By David Cho and Kendra Marr
Washington Post Staff Writers
Saturday, January 17, 2009
The government expanded its bailout of the nation's troubled auto industry yesterday, announcing a new $1.5 billion loan for Chrysler Financial while Ford Credit said it was in talks to obtain federal aid.
The money for Chrysler Financial will come from the government's $700 billion financial rescue program. Senior officials from the Treasury and Federal Reserve are hoping the assistance, combined with earlier support for General Motors' chief lender GMAC, will keep auto loans flowing until the two agencies can make more funds available for credit cards, student loans and small business loans.
The developments came on a frantic last work day at the Treasury Department, as officials pushed out the door several key deals and announcements related to the rescue program, known as the Troubled Assets Relief Program, or TARP.
The Treasury announced early yesterday that it would give $20 billion in aid to Bank of America and committed to limit the company's losses on $118 billion of troubled assets. The package was modeled on a similar bailout engineered for Citigroup in December. Taken together, the two deals established an approach to how troubled banks may receive help through the TARP in the next administration, department officials said.
Also yesterday, Treasury Secretary Henry M. Paulson Jr. suggested that the government might establish a "bad" bank to take on the troubled assets that lenders cannot sell. The idea was also broached in a speech this week by Federal Reserve Chairman Ben S. Bernanke and is being considered by President-elect Barack Obama's top economic advisers, the government officials said.
Last fall, Paulson told lawmakers that the TARP would be used to buy bad assets. But soon after the bill was approved by Congress in early October, he moved away from the idea to provide more direct aid to financial institutions.
"For me, we made some tough, big decisions without all of the facts," he said in an interview. "Now that we have got more [facts], I feel every one of the major decisions we made were the right ones."
The moves to aid the financing arms of the nation's automakers draw the federal government more deeply into Detroit's troubles.
To date, the government has committed TARP money to provide $17.4 billion for General Motors and Chrysler, $6 billion for GMAC, and now the new loan to back Chrysler Financial.
Unlike Chrysler Financial and GMAC, Ford Credit has been talking to government officials about receiving financing through a separate $200 billion Term Asset-Backed Securities Loan Facility, or TALF, which is being created by the Treasury and Fed to support auto, student and other consumer loans.
"We're still funding our business," said Ford Credit spokeswoman Margaret Mellott, who confirmed the talks, which have been going on for months. "We have strong liquidity . . . It's an ongoing dialogue to free up credit."
Although Ford has said it can survive without federal aid or intervention, it continues asking to be treated the same as its struggling cross-town rivals GM and Chrysler.
"Ford has been trying to have its cake and eat it, too," said David Cole, chairman of the Center for Automotive Research.
The support for Chrysler Financial is structured differently than most other loans the Treasury has made from the TARP. Instead of investing money directly into Chrysler Financial, the company is creating a special entity that will receive the government loan. Chrysler Financial can then withdraw those funds to make new auto loans.
The interest rate on the $1.5 billion government loan is initially set to be a percentage point above the bank lending rate known as Libor, and is set to rise by half a percentage point after one year. At the current low rates for Libor, the government would see an interest rate of 1.36 percent.
As further compensation for making the loan, the new lending entity will also in effect commit to pay the government $75 million, in the form of notes.
In addition, Chrysler Financial agreed to reduce by 40 percent the pool of bonus money for its senior executives relative to the 2007 levels, among other limitations on what it can pay its top officials.
As a result of this aid, many car buyers will be able to get zero percent financing for up to five years on some 2008 and 2009 Chrysler cars, company officials said.
"This will provide a great economic stimulus for car buyers across the country," Jim Press, Chrysler vice chairman and president said in a statement.
Chrysler Financial applied for TARP funds in November. In December, Chrysler's sales slid 53 percent compared with the corresponding month a year before.
"This funding will better position us to withstand the current economic challenges until funding becomes available through more traditional commercial sources," said Thomas F. Gilman, vice chairman and chief executive of Chrysler Financial in a statement.
In addition to announcing the deals for Chrysler Financial and Bank of America, the Treasury said banks receiving federal aid must provide written certification that their five most highly compensated executives are complying with pay restrictions laid out in the TARP legislation. Some of these limits include banning payments that reward risky behavior, prohibiting some "golden parachute" payments when the officers leave, and limiting tax deductions in excess of $500,000 for each senior executive.
The Treasury also announced it would lower the amount of losses that it would insure for Citigroup to $301 billion from $306 billion.
The Treasury staff has showed little sign of slowing their pace since March, when Bear Stearns nearly collapsed.
Yesterday was supposed to be their last day of work, but many senior Treasury officials kept their government-issued BlackBerrys rather than turn them in. They were given Federal Express envelopes to ship their devices next week, in case they had to work over the weekend.