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And story just keeps on going............


Pay Rule Led Chrysler to Spurn Loan, Agency Says
Firm Claims It Didn't Need The Government Infusion

By David Cho, Peter Whoriskey and Amit R. Paley
Washington Post Staff Writers
Tuesday, April 21, 2009

Top officials at Chrysler Financial turned away a government loan because executives didn't want to abide by new federal limits on pay, according to new findings by a federal watchdog agency.

The government had offered a $750 million loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a major lender to Chrysler dealerships and customers.

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

Chrysler Financial officials denied in a statement that the company's executives had refused to accept new limits on their pay, adding that the firm turned down the loan because it no longer needed it. But their account conflicts with a report set to be released today by the Treasury's special inspector general for the federal bailout, saying the executives' refusal led Treasury to withdraw the loan offer.

"It was certainly a deal-breaker from Treasury's perspective," said Neil M. Barofsky, the special inspector general, who spoke to the bailout program's chief compliance officer about the situation last week.

The incident is the latest controversy to illustrate the hazards confronting the Obama administration as it sets out to assist private firms.

The uproar over the federal financial rescue, much of it focused on executive pay at bailed-out firms, has made companies skittish about taking government aid. Several big banks, such as J.P. Morgan Chase and Goldman Sachs, have said the bailout money now carries a stigma and have taken steps to pay it back. A program to aid small-business lenders has been stymied by the firms' reluctance to accept pay limits and other requirements of bailout loans.

Government officials have said that unless financial firms have enough resources to lend liberally to consumers, the economy cannot be revived.

The Treasury Department previously lent Chrysler Financial $1.5 billion, when less stringent requirements on executive compensation were in place for recipients of federal bailout money. But since that first loan was announced on Jan. 16, the Obama administration and Congress have toughened the rules.

During March, when it seemed that the first loan would run out, the Obama administration began working on a deal to lend the company an additional $750 million.

It did not take long for most of the agreement to fall in place. But on April 7, the Treasury asked Chrysler Financial to have its top 25 executives sign waivers regarding their compensation, according to the special inspector general's report.

Those waivers would have barred the executives from suing the Treasury or Chrysler Financial over new pay restrictions. As part of the economic stimulus package, Congress approved compensation limits, and the Treasury is working on clarifying what the firms must do to comply with the rules.

In other words, the executives were asked to sign the waivers without knowing what specific limits the Treasury might set.

Within a week, Chrysler Financial responded that "it was unable to obtain waivers from all 25 executives," the report said. By last week, the report added, "the request for additional funding was denied."

Chrysler Financial denied that its executives balked at new pay limits and said the firm had met all the restrictions of its first loan from the government's Troubled Assets Relief Program, 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 passed up the new government loan because, with auto sales down in April, there has been even less need for financing. The official said that if sales pick up, Chrysler Financial may seek additional government aid, even if it means agreeing to executive-compensation limits.

"If Chrysler Financial needs the cash to support Chrysler, they [the executives] are not going to put the auto company at risk," said the senior industry official, who spoke on condition of anonymity because the negotiations were private. "These guys aren't going to blow up the car company for their personal reasons. . . . They've done everything they can to support the 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 a statement.

But by forgoing the government loan, the company had to tap loans from a group of private banks, including J.P. Morgan and Citigroup, that charged more for the money than the government would have, sources said. That line of financing had been arranged in August, when the company was struggling to stay afloat, according to an industry official.

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

Treasury officials declined to comment on the matter but released a statement that said the department's auto task force would "monitor closely the financing situations for both GM and Chrysler."

"This is an issue that Chrysler and its stakeholders will need to address as part of this process and any potential deal," the statement said.