April 17, 2009 - Steven Rattner - J.P.Morgan Chase, Citigroup, Morgan Stanley and Goldman Sachs - Washington D.C.

At a meeting with executives from four of the nation's largest banks earlier this month, the chief of the government's auto task force, Steven Rattner, delivered a message that shocked some in the room.

"People's jaws just dropped," said a person familiar with the discussions.

Rescued Banks Balk at Chrysler Deal

Creditors Pushed To Surrender Claims Of Billions

"People's jaws just dropped," said a person familiar with the discussions.

At a meeting with executives from four of the nation's largest banks earlier this month, the chief of the government's auto task force, Steven Rattner, delivered a message that shocked some in the room.

To save Chrysler, he told them, the four banks and several other financial firms would have to surrender their claims to most of the $7 billion the automaker owed them. And what would the banks get in return for this sacrifice? Nothing.

"People's jaws just dropped," said a person familiar with the discussions.

The banks -- J.P. Morgan Chase, Citigroup, Morgan Stanley and Goldman Sachs -- have all since balked at the government's proposal. This week, they are drafting a counteroffer.

But those four banks are themselves recipients of billions of dollars in government largesse. Collectively, they have received $90 billion from the rescue program for the country's banks. Now, their critics say, the firms have an obligation to cooperate as the government seeks to save Chrysler.

"These are banks that have received substantial investments from the government," said Rep. Gary Peters (D-Mich.), whose district includes Chrysler headquarters. "We hope they will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs. People are angry that again it seems like the banks are standing in the way."

Representatives of the banks and the other lenders have formed a committee to handle negotiations.

"Together, we are focused on providing a thoughtful response to the initial proposal," they said in a public statement this week.

Privately, the lenders contend that the government offer was unfair.

"Ironically, politicians are accusing us of not wanting to lend more," said a source at one of Chrysler's creditors, referring to criticism that the reluctance of financial firms to make loans has stalled the economy. "But what's the incentive to provide loans if the government can come in at any time and trump you?"

Under the Chrysler rescue plan outlined March 30 by President Obama, Chrysler must strike a deal with its creditors and unions to reduce the company's debts. The company then must reach a pact to merge with the Italian automaker Fiat. If it does so by April 30, the government may extend an additional $6 billion in loans.

The requirements set out by the Obama administration leave the banks with a powerful role in determining the fate of the storied U.S. automaker.

If the bankers agree to lessen the burden of the Chrysler's $7 billion in secured debt, a deal with Fiat may go forward. If they don't, the Fiat deal would collapse and Chrysler likely would be liquidated, analysts said.

A liquidation would have serious financial consequences for the government and the banks, even beyond the loss of 180,000 jobs -- Chrysler's estimate of the number of employees and those of its dealers who would be affected.

If Chrysler is liquidated, according to people familiar with the matter, the banks could recover some of their loans and the government likely wouldn't because the bank loans take legal precedence.

About three-quarters of the $7 billion in Chrysler's senior secured debt -- or debt that takes precedence and is backed by assets -- is owed to the four major banks, the rest to an array of other financial institutions such as hedge funds. By contrast, Treasury officials expect that the government, which loaned Chrysler $4 billion earlier this year from the bailout program, would receive nothing back.

At the April 2 meeting at the Treasury, representatives of the banks and another firm, Elliott Management, met with members of the auto task force to negotiate a deal to reduce the loans.

Representing the Treasury were Rattner, the task force's senior adviser, as well as Ron Bloom, a former Wall Street investment banker who worked for the United Steelworkers of America. Also attending were Chrysler chief executive Robert L. Nardelli and Fiat's chief executive, Sergio Marchionne, according to people familiar with the matter.

At the meeting, Rattner and Bloom laid out the government's proposal for reducing Chrysler's debt. The government urged the banks to accept 15 cents in cash for every dollar that was owed them. While bank representatives were shocked at the meager proportions of Rattner's proposal, Chrysler's debt is currently trading at about that price. If accepted, the offer would reduce Chrysler's $7 billion debt to about $1 billion in cash.

