The Rescue of the US Auto Industry, Module C: Restructuring Chrysler through Bankruptcy

The restructuring of Chrysler was only one part of a larger attempt to rescue the American automotive industry during the Global Financial Crisis. Under the auspices of the Automotive Industry Financing Program (AIFP), the government provided financing for restructuring to GM and Chrysler, but it also created programs to aid related stakeholders such as suppliers, financers, and customers deemed necessary because of the highly integrated and inter-dependent nature of the industry (Office of Financial Stability 2018). GM and Chrysler first received aid under a set of Bridge Loans in late 2008 and early 2009 (see Nye 2021). Treasury provided assistance to suppliers that would continue delivering parts, to finance companies that would maintain financing for new car purchases, and to special purpose vehicles that would guarantee warranties on new cars (Klier and Rubenstein 2012, 39–41, 49). GM also received support from Treasury during its bankruptcy, which followed a similar legal framework.

Despite the sentiment among the staffers working on the restructuring that “from a highly theoretical point of view, the correct decision could be to let Chrysler go,” they and President Obama eventually agreed that Chrysler should be saved (Klier and Rubenstein 2012, 40). A paper from two former members of Obama’s Council of Economic Advisers (CEA) quotes “numerous experts” who questioned the wisdom of saving Chrysler, believing that it would make it more difficult to rescue GM, the failure of which would have been a “major blow to consumer confidence […] at exactly the wrong moment for the economy” (Goolsbee and Krueger 2015, PDF p. 2, 11). President Obama ultimately decided that the “political and social reality,” rather than the economic fundamentals, made the case for saving Chrysler (Rattner 2011, 120). That is not to say a Chrysler liquidation would have been an easy decision. Approximately 300,000 jobs would have disappeared, with the impact falling heavily on districts that already had unemployment rates as high as 24% (Rattner 2011, PDF p. 4). The CEA economists noted that “66 percent of Chrysler suppliers were also suppliers to GM and 54 percent were suppliers to Ford,” meaning that Chrysler’s liquidation could also endanger other producers at an extremely vulnerable time (Goolsbee and Krueger 2015, PDF p. 15).

The George W. Bush administration cited its authority under EESA, through TARP, to fund the United States’ portion of the Joint DIP Facility and the post-petition First Lien Credit Agreement, much like the rest of the spending under the AIFP. Although the Bush administration initially argued that EESA did not give it the authority to use TARP funds for aid to the automotive industry, Congress’s failure to pass a legislative solution forced it to pivot (Canis et al. 2009, 9). On December 23, 2008, Treasury Secretary Henry M. Paulson, Jr., relied on Section 101(a)(1), Section 3(5), and Section 3(9)(B) of EESA to send an official determination to Congress (Secretary of Treasury 2008).^FSection 101 (a)(1) authorized the Secretary of Treasury to establish the TARP to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution” (COP 2009b, 158–59). Section 3(5) broadly defined “financial institutions” as “any institution […] established and regulated under the laws of the Unites States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government” (COP 2009b, 71). Section 3(9)(B), allowed the Secretary of Treasury (after consultation with the Chairman of the Fed) to define “troubled assets” as any financial instrument for which the Secretary determines purchases “[are] necessary to promote financial market stability […] upon the transmission of said determination, in writing, to the appropriate Committees of Congress” (COP 2009b, 71–72). Paulson defined “certain thrift and other holding companies which are engaged in the manufacturing of automotive vehicles and the provision of credit and financing in connection with the manufacturing and purchase of such vehicles” as “financial institutions” pursuant to EESA. He further defined their assets as “troubled assets” eligible for purchase with TARP funds to promote financial stability (Secretary of Treasury 2008).

During the litigation associated with GM and Chrysler’s 2009 bankruptcies, the government further justified Paulson’s determination as being in line with the intentions of Congress in passing TARP, even after his successor as Treasury Secretary, Timothy F. Geithner, issued a more specific determination on April 29, 2009, which specified that the relevant “troubled assets” were “the debt obligations or equity of […] certain companies engaged in the manufacturing of automotive vehicles” (COP 2009b, 74–76; Secretary of Treasury 2009). The government argued that there was “a certain connection between the automotive companies’ financing entities and the automotive companies themselves that permits the use of TARP funds to support the automotive companies, thereby supporting the companies’ financial divisions” (COP 2009b, 74–76). The Congressional Oversight Panel discussed the validity of the Treasury’s arguments and concluded that the issue of TARP authorization “may never be answered with any finality” because it had not been brought to any court to adjudicate (COP 2009b, 79).
 

