Pay Rule Led Chrysler to Spurn Loan, Agency Says
Firm Claims It Didn't Need The Government Infusion
By David Cho, Peter Whoriskey and Amit R. Paley, Staff Writers
Tuesday, April 21, 2009
Top officials at Chrysler Financial turned away a government
loan because executives didn't want to abide by new federal
limits on pay, according to new findings by a federal watchdog
The government had offered a $750 million loan earlier this
month as part of its efforts to prop up the ailing auto
industry, including Chrysler, which is racing to avoid
bankruptcy. Chrysler Financial is a major lender to Chrysler
dealerships and customers.
In forgoing the loan, Chrysler Financial opted to use more
expensive financing from private banks, adding to the burden on
the already fragile automaker and its financing company.
Chrysler Financial officials denied in a statement that the
company's executives had refused to accept new limits on their
pay, adding that the firm turned down the loan because it no
longer needed it. But their account conflicts with a report set
to be released today by the Treasury's special inspector general
for the federal bailout, saying the executives' refusal led
Treasury to withdraw the loan offer.
"It was certainly a deal-breaker from Treasury's perspective,"
said Neil M. Barofsky, the special inspector general, who spoke
to the bailout program's chief compliance officer about the
situation last week.
The incident is the latest controversy to illustrate the hazards
confronting the Obama administration as it sets out to assist
The uproar over the federal financial rescue, much of it focused
on executive pay at bailed-out firms, has made companies
skittish about taking government aid. Several big banks, such as
J.P. Morgan Chase and
Goldman Sachs, have said the bailout money now carries a
stigma and have taken steps to pay it back. A program to aid
small-business lenders has been stymied by the firms' reluctance
to accept pay limits and other requirements of bailout loans.
Government officials have said that unless financial firms have
enough resources to lend liberally to consumers, the economy
cannot be revived.
The Treasury Department previously lent Chrysler Financial $1.5
billion, when less stringent requirements on executive
compensation were in place for recipients of federal bailout
money. But since that first loan was announced on Jan. 16, the
Obama administration and Congress have toughened the rules.
During March, when it seemed that the first loan would run out,
the Obama administration began working on a deal to lend the
company an additional $750 million.
It did not take long for most of the agreement to fall in place.
But on April 7, the Treasury asked Chrysler Financial to have
its top 25 executives sign waivers regarding their compensation,
according to the special inspector general's report.
Those waivers would have barred the executives from suing the
Treasury or Chrysler Financial over new pay restrictions. As
part of the economic stimulus package, Congress approved
compensation limits, and the Treasury is working on clarifying
what the firms must do to comply with the rules.
In other words, the executives were asked to sign the waivers
without knowing what specific limits the Treasury might set.
Within a week, Chrysler Financial responded that "it was unable
to obtain waivers from all 25 executives," the report said. By
last week, the report added, "the request for additional funding
Chrysler Financial denied that its executives balked at new pay
limits and said the firm had met all the restrictions of its
first loan from the government's Troubled Assets Relief Program,
"Executives have not been presented with any new demands with
regard to executive compensation," the company said in a
statement. "As a TARP recipient we remain in full compliance
with current executive compensation requirements."
A senior industry official with knowledge of the matter said
Chrysler Financial passed up the new government loan because,
with auto sales down in April, there has been even less need for
financing. The official said that if sales pick up, Chrysler
Financial may seek additional government aid, even if it means
agreeing to executive-compensation limits.
"If Chrysler Financial needs the cash to support Chrysler, they
[the executives] are not going to put the auto company at risk,"
said the senior industry official, who spoke on condition of
anonymity because the negotiations were private. "These guys
aren't going to blow up the car company for their personal
reasons. . . . They've done everything they can to support the
Chrysler Financial recently announced publicly that it no longer
needs additional federal loans. Instead, the company said, it
will rely on other sources of financing.
"Chrysler Financial has determined that it has adequate private
capital funding to cover the short-term needs of our dealers and
customers and as such no additional TARP funding is necessary at
this time," the company said in a statement.
But by forgoing the government loan, the company had to tap
loans from a group of private banks, including J.P. Morgan and
Citigroup, that charged more for the money than the
government would have, sources said. That line of financing had
been arranged in August, when the company was struggling to stay
afloat, according to an industry official.
Chrysler and Chrysler Financial are separate companies. But both
are owned largely by Cerberus, a private-equity firm. The German
automaker Daimler owns a 20 percent stake in each.
Treasury officials declined to comment on the matter but
released a statement that said the department's auto task force
would "monitor closely the financing situations for both GM and
"This is an issue that Chrysler and its stakeholders will need
to address as part of this process and any potential deal," the