Overhaul (27 page)

Jimmy seemed to understand what I was trying to do and played along, asking to see the projections and business plans that Fiat was developing. "If you want an answer other than no, something like a counteroffer, then we need those new numbers," he said. We agreed. As the meeting drew to a close, Jimmy asked if we could have a word alone. We stepped into the corridor by an elegant open stairwell, looking down five stories to the Treasury basement. "Putting aside the very, very generous offer," he said sarcastically, "I think I can get all the banks to do a deal." Achieving unanimity among the lenders would mean that at least one reason for a bankruptcy filing would be avoided.

"I don't really think you can," I replied.

While hardly a bankruptcy expert, I was unaware of any situation in which unanimity had been achieved in a creditor group this big—Chrysler had forty-six lenders, including several aggressive hedge funds that might prefer to fight to the death. We parried for a few more minutes and then Jimmy was on his way back to the Acela.

Just as Ron viewed the opening clash of Fiat and the UAW as obligatory theater, I discounted what Jimmy had said. And I felt no urgency to reengage him in the coming days. Of all the hurdles we faced, the banks were the smallest. When the time came, either they would agree to something reasonable or they could take over Chrysler. We had agreed to make every effort to save the company, but my ambivalence about its prospects was such that I wasn't all that bothered by the possibility of getting "caught trying."

Ron, it turned out, had been a bit too sanguine about the Fiat CEO. We really were dealing with a new Sergio, not the urbane charmer who had assured us in March that he saw no impediment to an agreement with the UAW. As the days ticked by toward the April 30 deadline, Dottore Jekyll became Signore Hyde. Yes, there was a charmer in Sergio. But there was also someone else.

His next negotiating session with Gettelfinger, held at the Chrysler-UAW training center in Detroit, was a disaster. Sergio started lecturing Gettelfinger about the need for the autoworkers to accept a "culture of poverty" instead of a "culture of entitlement," attacking, among other things, retiree health care benefits.

"Why don't you come and sit with me and tell a seventy-five-year-old widow that she can't have surgery and that you killed her husband?" Gettelfinger snapped. The discussion became more emotional and nastier as Sergio revealed in greater detail the changes he wanted in the UAW contract. "Tweaks," he kept calling them. But a quick, back-of-the-envelope calculation by Bloom showed that Fiat was really demanding what amounted to as much as $5 an hour off the contract. The meeting ended in a shouting match. Sergio went off to shop in an Apple store—he is obsessed with Apple—to cool off.

Sergio's attitude toward his Chrysler counterparts changed too. "From puppy dog to pit bull" was the way one executive described the transformation. Congenial conversations in March about Fiat-Chrysler technology sharing gave way to tense April talks in which Sergio would demean and swear at the Chrysler officials. "Do you think I am fucking stupid?" he'd ask rhetorically.

Gettelfinger, the veteran labor negotiator, took all this in stride. He sensed a performance in progress and knew that, despite Sergio's bluster, Fiat really wanted the deal. And Sergio knew that Gettelfinger was a realist. The UAW chief may well have put off Corker and the Republicans, thinking President Obama would offer a better arrangement, but now that Obama had threatened on national TV to liquidate Chrysler unless all parties came to terms, Gettelfinger was cornered. He understood that we needed to be able to tell taxpayers that any new Chrysler contract satisfied the conditions of the
TARP
loan, including parity with the Japanese transplants. (To that degree, the Bush administration was getting its wish to "rule from the grave.")

An even bigger motivator was fear. The continuing deterioration in the auto business was terrifying for all of us. More than once, I would think of Rahm Emanuel saying, "Never let a crisis go to waste," as we used the growing economic catastrophe to achieve changes and sacrifices that would have been impossible in another environment. And we had the advantage that for the Obama administration, this was something of a "Nixon goes to China" moment, as Rahm had signaled with his short, crisp dismissal of the UAW in his office a month earlier.