The legal mechanics for Chrysler’s restructuring came from Chapter 11 of the Bankruptcy Code. Team Auto^F“Team Auto” was an internal name for the government officials working on the restructuring (see Rattner 2011, 90). was concerned that a Chapter 11 restructuring might drag on for so long that Chrysler would be destroyed in the process (Rattner 2011, 107). Consequently, Team Auto facilitated a surgical bankruptcy for Chrysler using Section 363 of Chapter 11, which could allow Chrysler to sell substantially all of its assets to Fiat and hopefully “clear away old liabilities” quickly (Canis et al. 2009, 24).^FThinking on a GM acquisition of Chrysler’s top brands floated around Team Auto as Chrysler neared bankruptcy (Rattner 2011, 160-162). Such an arrangement would have cost the taxpayer less money but would not have saved as many American jobs (Rattner 2011, 160–62). Bankruptcy scholars advocate for the use of Section 363 in cases dealing with “ongoing losses, limited lender funding commitments, and rapidly depleting assets,” where the faster procedure can help “maximize the value of the estate, thereby increasing creditors’ returns” (Ben-Ishai and Lubben 2011, 81). This type of organization had become popular among creditors by the late 2000s, and, as a creditor, the Treasury decided to take advantage of it. However, the Supreme Court vacated the various judgments approving the Section 363 sale in late 2009, which leaves open the question of whether the courts would approve a similarly aggressive Section 363 sale again (David 2010, 39). Some legal scholars argue that the order indicates that the Supreme Court wished to keep the Second Circuit’s favorable Chrysler opinion from being used as precedent (David 2010, 39).

That said, Team Auto did consider a more conventional Chapter 11 reorganization. Team Auto began looking at the feasibility of restructuring Chrysler without Chapter 11 (even then, using a prepackaged bankruptcy) only as the April 30, 2009, deadline neared and Chrysler’s First Lien Secured Creditors offered a restructuring plan that would allow Chrysler to avoid bankruptcy (Rattner 2011, 173–77). Apparently, “avoiding bankruptcy seemed so unlikely that we [Team Auto] hadn’t so much as studied the numbers of [such a] case where all the secured lenders were on board,” but the cost of such a restructuring was surprisingly close to the planned bankruptcy (Rattner 2011, 175–76). Officials who were part of Team Auto still opted for the Section 363 sale when it became apparent that some of the First Lien Secured Creditors would not agree to this new restructuring plan (COP 2009b, 49), even though they knew that the 363 sale would provoke legal challenges (Rattner 2011, 175–78; Feldman 2019).

A Section 363 sale, in contrast to a conventional Chapter 11 reorganization, could be executed much more quickly. This is because they do not require various creditor protections like “the drafting of a complete plan and disclosure statement, creditor voting, and a confirmation,” which can delay the completion of a bankruptcy (COP 2009b, PDF pp. 45–49, 132). To have the sale approved, Treasury just had to get a majority of the creditors’ committee to agree and obtain approval from the bankruptcy judge. The governments involved in the rescue believed that a faster restructuring would thus “preserve the value of the business, restore consumer confidence, and avoid the costs of a lengthy Chapter 11 process” (Ben-Ishai and Lubben 2011, 81). However, Treasury also was able to use its leverage as DIP lender to create a highly restrictive bidding process for Old Chrysler, which essentially ensured that Fiat’s New Chrysler would successfully purchase Old Chrysler’s good assets (Skeel 2015, 135). Unlike most Section 363 sales, Treasury had New Chrysler purchase Old Chrysler’s assets at a relatively low price while assuming large “liabilities to favored creditors” (Skeel 2015, 135).

Treasury officials emphasized that each stakeholder affected would still have “full opportunity to have his or her claim heard” in the reorganization (COP 2009b, 35). Other figures, among them the Indiana Funds and some bankruptcy scholars, thought that Chrysler’s aggressive use of Section 363 circumvented such safeguards necessary to the functioning of the Bankruptcy Code as absolute priority (Ben-Ishai and Lubben 2011, 79; Docket 3073 2009).

Treasury and EDC agreed to a Joint DIP Facility to provide Old Chrysler with “the necessary liquidity to sustain [Old] Chrysler during the bankruptcy period” (GAO 2009b, 135). Although Old Chrysler drew only $1.89 billion from the Joint DIP Facility, Treasury and EDC increased the facility to $4.96 billion less than a month after creating it (Office of Financial Stability 2018).^FThis brought Treasury’s commitment to $3.8 billion and EDC’s commitment to $1.16 billion (SEC 2011b, 260).