During the negotiations, Treasury officials did not use their leverage as lenders to the banks to push them to accept the offer, people familiar with the meeting said. Treasury officials considered the bankers' shock at the proposal as much a negotiating posture as a sincere reaction, a source said.

J.P.Morgan, most recently as yesterday, and Goldman Sachs have said they want to return money from the government's Troubled Assets Relief Program as soon as possible.

Peters, the Michigan congressman, said the banks should take the market price. "Giving them more would be giving the banks another subsidy," he said.

But the banks balked at the offer because they estimate the loans are worth far more.

According to an analysis by Standard & Poor's, the loans would be worth 30 to 50 cents on the dollar if the company goes into bankruptcy and assets are sold to repay creditors. Likewise, Chrysler said that if it liquidates, the creditors would receive between 11 cents and 43 cents on the dollar, according to estimates it submitted to the government in February. More than a billion dollars could be at stake.

Though the two sides were far apart -- some of the bankers wanted at least 50 cents on the dollar for the loans -- representatives of the financial firms agreed to look at the Treasury's analysis behind the offer of 15 cents.

Late on Easter, the Treasury delivered 70 to 80 pages of documents outlining the government position. Since then, the banks have been developing a counterproposal, which could be delivered as early as today.

Original Story - Washington Post

April 22, 2009

Debtholders vs. U.S. Over Chrysler Deal

The Obama administration has entered a tense showdown with several of the nation’s largest banks that appears likely to determine whether Chrysler survives.

Last week the Treasury Department, which runs President Obama’s automobile task force, presented banks holding $6.9 billion in Chrysler’s secured debt with a plan under which they would get about 15 cents on the dollar, or about $1 billion.

That is roughly the trading level of Chrysler debt in recent days, a reflection of Mr. Obama’s declaration that the firm is not viable on its own, and must put together a partnership with Fiat or go out of business.

The government’s insistence on an aggressive write-down of the debt is part of an enormous game of chicken with the debtholders.

But it is also a test for Mr. Obama and his Treasury secretary, Timothy F. Geithner, as they deal with banks that, in an effort to keep the American financial system from collapsing, have also been lent money under the government’s Troubled Asset Relief Program.

On Monday the banks, led by JPMorgan Chase and Citigroup, rejected the administration’s plan outright, with some of the debtholders arguing that they would rather break up Chrysler and sell its assets — notably its Jeep brand — because they believed that they would receive more money selling the assets than they were being offered by the administration.

In a plan submitted to the administration on Monday night, the debtholders insisted that they receive about 65 cents on the dollar, or about $4.5 billion, and roughly a 40 percent stake in whatever car company emerges as a re-engineered Chrysler.

The standoff with the banks was underscored Tuesday evening by an administration official. “It is neither in the interest of Chrysler’s senior lenders nor the country for them to advance a proposal that would yield them an unjustified return,” said the official, who requested anonymity because the negotiations were incomplete. “Our hope and expectation is that these lenders take a more constructive position in the coming days that reflects the actual situation that they and the company face.”

Inside the administration, there is increased talk of pushing Chrysler into a structured bankruptcy, re-emerging with Fiat as a major investor in the company.

It is unclear what assets would be left to the banks, but representatives of those financial institutions have warned the task force “that a bankruptcy would be very messy and everyone would lose — those of us who carry the debt, and those in the government who are trying to save jobs,” said one banker involved in the negotiations who also requested anonymity because of the delicate nature of the talks.

Terms of Chrysler’s proposed alliance with the Italian automaker Fiat are essentially complete, with Fiat agreeing to take an initial 20 percent stake in the company in return for providing small cars, fuel-efficient engines and other technology. It would not put any cash into the deal.

Mr. Obama said in March that Chrysler, which has received $4 billion in federal loans, must reduce its debt if it is to get further government assistance and avoid a Chapter 11 bankruptcy filing.

The company also has been ordered to use stock to finance half of its $10.6 billion in health care obligations for retired union workers.

The United Automobile Workers union has tentatively agreed to the stock-financing plan, said people close to the talks. But the union and Chrysler have yet to complete a schedule for the company’s cash contributions to the health care trust.

Neither the U.A.W. nor the banks, however, appear willing to strike a deal before the other side does the same.

