Chrysler Financial Refused Government Loan Over Limits on Executive Pay

Guess that didn't work out quite as you'd planned, eh Mr. President?

Washington Post:

Sources: Chrysler Financial Refused Government Loan Over Limits on Executive Pay
By David Cho and Peter Whoriskey
Washington Post Staff Writers
Monday, April 20, 2009; 4:02 PM

Top officials at Chrysler Financial turned away a $750 million government loan because executives didn't want to abide by new federal limits on pay, sources familiar with the matter say.

The government had been offering the 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 vital lender to Chrysler dealerships and customers.

In forgoing the loan, Chrysler Financial opted to use more expensive financing from private banks, adding to the burdens of the already fragile automaker and its financing company.

Chrysler Financial denied in a statement that its executives had refused to accept new limits on their pay.

The company's decision comes amid a firestorm on Capitol Hill and elsewhere over the lavish pay of executives at companies being aided by government money. The uproar has made companies skittish about taking federal aid and hindered the Obama administration's effort to revive lending by replenishing the coffers of the nation's financial firms.

The Treasury Department previously had loaned Chrysler Financial $1.5 billion, when less stringent requirements on executive compensation were in place for recipients of federal bailout money. Since that first loan was announced on January 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 another $750 million.

Most of the agreement was in place, sources said. But on April 7, Treasury asked Chrysler Financial to have its top 25 executives sign waivers regarding their compensation, according to sources familiar with the matter who declined to talk publicly because they were not authorized to speak.

Within a week, the company responded that some of the executives had refused to give their approval. By last week, Treasury had rescinded the loan offer, the sources said.

Chrysler Financial denied that executives balked at the pay limits and said it had met all the restrictions of its first loan from the government's Troubled Assets Relief Program, or TARP.

"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 turned down the new government loan because, with auto sales down in April, there has been even less need for financing, the industry official said.

The official said that if sales picked 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," the senior industry official said. "These guys aren't going to blow up the car company for their personal reasons . . . they've done everything they can to support the automotive company."

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 its statement.

But by forgoing the government loan, the company must borrow money from a group of private banks, including JP Morgan and Citigroup, sources said. That line of financing had been arranged in August, when the company was on the brink of bankruptcy, according to an industry official. The financing from the private banks comes at a higher borrowing cost for Chrysler Financial, a source said.

Chrysler and Chrysler Financial are separate companies. But both are owned largely by Cerberus, the secretive private equity firm. Daimler owns a 20 percent stake in each.