It is also important to note that Treasury believed that lending under the facility would probably not be repaid in its entirety (COP 2009b, 55­–56). However, the DIP loan still gave Treasury two useful mechanisms that would allow it, and Chrysler, to succeed: liens and control.

First, the Joint DIP Facility gave Treasury liens on nearly all of Old Chrysler’s assets that were senior to all of Old Chrysler’s other creditors (Chrysler, EDC, and Treasury 2009, PDF pp. 7–8, 30, 44). With this advantage, Treasury (and EDC) would be first in line to recover funds from the company if Fiat pulled out of the deal and Old Chrysler collapsed during the Chapter 11 bankruptcy.

Second, the Joint DIP Facility gave Treasury and EDC a lot of control over the bankruptcy process as major creditors (COP 2009b, 44–45; Feldman 2019). The Bankruptcy Code imposes no statutory limits on the conditions that DIP lenders can attach to their loans beyond requiring approval from the bankruptcy judge (COP 2009b, 44–45). In the case of Chrysler, this meant that the US and Canada could effectively determine which creditors (whether they be suppliers, trade creditors, secured creditors, or the UAW) would have their liabilities assumed by the New Chrysler (COP 2009b, 44–45). The Joint DIP Facility’s financing (and, as spelled out in Key Design Decision No. 10, Fiat’s acquisition of a fair amount of Old Chrysler via New Chrysler) was conditional on Old Chrysler’s quickly meeting several milestones in the bankruptcy process (Chrysler, EDC, and Treasury 2009, PDF p. 55). For example, the facility had several different maturity dates, each linked with one of the various paths the bankruptcy proceedings could take (GAO 2009b, 135). Some of these terms triggered maturity by the confirmation of Chrysler’s reorganization plan, by a set number of days after an early event in the bankruptcy process elapsing, or simply by the end of the third quarter of 2009 (Chrysler, EDC, and Treasury 2009, PDF p. 22). Such restrictive terms reflect the extent that the Bankruptcy Code allows DIP lenders to obtain leverage over the speed and shape of a Section 363 sale (David 2010, 66). However, terms such as the various oversight requirements would conceivably help diminish the risk of Chrysler collapsing during the bankruptcy.
 

While most of GM’s bankruptcy-related aid came via a DIP loan that Treasury and EDC swapped for equity in New GM, most of Chrysler’s bankruptcy-related aid came through a Treasury loan to New Chrysler (Office of Financial Stability 2018). Two members of the Obama-era CEA provided an explanation for this difference: Because of their different financial positions, most of the support provided to GM took the form of equity, while support for Chrysler was in the form of debt that needed to be repaid. One former Treasury official who worked on the restructuring said that Chrysler aid was also less attractive because “we felt as stewards of the taxpayers’ money, we could not put more money into Chrysler than the minimum that we thought was reasonable for it to have a chance to succeed” (Brookings 2014, 87). One could justify the less generous terms of support for Chrysler in part because Chrysler was in more precarious financial shape than GM in 2009, and in part because Chrysler was less pivotal for the near-term course of the auto industry and economy given its smaller size (Goolsbee and Krueger 2015, PDF p. 17).

While Old Chrysler’s bankruptcy case remained active through at least March 1, 2016 (Docket 8460 2009, 1–3), it took Chrysler only 42 days to complete the portion of the bankruptcy relevant to financial stability: the sale of the majority of Old Chrysler’s assets under Section 363 of the Bankruptcy Code (COP 2009b, 13). This was unprecedentedly fast (Canis et al. 2009, 24; Docket 8490 2009, PDF pp. 4–5; Docket 8460 2009).

One reason for the speedy asset sale was that many policymakers saw Chrysler’s Section 363 sale as a test case for the GM restructuring (Feldman 2019; Foley, Goldberg, and Meyer 2010, 2). The results of the Chrysler restructuring would give Treasury time to modify the plan for restructuring GM if anything went wrong (Feldman 2019). Additionally, the damage from a Chrysler liquidation following a failed attempt at restructuring via Section 363 would have been significant but much more limited than it would have been if the same were to happen to GM (Goolsbee and Krueger 2015, PDF pp. 2, 10).

Another reason Treasury pursued such a fast bankruptcy was the cost of keeping Chrysler alive with taxpayer money. Steven Rattner, Lead Auto Advisor at the Treasury Department, argued that “each additional month of life support [for Chrysler] was going to cost $500 million to $1 billion, money that the Treasury would never see again if the company ended up liquidating” (Rattner 2011, 127). Intuitively, the more time Chrysler spent in Chapter 11, the more likely it would be to draw on DIP funding to stay alive. Drawing more DIP funding would mean that Treasury would receive less per dollar invested in Old Chrysler when Old Chrysler liquidated its remaining collateral.

