memoir of her time as President Reagan's speechwriter, ridiculing the bureaucratic "mice" who nibbled away at her prose. I didn't want to be a mouse.

  I was barraged with questions as we assembled the final elements of the announcement package. Most of the burden fell on Deese and, of course, Matt Feldman, but I had my hands full putting in place our $7.5 billion stopgap to support GMAC in the absence of cooperation from the FDIC.

  And then, just after lunchtime, Jimmy called with a startling request.

  If we were willing to modestly increase the consideration to Chrysler's lenders, he believed he could get all forty-six to agree. He asked us to put up $2.5 billion in cash in return for 100 percent participation by the creditors. Jimmy, it seemed, had gotten himself sideways with many members of his lending group. He had cleared our $2 billion offer only with the other three "TARP banks" and for some reason had delayed informing the other lenders until several days had passed. When the rest of the lenders found out, they were livid, particularly a group of hedge funds that Jimmy—as old school a banker as remains on Wall Street—regarded as junkyard dogs.

  Whatever his motives, his proposal, if we accepted it, could have a very strong impact. For many weeks we had seen no alternative to bankruptcy for Chrysler—the only question was what kind. Best case, our 363 transaction would be completed quickly and a "new Chrysler" would emerge as a leaner, more viable business in a promising alliance with Fiat. Worst case, Chrysler would liquidate through a Chapter 7 proceeding.

  But even the best case was far from risk-free. Experts had been predicting that any form of bankruptcy could take months and months. No matter how fast we could push the 363 sale through, we knew that Chapter 11 would be costly and distracting. Having been humiliated by Sergio, Bob Nardelli and his team were miserable at the prospect of trying to manage the business for any longer than absolutely necessary. And we all still worried that bankruptcy would decimate Chrysler vehicle sales.

  Yet avoiding bankruptcy seemed so unlikely that we hadn't so much as studied the numbers of a case where all the secured lenders w
ere on board. I summoned Team Auto in a state of high anxiety. "Let's get in on a single page, where we can look at it," I instructed Matt and the Chrysler team. "We need two columns, with everything we can quantify about the costs and benefits of the two paths." My hope was that the benefits of avoiding bankruptcy would sufficiently outweigh the costs to justify our raising our offer enough to close the deal. If Jimmy was asking for $500 million, I thought that $250 million would satisfy him.

  Very quickly, the page filled with numbers. To my amazement, the totals at the bottom of the two columns were much closer than I would have guessed. For example, closing unwanted dealerships would be difficult and costly without Chapter 11 protection—they'd have to be bought out one by one. But when bankruptcy expenses like lost sales and administrative costs were added, the two approaches were about a wash. Hovering over all this was the unquantifiable risk of disrupting consumer demand. All in all, Chapter 11 was not the place we wanted to be if it could be avoided for $250 million.

  It was very late to come to this revelation. As I called Tim and Larry to strategize, my mind raced ahead. Team Auto would have to stay up all night helping rewrite the president's speech, plus the fact sheets and supporting materials, all of which were ready to go. Instead of presenting Chrysler's bankruptcy, Obama would now say, in effect, "I am delighted to announce that after arduous negotiation, in an unprecedented shared sacrifice, all of Chrysler's stakeholders have reached agreement. This will enable the company to go forward with manageable operating costs and liabilities, and without the taint of bankruptcy. As President, I have agreed to commit $8 billion to support Chrysler's plan to achieve sustainable profitability, to the benefit of its workers, its customers, its communities, and our nation."

  Tim and Larry agreed that I should respond to Jimmy with an offer of $2.25 billion—an additional $250 million. But the offer was good only until 6 P.M., I told Jimmy, because of the President's speech. He had just a few hours to win over all the creditors and deliver the holdouts.

  There was nothing more to do now except carry on with the final preparations for bankruptcy and wait to see if Jimmy could deliver. Jimmy gave the controls to his bespectacled head of syndicate, Andy O'Brien, who began working the phones. They soon assembled more than thirty consents. As 6 P.M. approached, Jimmy reported he was still short more than a dozen answers. He asked for more time, which I doled out in increments, extending the deadline to 6:30, then 7:00, and finally 7:30.

  As 7:30 neared, we were hearing through the grapevine that Jimmy was not going to get all of the consents in. I decided that time was up and called to thankJimmy for having tried. "I've gotjust five left," Jimmy pleaded. "Give me more time, Steve. I can get them." Reluctantly, I replied, "I can't, Jimmy. I'm sorry." We would go forward with the bankruptcy. His final request was that the President publicly recognize JPMorgan's efforts to be constructive.

  Later in the evening, Matt was able to piece together what had happened behind the scenes, and it became clear that I had made the only decision possible. Not only had the holdouts—a handful of hedge funds—demanded $500 million to sweeten the deal, they had also wanted all the extra money for themselves, to the exclusion of the other lenders. That crazy proposal—which cost the creditors the $250 million that I had offered—was pushed by a lawyer named Tom Lauria, whom the hedge funds had hired. I had never heard of Tom Lauria, but Matt knew him well professionally; he regarded Lauria as one of the most undisciplined members of the bankruptcy bar, a self-promoter who would say or do almost anything.

  My decision did not sit well with Chrysler, whose board of directors was in almost constant session as bankruptcy neared. Bob Manzo, the company's representative, continued to push for a deal. E-mailing Bloom and Feldman that night at 8:44, he urged them to reconsider the holdouts' proposal.