The chief executives of Fiat and Chrysler, along with the U.A.W.’s president, Ron Gettelfinger, met for a second day on Tuesday in Washington with the auto task force.

Fiat cannot complete its alliance with Chrysler until the debt and health care issues are resolved. But Fiat’s chief executive, Sergio Marchionne, remains committed to the alliance, particularly because it gives Fiat an opportunity to re-enter the American car market.

The steering committee for the lenders is made up of JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs, and four other investment firms. Together, they represent a wider group of 45 banks and hedge funds.

The lenders have argued that they are being asked to shoulder too much of the burden of cutting Chrysler’s debt, that the U.A.W. is getting preferred treatment, and that Fiat should have to contribute cash to Chrysler’s balance sheet.

The hard line by the steering committee drew criticism Tuesday from Representative Gary Peters, Democrat of Michigan, who noted that JPMorgan and other banks had received their own federal aid.

“It is extremely disappointing that while other stakeholders have agreed to work with President Obama to advance Chrysler’s restructuring, financial institutions that have already taken billions of dollars in taxpayer support are refusing to do the same,” Mr. Peters said. Chrysler is continuing to make cuts. The company has made buyout offers to its remaining 26,000 U.A.W. workers that expire on April 27.

The automaker is also in talks with the Canadian Auto Workers union to reduce costs in Canada, which account for about 25 percent of Chrysler’s production.

Mr. Obama said Chrysler would get $6 billion more in loans if it can get the debt and health care concessions by April 30, and complete its Fiat alliance.

Original Story - New York Times

Update April 22, 2009

Treasury Said to Raise Offer to Chrysler Lenders

The Treasury Department has increased its offer to repay Chrysler’s senior lenders as part of continuing talks on how to reduce the company’s debt, a person who had been briefed on the talks said on Wednesday.

The government’s new plan, however, still shows a broad chasm between the two sides as Chrysler races to complete a reorganization plan by April 30 or face a near-certain liquidation through bankruptcy.

Under the terms of the new plan, presented Wednesday afternoon, Chrysler’s lenders, who hold about $6.9 billion worth of debt, would receive about 22 cents on the dollar, or about $1.5 billion. They would also receive a 5 percent equity stake in the reorganized company, this person said, who spoke only on the condition of anonymity because the talks are private.

That is an increase from the government’s original proposal, presented on April 12, under which the lenders would have received just 15 cents on the dollar, or about $1 billion. That is roughly equivalent to where Chrysler’s debt is trading on the public markets today.

But in a plan presented to the government on Monday, the steering committee of Chrysler’s lenders sought at least 65 cents on the dollar, or about $4.5 billion, and a roughly 40 percent equity stake in a restructured Chrysler.

The intensifying proposals and counteroffers between the two sides represent the growing urgency of the situation. The Obama administration has mandated that Chrysler complete an alliance with Fiat, the Italian carmaker, and win concessions from both its lenders and the United Auto Workers union before the April 30 deadline. If Chrysler succeeds, the government would give it an additional $6 billion in loans.

The lenders’ steering committee — comprising five banks and three investment firms and led by JPMorgan Chase and Citigroup — has argued that it would recover more money from a liquidation of the company’s assets than under the government’s offers. The committee represents a wider group of about 45 banks and hedge funds.

These creditors have also argued that Fiat should contribute more capital to its proposed alliance with Chrysler. Under the terms of the potential deal, Fiat would take a 20 percent stake in the company in exchange for small-car models and various technologies. It would not invest any cash.

Chrysler’s lenders have also said that the U.A.W. should be forced to accept greater concessions. The U.A.W. has tentatively agreed to allow Chrysler to use stock to finance half of a $10.6 billion fund for its retired workers’ health care obligations.

Until now, the Treasury task force had been reluctant to offer to pay the lenders more than the debt currently trades at on the public markets. And some politicians have pointed out that many of the banks involved have taken federal bailout financing. Yet the banks contend that they must take care of their own constituents.

Some of the lenders are also split over how to negotiate with the Treasury’s task force, people with knowledge of the matter said, with some institutions, mostly the banks, favoring a more flexible negotiating stance and others advocating a hard-line position.