By the time the labor negotiation moved back to Washington, I had begun to think of the Treasury building as Uncle Sam's Fix-It Garage. Although we were still facing potentially insurmountable problems, the task force seemed increasingly like an actual entity and our jobs like actual positions. Down in the basement, we settled into the "skunk works," as Ron called it. My partner Josh Steiner had told me that status in Washington had much to do with offices and staff. While I had worked hard to build our team, I couldn't have cared less about my office. I was very comfortable in my basement lair. In the anteroom of my office, cubicles had been built for the "partners" (Ron, Harry, and Matt) and for Haley. A few doors away, two other sizable rooms had also been carved into cubicles for our more junior colleagues. And we had nice government-issue signs outside our doors: "Auto Task Force" they announced. From my desk I could gaze through barred windows onto the Washington Monument and the Mall and, in the other direction, to the small parking lot where Tim Geithner's gold Suburban pulled up by his private entrance. For security reasons, he took his SUV even to go across the street to the White House. I would often see him come and go several times a day, cell phone invariably clamped to his ear.

I was on the phone plenty myself, fielding calls from a dizzying array of interested parties, led, of course, by the Michigan politicians. Like many other stakeholders, they had been unnerved by the President's tough March 30 speech and particularly his use of the B word. As clear as Obama had been, the delegation chose to concentrate on the possibility of avoiding bankruptcy rather than the prospect of entering it. Our running joke was that the Michigan politicians were progressing through Elisabeth Kubler-Ross's five stages of grief—denial, anger, bargaining, depression, and acceptance. Except that just when we thought we had nudged them to the next step of understanding the need for bankruptcy, they would fall back a stage.

Ron Bloom decided to tackle the most visible labor issue first: so-called legacy costs. The UAW was notorious for its "Cadillac" retiree benefit plans, which in essence guaranteed free medical and dental care and prescriptions for life. (Such plans had made General Motors the largest purchaser of Viagra in the world.) In casual conversations after I took the auto job, my friends would often ask, "What are you going to do about the medical benefits?"

Happily, we had a road map. In 2007, Chrysler had taken a major step when the UAW agreed to create a trust—a Voluntary Employee Beneficiary Association, or
VEBA—
to assume responsibility for retiree health care benefits. This relieved the company of the uncertainty of this huge, ever-growing, and unknowable expense. Under the plan Chrysler was committed to make an additional one-time contribution of $8.8 billion to the
VEBA,
and in return would have no further obligation. All future benefits would be paid by the
VEBA.
If the $8.8 billion proved insufficient, that would be the problem of the
VEBA,
the UAW, and the workers.

The Corker amendments would have taken the arrangement one step further and required that the UAW agree to convert $4.25 billion of this debt into Chrysler equity. In the December negotiations, the UAW had signaled its willingness to say yes (it had reached a similar accommodation with Ford in February 2009), but the collapse of the legislation ended the discussion. Until now.

Starting with
VEBA
enabled Ron Bloom to sidestep Sergio to a large degree. Fiat had already agreed to accept a 20 percent ownership of Chrysler with the opportunity to earn another 15 percentage points. Of the 65 percent of equity not yet allocated, we—the U.S. government—wanted no more than a nominal percentage. Some might well go to the creditors, but we knew that the banks' appetite for Chrysler equity was small, because the shares of a restructured Chrysler would have little immediate value. So most of the equity was actually unspoken for, and Tim and Larry readily acquiesced in giving 55 percent ownership to the
VEBA.
(As Bloom designed the deal, "giving" was a relative term; in the unlikely event of excess profits on the
VEBA'S
equity, this overage would revert to the Treasury.)

We expected headlines blaring "UAW in Chrysler Driver's Seat." In fact, we'd made sure to do everything we could
not
to have the UAW control Chrysler. For starters, the
VEBA
equity was held by the health care trust, not the UAW. And the stock had no voting rights. All we gave the
VEBA
was the right to designate a single Chrysler board member with the approval of the UAW. Negotiating these terms was easy. Neither the UAW nor the
VEBA
had any interest in controlling or owning the struggling automaker; rather, they wanted to sell their equity as quickly as possible.

Structuring a note to satisfy the other half of the
VEBA'S
approximately $8.8 billion total claim was more complicated. Given the restructured Chrysler's heavy liabilities (even after bankruptcy), Ron felt that payments had to be back-loaded. And they were. Chrysler's annual payments to
VEBA
would rise from $300 million in 2010 to a staggering $823 million in 2019. Ron reasoned that by that date Chrysler would either be healthy enough to make the payments or be liquidated. If the latter transpired, the UAW's retirees would have lost their health care anyway.