Treasury framed its exit policy as “selling the government’s shares as soon as practicable to recover taxpayer money and return the company to private ownership” (Goolsbee and Krueger 2015, PDF p. 28). Treasury thought this would involve “either a private sale or a gradual sell-off of shares following an IPO” (COP 2009b, 38) The Congressional Oversight Panel noted that Treasury’s “strategy hinges directly on the ability of the […] [company] to restructure and become profitable” (COP 2009b, 68). Treasury eventually chose a private sale and began indicating this direction in 2010, with the GAO reporting “that the department is more likely to consider a private sale [for Chrysler] because its equity stake is smaller [than in GM]” (GAO 2009d, 24). Treasury finally sold its stake in New Chrysler for $500 million to Fiat on July 21, 2011 (Treasury 2011; Canis and Webel 2012, 12).

The primary way that Treasury and EDC protected their interest in Chrysler (both Old Chrysler and New Chrysler) in the Joint DIP Facility and First Lien Credit Agreement was obtaining first priority liens on substantially all of the company’s assets. The Bankruptcy Code allowed the lenders under the Joint DIP Facility to bypass more senior creditors by granting the DIP financiers superpriority status and priming liens with a few exceptions for foreign joint ventures (Chrysler, EDC, and Treasury 2009, PDF p. 7–8, 27). Treasury similarly obtained a “first priority lien on all of [New] Chrysler’s assets” under the First Lien Credit Agreement (Treasury 2009c).

Treasury and EDC also received the Additional Notes as additional consideration for their lending (Chrysler, EDC, and Treasury 2009, PDF pp. 9, 49; Manzo 2009, PDF p. 168). Under the law that created TARP, Treasury was mandated to receive some type of warrant or some other type of additional security as consideration (EESA 2008, §113). For reasons related to both Old and New Chrysler’s private status, warrants were not considered a desirable option, so the Additional Notes were issued.^FSee P.L. 110-343 Sec. 113(d). This requirement emerged from various lessons of the late-1970s bailouts. Namely, that the government could obtain risk compensation for its aid through equity participation—for example, receiving warrants, as it did in its support for Chrysler in the late 1970s. In that circumstance, the government, which had guaranteed certain Chrysler borrowing and received warrants for its assistance, ultimately sold the warrants back to the company at a profit (General Accounting Office 1984, v-vi).

For the Joint DIP Facility, Treasury and EDC received Additional Notes worth 6.67% of the “Maximum Loan Amount” committed by each Lender (or, $3.04 billion yielding a $203 million Additional Note for Treasury and $1.06 billion yielding a $70 million (Additional Note for EDC; Chrysler DIP Term Sheet 2009, 6; Chrysler, EDC, and Treasury 2009, PDF pp. 9, 49). These notes had the same interest rates and terms as their related loan (Chrysler, EDC, and Treasury 2009, PDF pp. 9, 49).

Under the First Lien Credit Agreement, Treasury received a $288 million principal Additional Note, about 6.67% of the working capital offered by Tranche C (Chrysler 2011b, 182). Treasury also received $100 million in zero-coupon promissory notes (called Zero Coupon Notes) as additional consideration for its Tranche C financing (Chrysler 2011b, 182).

In return for providing $2 billion in financing under Tranche B of the First Lien Credit Agreement, Treasury received a 9.85% equity stake in New Chrysler and an additional power over the VEBA’s large stake in New Chrysler (Chrysler, New Carco Acquisition LLC, and Treasury 2009, PDF p. 52). The equity gave the Treasury an additional asset to restore some of the taxpayer’s investment, while the power over the VEBA stake further limited the UAW’s influence within New Chrysler.

Sacrifices by Board and Management

Team Auto introduced an entirely new board of directors for New Chrysler, replacing the CEO of Old Chrysler with Fiat CEO Sergio Marchionne (COP 2009b, 16). As part of New Chrysler’s corporate governance arrangements, Treasury appointed four of these new board members, all from outside of the auto industry (COP 2009b, 16). Ron Bloom, one of the key members of Team Auto, explained that replacing the board was meant to create a cultural change within Chrysler, saying that Team Auto sought out a

new board of directors of people of extraordinary accomplishment in the private sector [for Chrysler]; […] we have tasked them with the responsibility of overseeing the management so that this culture change […] is in fact effectuated (COP 2009, PDF p. 34).

