The Rescue of the US Auto Industry, Module E: Emergency Assistance for Chrysler Financial

By the time that two of America’s largest auto makers, General Motors (GM) and Chrysler, obtained a $17.4 billion financing commitment from the George W. Bush administration on December 19, 2008, they had been in dire straits for several years (Klier and Rubenstein 2012, 35–36; Paulson 2010, 361). This was due to a combination of declining market share, miscalculated labor arrangements, slim profit margins, and reliance on gas-guzzling vehicles for profit (COP 2011, 9–11; Canis et al. 2009, 1–2). The Global Financial Crisis had been raging for more than a year, and consumer confidence and access to credit was evaporating (COP 2011, 9­11). The companies and the rest of the American auto industry were insolvent and unable to fund themselves (COP 2011, 9­11).

Credit was and is the lifeblood of the American auto industry (Canis et al. 2009, 46­50). Dealers use cheap financing to buy cars for their showrooms. Before the crisis, manufacturers themselves typically provided this “floorplan financing” through captive (or de facto captive) finance companies such as General Motors Acceptance Corporation (GMAC) for GM, Ford Motor Credit for Ford, and Chrysler Financial for Chrysler (Canis et al. 2009, 46–50).^FNIn 2008, GMAC, which was GM’s former captive auto finance company, and Chrysler Financial were both controlled by Cerberus Capital Management (Cerberus), but each was still informally acting as a captive finance company for their respective brands (COP 2010, 9) Credit is equally important to fund consumer purchases, because “90 percent of consumers finance automobile purchases through loans, either directly from the manufacturers” financing arms or through third-party financial institutions” (COP 2009, 7). Both kinds of credit typically take the form of loans from third-party banks and the same captives. If these two kinds of financing are not available, sales in the US auto market can collapse (Canis et al. 2009, 46–50).

Before the crisis, the companies providing auto financing frequently obtained funding by securitizing the loans; for example, by packaging loans into asset-backed securities (ABS), bonds that are sold to provide immediate cash that can be re-lent (GM Financial n.d.). Prior to the crisis, securitization financed about a third of all US auto loans (Campbell et al. 2011, PDF p. 3).

Chrysler Financial: From Crown Jewel to Chief Liability

In 2007, Daimler-Chrysler sold an 81% stake in Chrysler Holding (the direct parent company of Chrysler and Chrysler Financial) to private-equity company Cerberus Capital Management (Cerberus) (Bel Bruno and AP Newswires 2007). The sale of Chrysler Holding does not appear to have been caused by the crisis, but it was complicated by the crisis, making it difficult to access the needed funding (Bel Bruno and AP Newswires 2007).

Daimler was losing money on Chrysler and expected losses to continue to grow due to Chrysler’s future benefit liabilities (Isidore 2007). For that reason, it sold Chrysler for one-fifth of what it had paid nine years earlier (Isidore 2007).^FNDaimler had paid $37 billion for Chrysler, but sold the automaker to Cerberus for $7.4 billion (Isidore 2007). After the sale, DaimlerChrysler and DaimlerChrysler Financial were renamed Chrysler and Chrysler Financial, respectively (Isidore 2007; Chrysler Financial Auto Securitization Trust 2009-B 2009, 16). This split from Daimler would cause Chrysler Financial to lose its business providing auto financing for Mercedes and Maybach in North America.

Credit conditions were bad and getting worse by fall of 2008. From early 2008 through at least mid-2009, the market for ABS was essentially nonexistent (COP 2010, 34, 55). Chrysler Financial had tried to renew its $30 billion line of credit from 22 large banks but had to settle for just $24 billion on August 4, 2008. Credit was also growing increasingly expensive (Koons 2008). The banks lent the $24 billion at an interest rate of between LIBOR plus 110 basis points and LIBOR plus 225 basis points, a rate that was unexpectedly high and which would have made offering attractive consumer financing difficult (Rappaport 2008; Boudette 2008). Also, as a condition of its new financing, Chrysler Financial rapidly tightened lending requirements, increased interest rates, stopped leasing vehicles to consumers, and began charging Chrysler dealerships additional fees for older unsold inventory (Banks 2008).

These factors crippled Chrysler’s ability to sell vehicles, which had been under pressure since early 2008 when Cerberus had directed it to reduce the number of dealerships. (Banks 2008). It is especially important to note that Chrysler Financial had a significantly lower debt-to-equity ratio than its peers, but Treasury considered its situation to be worse than that of GMAC because all of its outstanding debt was set to mature in July 2009 (COP 2010, 22; Picarillo and Laterza 2009).