  "That's too close to not exhaust every avenue to get this done," Manzo wrote. Feldman was furious that Manzo had gotten in the middle of the negotiations. "I'm now not talking to you," he fired back. "You went where you shouldn't."

  Manzo tried to make amends, but Feldman ignored his e-mails and calls as he worked into the night putting the final touches on the bankruptcy petition. He finally responded to Manzo at 3:54 A.M. "It's over," Matt's e-mail said. "The President doesn't negotiate second rounds. We've given and lent billions of dollars so your team could manage this properly. I've protected your management and Board and now your [sic] telling me you're going to try to put me in a position to have to bend to Lauria. That's BS."

  At daybreak in Detroit, two hours later, Chrysler President Tom LaSorda e-mailed Manzo to ask if their last-ditch intervention had been successful. Manzo was direct: "Tom. Not good. Tried most of the night with no luck. These Washington guys want to show the market ... that they can be tuff."

  That, of course, was not at all how we saw it. Nothing would have pleased us more than to avoid the bankruptcy of a major U.S. automaker.

  The White House protocol resembled the one we'd followed a month earlier: a preliminary briefing for the media, outreach calls by President Obama from the Oval Office, then the televised presidential address. I had a chance to review his speech one last time. Despite his theatrics, Jimmy ultimately had been a positive force, and I had taken the mouselike step of inserting a thank-you to JPMorgan. I was also pleased to see that the White House had added language to echo some of the last-minute battles behind the scenes. Notably, the speech now included a searing criticism of "investment firms and hedge funds [that] decided to hold out for the prospect of an unjustified taxpayer-funded bailout." I was quite angry that a handful of investors had pushed Chrysler into bankruptcy (while costing themselves their share of the extra $250 million), so I welcomed that language.

  We took some time in the Oval Office beforehand to underscore for the President the remaining uncertainty with GMAC and the risks that it held. Not wanting to publicize our difficulty with Sheila Bair, we had fudged the situation in the President's speech and in the fact sheet. The latter read: "The U.S. Government is supporting the automotive restructuring initiative by promoting the availability of credit financing for dealers and customers, including liquidity and capitalization that would be available to GMAC, and by providing the capitalization that GMAC requires to support the Chrysler business." In his calm way, the President took this in stride, and happily the media never probed the weasel wording to find out what was really going on with GMAC.

  After President Obama completed his outreach calls, we made our way from the Oval Office to the first floor of the White House to assemble behind him as he announced to the nation that we were putting Chrysler into bankruptcy. This time, Ron and I merited inclusion as potted plants.

  ***

  Sequestered in the West Wing for much of the morning, I was unaware of the drama that had unfolded for Matt Feldman and the bankruptcy team. Matt was working with Brian Deese on more White House talking points when his BlackBerry began buzzing. He saw a slew of urgent e-mails from Manzo. Matt stepped outside to call. "What happened?" he asked.

  "You're never going to believe this," said Manzo breathlessly. The pressure of events had apparently gotten to Chrysler's bankruptcy lawyer, Corinne Ball. "She stood up at the board meeting and told the board that there was a real risk that Lauria was going to file an involuntary and that it would be a breach of the board's fiduciary duty not to file immediately to preserve venue."

  Translated, this meant that she thought the holdouts would try to block us from filing the Chrysler case in New York federal court, which had the most experienced and professional bankruptcy judges. Instead they would file in a friendlier court. The White House was aware of this risk but didn't think it worth adjusting the plan.

  "You've got to be kidding," Matt said. "Where is she?"

  "She took her briefcase and the pleadings and headed downtown," Manzo replied. Feldman, mystified, called Corinne on her cell phone.

  "Have you filed yet?" he asked.

  "I just handed the clerk the petition," sh
e said. Feldman, who knew everybody in the bankruptcy court, asked her to put the clerk, Vito, on the phone.

  "Hey, Matt," Vito said.

  "Have you put the petition on the system yet?"

  "No, I was just about to."

  Once the petition was keyed in, it would hit the Internet within twenty minutes. The President was not due to speak for ninety minutes. Matt asked Vito to give the phone back to Corinne.

  "Corinne, Vito is going to hand you back the petition. You do not want to preempt the President. If you preempt the President, I'm telling you, I don't know that the financing is still available. You cannot do this."

  "You don't understand," Corinne insisted. "There are reporters all over the place. They saw me go in. We've got to file." Matt asked her to put the clerk back on the line.

  "Is there a place you can have Corinne sit so the press won't see her for the next hour?" Feldman asked.

  "I have a desk in the corner," Vito said.

  Just then a line from Dirty Dancing popped into Feldman's head: Nobody puts Baby in a corner.

  "Put Corinne in the corner," he told Vito.

  And there she sat until President Obama uttered his first words.

  The news of Chrysler's bankruptcy was explosive, of course. "Chrysler Pushed into Fiat's Arms," declared the Wall Street Journal. "Obama Vows Swift Overhaul as Chrysler Enters Bankruptcy," said the Washington Post. As we regrouped in Larry's office after the President's speech, Larry was unhappy with Obama's words about the hedge funds, thinking them unnecessarily harsh. He'd reviewed the speech in advance and blamed himself for not having spoken up. "I should have said something," he fretted.