First Lien Secured Creditors

The First Lien Secured Creditors received $2 billion from New Chrysler, financed by Treasury, in satisfaction of $6.9 billion in claims, or 29 cents on the dollar (COP 2009b, 152). Treasury played an active role in negotiations with these creditors, with Ron Bloom later explaining that such a strategy was “necessary to administer the government’s investments and protect the taxpayers’ interests” (Rattner 2011, 172–73; COP 2009a, 135; Treasury 2009c).

Second Lien Secured Creditors

The Second Lien Secured Creditors, Cerberus and Daimler, were also Chrysler’s majority and minority shareholders,^FWhen it filed for Chapter 11, Chrysler was owned 80.1% by Cerberus and its affiliates and 19.9% by Daimler and its affiliates. (COP 2009b, 24). and Old Chrysler owed them $2 billion on a loan (Docket 190 2009, 7–8). They collectively agreed to relinquish their equity and forgive the $2 billion loan (Docket 190 2009, 7–8). Cerberus also contributed Chrysler’s headquarters, and Daimler was also able to negotiate an agreement with the PBGC that reduced the size of their pension guarantees (Docket 190 2009, 7; Treasury 2009c; PBGC 2011).^FThe Congressional Oversight Panel gives background to both of these sacrifices, noting that “when Chrysler filed for bankruptcy, its pension liabilities were significantly underfunded” and that the $2 billion loan was part of Cerberus’ 2007 leveraged buyout of Chrysler (COP 2009b, 14, 27). Additionally, Cerberus, the previous majority owner of Old Chrysler, “agreed to transfer its ownership of the Chrysler headquarters in Auburn Hills, Michigan, to New Chrysler” (COP 2009b, 14).

The UAW

The UAW (as well as Canadian auto workers, or CAW) agreed to major concessions that stretched from work-rule changes to retiree healthcare cuts (Canis et al. 2009, 27). The UAW concessions were motivated by two goals. One, Team Auto wanted to bring down costs to be competitive with the non-union transplants (the US-based factories of Toyota, Honda, etc.) (Rattner 2011, 37–38). This is the reasoning behind such reforms as the expansion of a two-tier wage system, the suspension of cost of living adjustments, and the UAW’s promise not to strike for five years (Feldman 2019; COP 2009b, 18; Canis et al. 2009, 27, 76; Kesselman 2017). The other reason for the concessions was that Team Auto (as well as Chrysler itself) wanted to reduce Chrysler’s massive UAW benefit liabilities (Rattner 2011, 153–54).

The UAW’s VEBA “exchanged an almost $8 billion fixed obligation to the [VEBA] […] for a $4.6 billion unsecured note” and equity in New Chrysler (COP 2009b, 18). While this gave the VEBA a 55% majority stake in New Chrysler,^FSome secondary sources say that the VEBA received a 55% stake in New Chrysler (COP 2009b, 152), but the LLC Agreement setting out New Chrysler’s structure and GAO reports show the VEBA receiving a 67.692% stake (GAO 2009c, 14). the VEBA was “managed by an independent committee of legally bound fiduciaries” and had only a single vote on New Chrysler’s board (COP 2009b, 28; Canis et al. 2009, 58–59; Chrysler 2011b, PDF pp. 86–88).

The UAW did make major concessions, but its workers suffered significantly less than some of Old Chrysler’s non-union workers. In a July 2009 Congressional Oversight Panel hearing, Ron Bloom explained that “product liability and some workers compensation claims will not be permitted to carry their claims forward to New Chrysler” (COP 2009a, PDF p. 26). The UAW also received a superior arrangement to Old Chrysler’s secured creditors. Traditionally, this would be against the Bankruptcy Code’s rule of absolute priority because it gave “value to junior claimholders—including the US government, the Retirees’ Settlement, the UAW, and unsecured trade creditors—while failing to pay the senior secured creditors’ claims in full” (David 2010, 32–35). However, the UAW received its equity stake in New Chrysler on account of “new value” brought to the business and not Old Chrysler’s obligations to the union, so the courts allowed the arrangement (David 2010, 49–50).^FThe UAW officially received the equity as “consideration for” the concessions in its new collective bargaining agreement with Chrysler, not for the VEBA restructuring part of Chrysler’s debt (David 2010, 31–32). Treasury’s explanation for this maneuver revolves around the sentiment that New Chrysler would need workers and would not have been able to survive the shock of a rejected collective bargaining agreement (Feldman 2019; Baird 2012, 279).