The Path to Aiding Chrysler Financial

Throughout 2008, automotive sales for the Big Three—GM, Chrysler, and Ford—rapidly declined due to a combination of factors: “rising gasoline prices, tightening credit markets, eroding consumer confidence, high unemployment, and discretionary spending concerns” (COP 2009). Automobile sales in the United States and abroad were down 18 percent lower than the previous year’s. The tightened credit market was particularly significant because the overwhelming majority of consumers finance auto purchases, directly through the manufacturer’s financing arm or from a third party. (COP 2009,7). “The particularly weak condition of the financing arms of Chrysler and GM—Chrysler Financial and GMAC, respectively—exacerbated the manufacturers’ plummeting sales as the credit markets seized up” (Bureau of Economic Analysis 2019; COP 2009, 7).

In response to the manufacturers’ requests, in December, the Bush administration announced a $4 billion Bridge Loan to Chrysler Holding to pay for Chrysler’s operating costs and a $13.4 billion loan to GM under the Troubled Assets Relief Program (TARP) (see Nye 2021a for more on the late-2008 funding for the auto industry; Kolka 2009, 30). As discussed in Key Design Decision No. 1, use of TARP funds was controversial and at first President Bush and Treasury Secretary Henry M. Paulson, Jr., did not believe that Congress had authorized TARP funds to be used for an auto bailout. However, the Bush administration ultimate determined that the statute was broad enough to provide relief. Among other arguments, Treasury relied on the nexus between GM and Chrysler and  their respective finance companies, GMAC and Chrysler Financial, and the critical role that financing played in the industry to support funding under TARP (COP 2009, 70; Wiggins, Metrick, and Nye 2021).

At the end of December 2008, Treasury also promised up to $6 billion in aid for Chrysler Financial’s competitor, GMAC (Shepardson 2009). Officials from the two Chrysler companies complained that the aid put Chrysler Financial, and therefore Chrysler, at a “competitive disadvantage” (Shepardson 2009).^FNAs part of Chrysler’s requests for aid from TARP, Chrysler had asked for $2.5 billion to aid Chrysler Financial’s floorplan and consumer financing operations (Kolka 2009, 30). This request was subsequently lowered to $1.5 billion in aid that would be allocated to only consumer financing (Kolka 2009, 30). On January 16, 2009, days after the complaints were aired to the press, Treasury announced $1.5 billion in aid from TARP to Chrysler Financial as a measure to improve consumer access to credit and prop up auto sales Treasury 2009a).

Use of the Federal Reserve’s Broad-Based Liquidity Programs

In an attempt to stabilize itself, Chrysler accessed two broad Federal Reserve programs that assisted Chrysler Financial’s auto finance business. The Commercial Paper Funding Facility (CPFF), which launched on October 27, 2008, was designed to backstop the commercial paper market and revive term lending. The CPFF provided funding for third parties to purchase highly rated unsecured and asset-backed commercial paper from eligible issuers (Wiggins 2020). Between October 27, 2008, and September 8, 2009, $4.82 billion of Chrysler Financial Auto Conduit Receivables were purchased under the auspices of the CPFF (BdofGov n.d.).

Another broad Fed program accessed by Chrysler Financial was the Term Asset-Backed Securities Loan Facility (TALF), which was intended to stimulate the renewed issuance of consumer and small business loans by facilitating the securitization of such loans at more normal interest rate spreads (Rhee 2020). Specifically, the TALF allowed eligible institutions to borrow from the Federal Reserve Bank of New York (FRBNY) using, as collateral, among other types, newly-issued auto loan asset-backed securities (ABS) (Rhee 2020). Chrysler Financial issued enough auto ABS, some funded under TALF, so that on July 14, 2009 it was able to repay the remaining principal, interest, and amounts due under the vested notes owing with respect to the Chrysler Financial Trust Loan. (GAO 2009c; Langlois 2009). It seems the conditions and cost of the TALF loans may have been preferable to continuing to pay the fees associated with, and comply with, the executive compensation restrictions of the Chrysler Financial Trust Loan.