With all components of the
VEBA
package valued fairly, we calculated that the UAW was taking a significant cut on its health care claim, at least 40 percent. Indeed, for the retirees, the shared sacrifice called for by President Obama had arrived without delay. Large reductions in benefits would start in July 2009, including the elimination of vision and dental plans.

Yes, the UAW accepted pain and risk. More surprising, however, Fiat also granted concessions that amazed the Chrysler representatives, including CFO Ron Kolka and restructuring adviser Bob Manzo. Perhaps to its detriment, Fiat had relied on Bloom, whom it credited with understanding
VEBA'S
intricacies, for guidance on how to handle the issues. And if Fiat was expecting the Chrysler team to protect its interests, it should have known better. The attitude of top Chrysler officials toward Fiat executives, especially Sergio, hovered between disdain and outright hatred. Manzo and Kolka felt it was not their job to take sides, just to answer questions Fiat or the UAW raised. For example, they watched the Fiat negotiators accept provision after provision—such as interim cash payments until the new agreement took effect in 2010—that Chrysler would have resisted. Fiat also didn't try to further reduce the health care benefits for retirees and agreed to make bigger up-front payments. Sergio himself was rarely in the room—he was much more interested in the wage negotiations with Gettelfinger, which were starting again down the hall.

On Good Friday, as Fiat's representatives, UBS investment banker Andrew Horrocks and deal lawyer Scott Miller, closed in on an agreement with the UAW, their BlackBerrys started to buzz. They ignored them, until they saw that the caller was Sergio's lieutenant, Alfredo Altavilla, who ultimately sent a curt text message with an unmistakable order: "Leave."

Outside on a beautiful spring day, Horrocks and Miller found Sergio and Alfredo standing by the Willard Hotel. Sergio was smoking a cigarette; his talks with Gettelfinger had blown up yet again. He and Alfredo had not only stormed out but also called a halt to the
VEBA
talks.

"I needed some air," said Sergio as he smoked. "Let's cool down over the weekend."

But not everyone was ready to close it all down. When Horrocks's cell phone buzzed again, it was an angry Ron Bloom. "Where the hell are you two?" he bellowed. Horrocks explained what had happened. "Don't leave, come back," Ron pleaded.

Soon Sergio relented, and after another couple of hours the terms were completed: a historic
VEBA
agreement that would permanently remove retiree health care liabilities from Chrysler's balance sheet and give the
VEBA
a 55 percent stake in Chrysler.

In accordance with UAW tradition, Ron Gettelfinger came into the room to finalize the deal. He was accompanied by General Holiefield and Steve Girsky, the Morgan Stanley auto-analyst-turned-GM-insider-turned-private-equity-investor, who was advising the UAW.

Horrocks stood and reached out to shake Gettelfinger's hand. "I know if Sergio was here he'd want to shake your hand," he said.

When Gettelfinger didn't extend his hand toward Horrocks, the room went uncomfortably still.

"This deal hurts people, and that's something Sergio needs to understand," said Gettelfinger. "This is
not
a time to feel good."

After a few more awkward seconds, Holiefield reached across and shook Horrocks's hand.

Horrocks mentioned the incident to Bloom the next day, saying it had upset him. But Bloom replied, "Don't take it personally. To Ron, you just undid one hundred years of collective bargaining."

Despite the progress on legacy costs, everything else was at a standstill. The wage negotiations were stalled, and Fiat still hadn't produced the projections it had promised Jimmy and the banks. Less than three weeks remained.

Bad blood between Fiat and Chrysler was the source of the delay as Sergio and Nardelli squared off over their divergent views of the business plan. Sergio wanted to lowball the numbers and downplay Chrysler's prospects to make his job easier. He wanted to ensure that he inherited Chrysler with as much taxpayer cash and as little debt on it as possible. To that end, he pressed for the inclusion of absurd assumptions that implicitly repudiated not only Nardelli's previous leadership but also the facts contained in the February 17 submission, which Sergio had signed off on—before backing out at the last minute.