Suppliers

Suppliers agreed to reduce their prices, but New Chrysler assumed many of the suppliers’ contracts (Canis et al. 2009, 27; Barron 2009).

Warranty Holders and Tort Creditors

New Chrysler agreed to assume the warranty claims of those who had warranties with Old Chrysler (COP 2009a, PDF p. 37). New Chrysler also agreed to assume “Lemon Law liabilities and executory contracts” outlined in the MTA that were made with Old Chrysler (Wolff v. Chrysler 2010).

Dealers

Team Auto, bankruptcy scholars, and eventually Chrysler personnel agreed that Chrysler needed to “dramatically alter its dealer network”; bankruptcy offered an opportunity to do that easily (Baird 2012, 274; Rattner 2011, 194; COP 2009a, PDF p. 83). Dealerships were notoriously difficult to eliminate outside of bankruptcy, due to various “franchising and state laws” (Harreld, Marshall, and Lane 2013, 6).

There is no explanation from Treasury for the sacrifices imposed on Chrysler dealers, though, unlike GM, “Chrysler’s dealer reduction would take place almost immediately” and offered no appeals process for terminated dealers; Chrysler offered only an approximately three-week transition period (Canis et al. 2009, 23; Canis and Platzer 2009, 21). Dealers that remained viable also made sacrifices; they agreed to reduce their “service contract margins” (Canis et al. 2009, 27). Chrysler dealers set to be wound down loudly protested. They objected to the “short wind-down period (26 days) and lack of appeals process” (Canis and Platzer 2009, 21).

Team Auto recognized that shutting down these dealers would be politically contentious; Rattner noted that the restructuring had “relatively little Congressional intrusion—until the two companies virtually simultaneously announced their dealer reduction plans (Rattner 2010, PDF p. 9).

Treasury’s Team Auto saw Fiat (and its CEO, Sergio Marchionne) as a partner integral to the restructuring of Chrysler (Feldman 2019; Treasury 2009b, 1). Fiat’s contribution of technology and access to supply chains (rather than cash or debt) meant that the Italian company would have limited skin in the game, but officials from Team Auto did not comment on whether this posed any problems. While Fiat’s knowledge of small, fuel-efficient cars and access to international supply chains would help Chrysler’s brands reach overseas, Team Auto used Sergio Marchionne to create lasting cultural change within the organization (Rattner 2011, 80–81; Chrysler et al. 2009, PDF p. 10–11). Treasury also structured New Chrysler’s operations agreement and its working capital in a way that restricted Fiat’s actions. Fiat could not easily exit the affiliation and had to meet predetermined milestones in Chrysler’s turnaround to increase its stake in the company (Chrysler 2011b, PDF pp. 86–88). Treasury connected Fiat’s ability to gain new seats on New Chrysler’s board with these milestones (Chrysler 2011b, PDF pp. 86­–88). That said, Fiat would increase its control of Chrysler even if Chrysler did not meet the various milestones set out for its restructuring (Chrysler 2011b, PDF p. 13). Reflecting on the arrangement as a whole, Fiat’s CEO said that he “had a very short leash” (Brookings 2014, 86). He explained that if Fiat did anything incorrectly or could not perform, Treasury would have had GM absorb Chrysler (Brookings 2014, 86).

Terms related to Fiat also lent a sense of urgency to the bankruptcy, potentially speeding it along. The Bankruptcy Court approved the expedited bidding timeline for the Section 363 sale because Fiat’s purchase agreement mandated that the bankruptcy be completed by June 15, 2009 (COP 2009b, 132). If the Bankruptcy Court did not execute the sale by that deadline, the government said that Fiat would back out of the sale and receive an additional breakup fee (Docket 492 2009, PDF pp. 5–6; COP 2009b, 132).

The government largely took a hands-off approach in managing its stake in New Chrysler (COP 2009b, 28–29). It asserted that using New Chrysler “as an instrument of broader government policy […] [was] inconsistent” with their goals (COP 2009b, 29). While the government did have control over a number of seats on New Chrysler’s board, it sought to limit potential political influence (COP 2009b, 12, 28–29). Treasury set down formalized, but not legally binding rules for government ownership known as the “USG as shareholders,” which “would add strict limits on government involvement post-restructuring to the existing edict that […] [it] not ever meddle in day-to-day management decisions” (Goolsbee and Krueger 2015, 28–30; Rattner 2010, PDF p. 8).