The Two Interventions Customized for Chrysler

Two government interventions were customized for Chrysler and Chrysler Financial. In early 2009 Chrysler Financial accessed a $1.5 billion lending facility from Treasury under the Troubled Assets Relief Program (TARP) (Office of Financial Stability 2018). After Chrysler Financial drew down that funding, the company became involved in Treasury’s restructuring of Chrysler via the bankruptcy code; this led to the second intervention. (COP 2010, PDF pp. 26, 46)de Starting in late April 2009, as part of Chrysler’s bankruptcy proceedings, Treasury facilitated the replacement of Chrysler Financial by GMAC as Chrysler’s auto finance partner (Treasury n.d., 5; COP 2010, 27,49).^FNOn March 30, 2009, Treasury had released a Determination of Viability for GM and Chrysler (Treasury 2009b). In the Chrysler document, the US government announced its expectations for Chrysler Financials’ future (Treasury 2009b, PDF p. 5). In spite of Chrysler’s reliance on Chrysler Financial for nearly half of its sales, Treasury cited the possibly divergent customer mix, “separation and independence of Chrysler Financial and increased credit standards,” and “substantial financing challenges” faced by Chrysler Financial as causes for its suggestion that Chrysler’s “future demand may depend on [its] finding alternate lending sources” (Treasury 2009b, PDF p. 5). This meant that Chrysler would likely further distance itself from Chrysler Financial, and Chrysler Financial would have to survive as a third-party auto finance company that would not follow Chrysler into the bankruptcy process (COP 2010, 27, 49).

Treasury’s $1.5 billion Funding Facility under TARP

Pursuant to a loan agreement, dated January 14, 2009, between Treasury and Chrysler LB Receivables Trust, a bankruptcy-remote trust established by Chrysler Financial (“Chrysler Financial Trust”), Treasury provided $1.5 billion in aid for Chrysler Financial that would fund a new pool of Chrysler Financial ABS (the Chrysler Financial Trust Loan) (Bansal and Krolicki 2008; Chrysler Financial Services and Treasury 2009, PDF p. 5; Treasury 2009a). The ultimate purpose of the program was the same as the original $17.4 billion Bridge Loan program that provided funding to GM and Chrysler: to provide financing to “restore stability to the domestic automobile industry in the United States” and “restore liquidity to its business” (Nye 2021a; Chrysler Financial Services and Treasury 2009, PDF p. 5). The proximate purpose of the program was to finance retail loans made by Chrysler Financial on or after January 1, 2009, with respect to the purchase of Chrysler vehicles, including cars, light-duty trucks, and recreational vehicles to “stimulate manufacturing and sales” of such vehicles Treasury n.d.; Chrysler Financial Services and Treasury 2009, PDF p. 5). It was thought that the extension and securitization of new consumer loans would temporarily help keep Chrysler Financial and thus, Chrysler, afloat (Treasury n.d.; Chrysler Financial Services and Treasury 2009, PDF pp. 5, 47–73; Dombey and Simon 2009). Tangentially, this would preserve jobs of American workers employed directly by the manufacturers and in related industries and “safeguard the ability of the [manufacturers and their affiliates] to provide retirement and health care benefits for their retirees and their dependents” (Chrysler Financial Services and Treasury 2009, PDF p. 5).

Authority: Funding for the Chrysler Financial Trust Loan came from Treasury’s Automotive Industry Financing Program (AIFP), which Treasury authorized under TARP pursuant to the Emergency Economic Stabilization Act of 2008 (EESA). This was the same authority Treasury relied on for all of its direct aid to the auto industry (Office of Financial Stability 2018).

Loan Terms: Treasury agreed to loan up to $1.5 billion to Chrysler Financial Trust. Treasury would make advances under the Chrysler Financial Loan commitment in specified amounts on several funding dates specified in the agreement upon Chrysler Financial Trust’s request. Once advances were repaid, they could not be re-borrowed. The initial funding date was January 16, 2009 (Chrysler Financial Services and Treasury 2009, PDF p. 60).^FNWe have not been able to determine other funding dates, or their frequency, as this information was included on Appendix A to the agreement, which is fully redacted in the public copy of the agreement. However, we do know that Chrysler Financial Trust drew on the facility multiple times before April 9, 2009 (Chrysler Financial Services and Treasury 2009, PDF p. 60; GAO 2009a, 62). The loan was for a term of five years and all advances were fully repayable on January 16, 2014, along with any outstanding interest and/or fees (Treasury n.d.). Advances could be prepaid by Chrysler Financial Trust in whole or in part. However, in the event of any prepayment, Chrysler Financial Trust would be responsible for making Treasury whole for any losses or costs that it suffered in redeploying funds maintained for advances (Chrysler Financial Services and Treasury 2009, PDF pp. 7, 11).

