Overhaul (30 page)

Bair's concern was the safety and soundness of GMAC. We had told the regulators that we intended to recapitalize the company based on the results of stress tests then under way. The goal of stress testing, orchestrated by Tim for the nation's nineteen largest bank holding companies, including GMAC, was the restoration of confidence in the banking system. If a company's capitalization was found wanting, it would be required to raise enough additional money to weather a full range of economic storms. Ideally, investors would put up the funds, but implicit was the assurance that Washington would provide capital if the private market wouldn't. GMAC was in such weak shape that its only possible source of capital would be
TARP.

Based on the stress test results—not yet public but available to us—we had budgeted $13.1 billion of new capital for GMAC. Of that, $4 billion was to support the lending it would take over from Chrysler Financial. Bair didn't believe those sums were enough. She suspected GMAC to be weaker than the stress test revealed, and didn't trust de Molina's ability to deliver what he promised. She also shared the FDIC members' antipathy toward GMAC for its aggressiveness in Internet banking.

So the FDIC withheld its approvals, muttering about more capital. Making things worse, Spoth hinted at but would not spell out his boss's demands. We made so little progress with him that I finally asked Tim to intercede. A summit meeting was booked for April 28, just two days before the President was to speak on television. It was in Tim's small conference room, in the early evening of another unseasonably warm day, that I first came face-to-face with Sheila Bair—a small, trim woman about my age with brown hair, brown eyes, and an unsmiling, sour demeanor. According to Washington protocol, this was a "principals plus one" meeting. Sheila brought Spoth. Tim and I represented Treasury, leaving me without my finco experts Brian and Rob. Bernanke and Alvarez participated by phone.

One could hear bemusement in Bernanke's soft voice coming through the speaker. His tone suggested that he was wondering, "Why are we even here?" The Fed was already prepared to meet a key demand by Bair, that GMAC be able to use dealer loans as collateral to borrow at the Fed's "discount window." But this meeting was about Bair's needs. An effort was under way in Congress to increase from $30 billion to $100 billion the credit line at Treasury used by the FDIC to backstop its deposit-insurance fund. Bair made it clear that in exchange for helping GMAC, she expected Treasury's support for the legislation. Such horse-trading is routine, and I didn't question it. I just wished that she or Spoth had been more straightforward and had brought it up weeks earlier. But Tim readily acquiesced.

Next came a recital of grievances about GMAC. Weirdly, Bair attacked dealer financing anew, making it sound as if floor-plan lending were the reincarnation of subprime. It was as though we had not, just days before, explained to Spoth why floor-plan financing is about the least risky activity an auto finance company undertakes. He remained silent, and though I was incensed, so did I. As a "plus one," I didn't think it was my place to take on Bair in the presence of Bernanke and Geithner. The moment the meeting ended, I rushed down to see Brian Stern and Rob Fraser, wondering if I had somehow misunderstood everything I had heard about floor plan. They assured me that I hadn't.

Clearly, the issue of the auto finance companies—which two months earlier we had viewed as the tail of the dog—was now a Great Dane of a problem. Soon to come was the news that Bair did not merely want Tim's support for expanding her credit line; she wanted the legislation passed by Congress before she would agree to help GMAC. That wasn't going to happen in the next forty-eight hours.

We agonized. It seemed insane to let Chrysler go down over her agenda. But Chrysler could not stay in business unless its dealers and customers got financing, and without FDIC approval, there was no way to provide it. We had fallen short on a key condition for not pulling the plug.

In close consultation with Larry and Tim, we decided the rescue was worth an additional gamble. We committed $7.5 billion of
TARP
funding to GMAC without waiting for the FDIC's cooperation. In exchange, de Molina agreed to take on Chrysler Financial's lending for two weeks so that the automaker could continue to sell cars. Two weeks would be long enough, we hoped, for the FDIC's legislation to pass or for Bair to come around.

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 were 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."