The July 2009 Congressional Oversight Panel hearing summarizes some of the other core elements of the rules. In the hearing, Team Auto member Ron Bloom noted that “the government has no desire to own equity stakes in companies any longer than necessary” (COP 2009a, PDF p. 21). The Government Accountability Office summarized:

Treasury’s role as an equity owner focuses on monitoring the financial health of the companies in order to protect the value of Treasury’s equity stake.[...] Treasury reserves the right to set up-front conditions to protect taxpayers and promote financial stability [and] Treasury plans to oversee its financial interests in a commercial manner, in which it will focus primarily on maximizing its return and take a hands-off approach to day-to-day management. Treasury plans to reserve its involvement for major transactions such as the sale of a controlling share of the companies. Treasury’s role as a creditor is not as clearly delineated, but much like in its role as equity owner, Treasury has said it will focus on monitoring the companies’ financial health.” (GAO 2009d, 14)

Still, the US government was also willing to use its stake to promote its industrial policy agenda. The post-petition First Lien Credit Agreement’s “Vitality Commitment” required that New Chrysler manufacture at least 40% of its yearly sales volume in the US or that New Chrysler’s yearly production volume in its US manufacturing plans be at least 90% of Old Chrysler’s 2008 fiscal year production volume from its US manufacturing plants (Chrysler, New Carco Acquisition LLC, and Treasury 2009, PDF pp. 76–77).

Because its financing came from the AIFP, which was itself part of TARP, the restructuring was administered by Team Auto, which was part of Treasury’s Office of Financial Stability (Treasury 2014; Rattner 2011, 90). Team Auto drew upon the few automobile industry experts in the federal government but was largely composed of restructuring and bankruptcy experts. The team was “was notable for not including any individuals with close ties to the auto industry” and one team member later reflected that the team had no communications professionals (Klier and Rubenstein 2012, 39; Feldman 2019). The primary reason for this seems to be that the auto rescue was considered a private-equity-style restructuring deal, which tends to rely on nonsectoral financial and bankruptcy expertise (Rattner 2011, 218). As such, Team Auto was intimately involved in the planning, negotiation, and execution of the restructuring and was supported in its efforts by many outside experts (COP 2009b, 49; Rattner 2011, 182).

Treasury and EDC collaborated frequently throughout Chrysler’s restructuring, though Canada’s influence on the design of the restructuring appeared limited. Canada was extremely exposed to a collapse in the US auto industry (Foley, Goldberg, and Meyer 2010, 7). Canada ended up assisting Chrysler as part of the Joint DIP Facility, but it only contributed to New Chrysler by offering working capital to Chrysler Canada, Chrysler’s Canadian subsidiary (Office of the Auditor General of Canada 2014). Canada guided its financial contributions using the principle that Canada’s total share of assistance would be based on the ratio of Canadian automotive production to the total automotive production of the three countries of the North American Free Trade Agreement (NAFTA) (Office of the Auditor General of Canada 2014). Canada and the US established this share at 20% (Office of the Auditor General of Canada 2014). Canada also included provisions similar to Treasury’s domestic production requirements in its own loan to Chrysler Canada (Chrysler Canada and EDC 2011, 76). Under these provisions, Chrysler had to maintain at least 17% of its NAFTA production volume in Canada while the loan and any of its related agreements were outstanding and at least 20% of its NAFTA production volume in Canada by June 10, 2017 (Chrysler Canada and EDC 2011, 10–33, 76).

Although the Joint DIP Agreement provided for some burden-sharing between EDC and Treasury (Chrysler, EDC, and Treasury 2009, PDF pp. 62, 66, 68), Canada had to adapt a number of its bureaucratic institutions to collaborate effectively with Treasury (Graham 2011, PDF pp. 4, 7). The Canadian government saw that it could use its loose equivalent to the Export-Import Bank, the EDC, to disburse funds abroad through its “Canada Account” (ISED Canada 2016, 10-11). However, when Canada wanted to participate in New Chrysler, it had to find a way to hold its equity, as “the legislation for the Canada Account prevents it from holding equity (ISED Canada 2016, 10-11).^FThese adaptions are explained by the fact that Canadian government did not consider the holding of equity in or the disbursement of emergency funds to a private company, let alone one outside of its borders, as part of its “core mandate” (ISED Canada 2016, 10-11). The Canadian government improvised and used the “Canada Development Investment Corporation (CDIC) to hold the equity” (ISED Canada 2016, 10–11). Canada also had no legal framework for the VEBA that was going to take over Chrysler Canada’s health care obligations. Canada’s parliament later passed amendments to its Income Tax Act that created a new category of trust for the VEBA (Office of the Auditor General of Canada 2014).