Each advance under the loan was evidenced by two classes of Variable Funding Floating Rate Asset Backed Notes (promissory notes) issued to Treasury by Chrysler Financial Trust (Chrysler Financial Services and Treasury 2009, PDF pp. 10, 137, 145).^FNTreasury could have received a third class of these notes (called Class C notes) in the event that Chrysler Financial wanted to deploy supplemental loans that enhanced the credit of the ABS master trust through overcollateralization (although it is not clear whether these loans would have been extended by the US government or some other entity) (Treasury 2009a, PDF p. 2). However, Chrysler Financial appears to have chosen not to draw on these supplemental loans (Chrysler Financial Services and Treasury 2009, PDF pp. 154­162, 171–179). The Class C notes appear to have carried the same interest rate and many of the terms of the other notes (Chrysler Financial Services and Treasury 2009, PDF pp. 154­162, 171­179). (See Figure 1.) Class A promissory notes required Chrysler Financial Trust to pay Treasury the outstanding principal and interest on the advance on a monthly basis (Chrysler Financial Services and Treasury 2009, PDF pp. 90, 171­172; Treasury 2009a, PDF pp. 1–2). Principal and interest accrued at a rate of LIBOR plus 100 basis points for the first year and LIBOR plus 150 basis points for the second through fifth years. For Class A notes, overdue installments of interest accrued interest at a penalty rate of LIBOR plus 4% for the first year and LIBOR plus 4.5% for years two through five (Chrysler Financial Services and Treasury 2009, PDF p. 184).

Class B notes, also issued to Treasury by Chrysler Financial Trust in connection with all advances, functioned as additional consideration, fulfilling Treasury’s requirement that it had to receive “a warrant for common or preferred stock, or a senior debt instrument” when it purchased troubled assets from financial institutions under EESA Section 113(d)(1)(b) (EESA, § 113(Chrysler Financial Services and Treasury 2009, PDF p. 179).). Class B notes had the same terms and maturity dates as the Class A Notes. Treasury received 5% of the maximum loan amount, or $15 million, at closing and on each anniversary of the closing, up to a total of $75 million. The Class B notes ranked below the Class A notes in the payment waterfall (See Figure 2).

Collateral/Security: The loan and Treasury’s right to payment of principal and interest under the notes were secured by all the property of the Chrysler Trust, the pool of loans that it purchased and the related receivables, the funding account and any hedges. These were held by the Indenture Trustee, who held perfected first-priority liens on all of Chrysler Trust’s property for Treasury’s benefit (Chrysler Financial Services and Treasury 2009, PDF pp. 15, 72, 79–81, 288–289).^FNThe indenture trustee’s (Deutsche Bank Trust Company Americas) role was to act as trustee on behalf of those holding the various notes (Class A, Class B, and Class C) issued by Chrysler Trust (Chrysler Financial Services and Treasury 2009, PDF p. 60). The indenture trustee had a number of other duties to Treasury and Chrysler Trust under an indenture agreement (Chrysler Financial Services and Treasury 2009, PDF pp. 79–81).

Mechanics: As illustrated in Figure 3, the legal structure of the loan mimicked that of an auto securitization, with the US Treasury playing the role of the bond-buying investor. (See Figure 2). Proceeds of the loan were received by Chrysler Trust, a bankruptcy-remote ABS master trust (Chrysler Financial Services and Treasury 2009, PDF pp. 171­172). The Chrysler Financial Loan promoted the sale of Chrysler vehicles through the following process:

Chrysler Financial would make loans to consumers buying Chrysler vehicles, then bundle these loan receivables into a pool that it would sell to a bankruptcy-remote special purpose entity (SPE) created for this purpose, which was called Chrysler Balloon Depositor II LLC (the “SPE” or the “Depositor”) (Chrysler Financial Services and Treasury 2009, PDF pp. 53, 64–65, 67). The SPE purchased the pooled receivables from Chrysler Financial using funds it received from Chrysler Financial Trust, which held the proceeds from the Treasury loan (Chrysler Financial and Treasury 2009, PDF p. 137–141, 274). Chrysler Financial Trust then issued to Treasury two classes of notes providing for the repayment of the loan and for additional consideration for Treasury. Thus, Chrysler Financial funded a new pool of Chrysler Financial ABS, with Chrysler Financial Trust acting as a purchaser for auto loan receivables (Chrysler Financial Services and Treasury 2009, PDF pp. 5, 171­173, 225–230; Bansal and Krolicki 2008). This allowed Chrysler Financial to originate new loans and leases for consumers at better terms, increasing its volume from the low levels of late 2008 (Chrysler Financial Services and Treasury 2009, PDF pp. 10, 47–73, 242–257).

Chrysler Financial serviced the pooled receivables held by Chrysler Financial Trust and used the related proceeds from those receivables to fund the administrative fees associated with the securitization, Chrysler Financial’s servicing fees, hedging costs, and the Chrysler Financial Trust’s loan repayments to Treasury as the holder of Chrysler Financial Trust’s notes (Chrysler Financial Services and Treasury 2009, PDF pp. 75–97, 115–117, 283).

Parent Company Guarantee: The loan documents also included a guarantee agreement under which Chrysler Financial’s parent company, Chrysler Holding, guaranteed penalties that Chrysler Financial might become obligated to pay if it violated “dividend and distribution restrictions” contained in the loan agreement Treasury n.d., PDF p. 3; Chrysler Financial Services and Treasury 2009, PDF pp. 237–241). We have not been able to determine the substance of these restrictions; they have been redacted in the loan documents released to the public (Chrysler Financial Services and Treasury 2009, PDF p. 342; Treasury 2009a, PDF p. 3).

Executive Compensation Requirements: The executive compensation requirements imposed by the loan aimed to limit the benefits and compensation enjoyed by Chrysler Financial senior employees and executives. These restrictions were of two types: (1) regulations regarding compensation to senior executive officers issued by the Treasury in connection with EESA programs^FNThese terms were automatically imposed under 31 CFR 30 and Section 111 of EESA on organizations that received TARP money (Treasury 2009d; EESA 2008).These rules defined Senior Executive Officer (SEO) as the top five highest-paid officers and Senior Employees as the next 20 most highly compensated employees. Among other conditions, the rules prohibit or limit cash compensation, total compensation, short-term stock incentives, severance payments, and the adoption of any new benefit plan for SEOs who did not comply with the rules. and (2) restrictions contained in the loan agreement. It is not clear, however, what restrictions were contained in the loan agreement, because these terms have been redacted from the public version of the agreement. However, the term sheet for the Chrysler Financial Trust loan (Loan Term Sheet) included the following:

(A) Chrysler Financial shall comply with EESA terms,

(B) Chrysler Financial shall comply in all respects with the limits on annual executive compensation deductibles imposed by Section 162(m)(5) of the Code, as applicable;

(C) Chrysler Financial shall reduce by 40.00% the aggregate amount of bonus compensation that may be paid to Senior Executive Officers [the top five highest-paid officers] or Senior Employees [the next 20 most highly compensated employees] in fiscal year 2009 from the aggregate bonus compensation actually paid to such employees in 2007, subject to certain adjustments;

(D) Chrysler Financial shall not adopt or maintain any compensation plan that would encourage manipulation of its reported earnings to enhance the compensation of any of its employees; and

(E) Chrysler Financial shall maintain all suspensions and other restrictions of contributions to Benefit Plans that are in place or initiated as of the closing date” Treasury n.d., PDF pp. 3–4).

In particular, the 40% bonus reduction appeared to be unusually restrictive compared to similar TARP programs at the time. Treasury press releases referred to the proposed executive compensation terms as “enhanced restrictions on executive compensation” Treasury 2009a).^FNAs part of the loan agreements, Chrysler Financial and its individual SEOs and executive officers were required to sign individual waivers foregoing any claims against the company and Treasury for any changes to any compensation (Chrysler Financial Services and Treasury 2009, PDF pp. 12 (Sec. O), 39–43.)

Corporate Governance Terms: Pursuant to the loan agreement, Chrysler Financial was required to suspend payment of dividends. It also had to comply with corporate governance requirements imposed by EESA, which included, a semi-annual risk review by the compensation committee and certain disclosures.^FNSee pages A8-A9 of the Special Master’s letter for a list of these requirements (Feinberg 2009, 11–12).