New Chrysler’s LLC Agreement committed the company to voluntarily filing quarterly reports with the SEC (COP 2009a, PDF p. 35; GAO 2009d, 17). However, these reports are only available beginning in early 2011 (Chrysler 2011c). According to Ron Bloom of Team Auto, New Chrysler filed with the SEC “because there are taxpayer dollars at stake […] giving the American people a periodic quarterly report card [was] […] proper and appropriate (GAO 2009d, PDF p. 43). The LLC Agreement also required New Chrysler to provide Treasury with monthly, quarterly, and yearly financial performance updates until Treasury no longer held over 5% in New Chrysler (GAO 2009d, 17).

Because funding for Chrysler’s restructuring came from TARP, the Government Accountability Office (GAO), and the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) had significant oversight over Old and New Chrysler (COP 2009b, 55–56, 174).

Treasury also gained broad oversight over Chrysler through terms in its lending facilities. The lending facilities required Chrysler to provide Treasury with “its consolidated balance sheet and the related consolidated statements of income and cash flow, on a quarterly and annual basis, and […] updates to its schedules of real property, mortgages property, pledged equity and notes, subsidiaries, and mortgage filing offices (beginning in 2010)” until Chrysler repaid its loans (GAO 2009d, 17).

Although one member of Team Auto later reflected that having a communications professional on the team would have been useful (Feldman 2019), there were frequent and detailed communications regarding the restructuring, which the White House appeared to lead. Communications largely served three purposes throughout the Chrysler restructuring.

Signaling Bankruptcy and Preparing Chrysler and Its Stakeholders for It

Because an automotive bankruptcy of this size was unprecedented, on March 30, 2009, President Obama appeared on TV to discuss the government’s support for the auto companies. He raised the possibility of bankruptcy and said that Chrysler would have to radically change to receive government support. He characterized bankruptcy as a tool for restructuring, rather than liquidation (PBS 2009). A month later, on April 30, President Obama announced the bankruptcy filing (Obama 2009a). First, Obama communicated the importance of America’s automakers to the larger economy and the implications of their failure, (C-SPAN 2009b). Second, Obama asserted that many of Old Chrysler’s stakeholders agreed to make sacrifices to make Chrysler become viable and execute a successful turnaround (C-SPAN 2009b). Third, the speech painted dissenting stakeholders as “a small group of speculators” endangering Chrysler’s future (C-SPAN 2009b). Fourth, the speech characterized the government as merely supporting a restructuring that already had “made great progress” (C-SPAN 2009b; Rattner 2011, 177–78).^FThere was still uncertainty pertaining to Chrysler’s transition to GMAC (Rattner 2011, 171–72, 177–78). Last, the speech also continued to describe bankruptcy as a tool for restructuring that would “clear away [Chrysler’s] remaining obligations so the company can get back on its feet” (C-SPAN 2009b; Obama 2009a).

Explaining the Government’s Direction throughout the Bankruptcy

Government communications also painted the use of the Bankruptcy Code as conventional, or even beneficial for Chrysler’s stakeholders. It discussed exactly how the restructuring would use the Bankruptcy Code and posited that the seemingly heavy-handed terms of the DIP loan were common. Ron Bloom also put forward the idea that the government behaved just like any other commercial actor taking part in a restructuring, but that it also “gave every affected stakeholder a full opportunity to have his or her claim heard” (COP 2009b, 35). He added that “every creditor will almost certainly receive more than they would have had the government not stepped in” (COP 2009b, 35).

Convincing the Public That the Government Was Doing a Good Job and Asserting That the Administration Was Going above and beyond Their Transparency Requirements

At the same time that President Obama announced the Chrysler bankruptcy on April 30, 2009, he also attempted to reassure workers by announcing the “White House Council on Automotive Communities and Workers” (C-SPAN 2009b). The President noted that the Council would be “reaching out to our hardest-hit areas, cutting through red tape, ensuring that the full resources of the federal government are getting to the workers, the families, and communities that need it the most” (C-SPAN 2009b). However, reports by the GAO point to the Council’s being used as a tool for demonstrating successes in the auto recovery, as it did not have a budget to directly assist communities (GAO 2011, 39). The White House and Treasury also used other tactics to demonstrate the success of the auto restructuring, which ranged from appearances on television to visits by the President to Chrysler assembly plants (Obama 2010; PBS 2009).

Team Auto also made an early effort to show taxpayers how their investment in New Chrysler was performing by requiring that New Chrysler file reports with the SEC (COP 2009b, 19).