Reporting Requirements and Administrative Burden: The reporting requirements included in the loan between the US Treasury and Chrysler Financial Trust were limited to standard conditions (notification of defaults, litigation, changes in control, right of lender to perform due diligence, etc.) (Chrysler Financial Services and Treasury 2009, PDF pp. 22–31).

Replacing Chrysler Financial with GMAC

In early April 2009, Treasury realized that Chrysler’s bankruptcy filing would cause Chrysler’s bankers to withdraw all $22 billion of its remaining credit lines (Rattner 2011, 147). Given its significant relationship with Chrysler and other concerns regarding the company, Treasury sought to arrange a more secure financing source for Chrysler. A plan was proposed to have GMAC replace Chrysler Financial. Chrysler Financial would go into “runoff mode,” continuing to hold the loans that it had made but not making new ones (COP 2011, 11; COP 2010, 48; Rattner 2011, 147). Treasury would not save Chrysler Financial. Chrysler made this plan public, announcing at the time that it “will enter into an agreement with GMAC that will provide dealer and customer financing after bankruptcy, in lieu of Chrysler Financial, which agreed to cooperate in the transition of its current dealer agreements to GMAC” (Canis et al. 2009, PDF p. 31; Docket 1261 2009, PDF pp. 8–11).^FNFor more details of the terms of Chrysler’s transition of its auto financing relationship from Chrysler Financial to GMAC see the Master Auto Finance Agreement at Chrysler Group LLC and GMAC 2009, PDF pp. 212–222.

Outcomes of the $1.5 billion Facility

Chrysler began to feel the benefits of the loan soon after implementation. From January to February of 2009, the number of loans written by Chrysler Financial “more than quadrupled” (Mitchell 2009). Chrysler Financial and its parent began to announce that loans would become more available and lending conditions would be relaxed. The companies also announced that the proceeds of the loan would be used to support an up to 60 month, 0% interest loan program along with other incentive programs (Shepardson and Priddle 2009; Mitchell 2009). As of early February, however, Chrysler’s dealers complained that many of their customers were still unable to access these incentive programs, as they were only “available to customers with top-tier credit ratings” (Kellogg 2009a).

Although the aid from the US government was lightening the financial load on Chrysler Financial, the company continued to be squeezed; Chrysler Financial’s financial burden was increasingly felt by Chrysler and its dealerships. Less than a month after the Treasury loan closed, the Wall Street Journal reported that Chrysler Financial “has focused increasingly on protecting its own bottom line, often at the expense of the auto company” (Kellogg 2009a). Chrysler Financial continued to face significant problems, as evidenced by the fact that it asked for additional TARP funds in March 2009 (Kellogg 2009b). The Washington Post reported that Treasury offered Chrysler Financial an additional $750 million in loans (Krisher and Manning 2009). However, the Associated Press wrote that a “government official with knowledge of the negotiations” said Chrysler Financial was unwilling to agree to the accompanying executive pay cuts Treasury demanded (Krisher and Manning 2009). The deal never came together or fell apart during negotiations over these pay cuts and soon Chrysler Financial indicated that it no longer needed such aid from the government (Krisher and Manning 2009).

Chrysler Financial reached the $1.5 billion maximum loan amount by April 9, 2009, and subsequently returned to raising lending rates, this time by an average of more than 1% (Kellogg 2009b; GAO 2009c, 62). The company repaid the loan in full (with interest and fees) quickly and made the last payment on July 14, 2009 (GAO 2009c, 62, 132). As a result, taxpayers received an extra $22.4 million (beyond the $1.5 billion they lent) (GAO 2009c, 134). Chrysler Financial stated that its speedy repayment was due to its successful participation in the Term Asset-Backed Securities Loan Facility (TALF) (Langlois, 2009).

Outcomes of GMAC’s Replacement of Chrysler Financial

With the filing of Chrysler’s Chapter 11 petition at the end of April 2009, Chrysler Financial’s funding sources dried up (Docket 482 2009, PDF p. 8). As a result, Chrysler Financial stopped providing floorplan financing to dealers and financing to consumers (Kellogg 2009b). Chrysler Financial “announced that it would no longer provide additional advances under the wholesale lines of such Dealers,” and Chrysler’s attorney worried about the fact that Chrysler Financial had liens “on most of these Dealers’ assets [including, among other things, new and used cars, parts, and other inventory]” (Docket 482 2009, PDF p. 8–9). Even worse, Chrysler Financial’s contracts with dealers apparently barred any party “from placing new liens on Chrysler Financial’s collateral without a waiver from Chrysler Financial” (Docket 482 2009, PDF p. 8–9). Chrysler Financial asserted that imposing new liens, like those of GMAC, would “result in an event of default under the financing documents between Chrysler Financial and the Dealers,” permitting Chrysler Financial “to exercise its remedies against the Dealers and their assets" (Docket 482 2009, PDF p. 8–9).^FNIn theory, convincing Chrysler Financial to waive these liens would not be difficult; the security from Chrysler Financial’s various pre-existing auto finance contracts with Chrysler protected it from some of the negative effects of a Chrysler bankruptcy. The 2007 Master Auto Finance Agreement governing Chrysler Financial’s services for Chrysler also made $1.5 billion ($500 million in cash and a $1 billion Chrysler note pledged to Chrysler Financial) in collateral available to Chrysler Financial in case of certain bankruptcy events and PBGC demands (Docket 482 2009, PDF p. 10). However, Chrysler’s obligations toward Chrysler Financial outstripped the $1.5 billion by the time of the April 30, 2009, bankruptcy filings (Docket 482 2009, PDF p. 10). Chrysler’s attorneys asserted that Chrysler’s “businesses cannot survive without financing for their Dealers and the Debtors cannot procure this substitute financing without the consent of Chrysler Financial” (Docket 482 2009, PDF pp. 8–9, 14). Accordingly, “Chrysler had to convince Chrysler Financial to waive the ‘new liens’ prohibition” in order for the GMAC transition to proceed (Docket 483 2009, PDF p. 12).

Treasury effectively subsidized Chrysler’s solution to this problem by increasing the $4.1 billion debtor-in-possession loan^FNThe debtor-in-possession (DIP) loan was a three-way agreement between Chrysler, Treasury, and Export Development Canada (EDC) dated May 5, 2009 (Chrysler LLC and Lenders 2009, PDF p. 21). See Nye 2021b for details. that it had provided to Chrysler by $896 million, some of which Chrysler would use to pay Chrysler Financial to waive a number of its potential claims against Chrysler once Chrysler had successfully restructured (Chrysler LLC and Lenders 2009, PDF p. 21; Docket 1903 2009; Docket 6273 2009, PDF p. 62).

Although Treasury originally intended for GMAC to acquire all of Chrysler Financial’s assets, Treasury noticed that Chrysler Financial had substantial debts coming due in July 2009 (COP 2010, 26). To avoid exposing GMAC to these debts, Treasury determined that it would finance “GMAC’s acquisition of only a part of Chrysler Financial’s business.”

In July 2009, the Treasury and Chrysler also amended the documents underpinning the $4 billion in Bridge Loan from late 2008 as part of the transition (Chrysler Holding and Treasury 2008, PDF pp. 383–401). The amendment required Chrysler to pay Treasury 40% of any distributions Chrysler Holding received from its stake in Chrysler Financial, including the first $1.38 billion (Chrysler Holding and Treasury 2008, PDF pp. 383–401).

Outcome of Winding Down the Old Chrysler(s)

By September 2009, Treasury issued a directive to Chrysler Financial “to liquidate its business” and the Special Master for TARP Executive Compensation noted that Chrysler Financial planned to wind down operations by the end of 2011 (GAO 2009b, 6; Feinberg 2009). In late spring 2010, Cerberus offered Treasury $1.9 billion to settle Chrysler Holding’s debts and facilitate Treasury’s exit from its potential 40% interest in Chrysler Financial’s proceeds (COP 2011, 16; Treasury 2010). Chrysler Holding still owed Treasury $3.5 billion under the Bridge Loan, and Treasury wished to exit Chrysler Holding quickly, hoping to recoup some revenues for the taxpayers (COP 2011, 16). Treasury subsequently accepted the offer on May 17, 2010 (COP 2011, 16). On December 21, 2010, TD Bank announced that it would buy Chrysler Financial from Cerberus for about $6.3 billion (COP 2011, 16–17). Chrysler Financial was rebranded as TD Auto Finance and as of the date of this case continues to operate (TD Auto Finance 2015). The alliance between Chrysler and GMAC did not last and was terminated in early 2013 when Chrysler replaced GMAC with Chrysler Capital, a captive full-service finance provider for Chrysler and associated companies executed in connection with Santander Bank (Chrysler Group 2014, 155; Chrysler Capital 2016).