U.S. Tries to Broker Sale Of Chrysler's Loan Arm
Tuesday, April 28, 2009
The Treasury Department is racing to engineer the sale of Chrysler's financing arm in a move the administration deems vital to saving the troubled automaker, but other federal agencies have not given their support, sources familiar with the matter said.
The Obama administration wants the nation's largest auto-financing company, GMAC, to buy Chrysler Financial, which is the primary source of lending for Chrysler dealerships and car buyers, industry officials said. But GMAC needs a new round of backing to buy its longtime rival, sources said.
Treasury officials have not yet obtained the agreement of the Federal Deposit Insurance Corp. and the Federal Reserve, sources said. The FDIC, created to backstop the banking industry, is balking out of concern that its resources would be drained in support of an auto manufacturer. And the Fed, which regulates banks, would need to grant a waiver from a long-standing rule that separates banking and commerce.
The dilemma over Chrysler Financial highlights the debate over the how far the government should stretch its financial rescue programs to help failing automakers. Despite reservations, regulators already anointed GMAC a bank holding company in December so it could access the federal bailout for financial companies and help preserve General Motors. Now regulators are being asked to preserve another storied American automaker.
Even if a deal is reached for Chrysler Financial, the fate of the car manufacturer remains uncertain. The Obama administration's auto industry task force and Chrysler's lenders remained in a standoff yesterday. If an agreement with the lenders cannot be reached to forgive most of their $6.9 billion in loans to the company, Chrysler is set to file for bankruptcy by Thursday, sources said. The sources spoke on condition of anonymity because of the sensitivity of the discussions.
But if Chrysler files for bankruptcy protection, keeping Chrysler Financial afloat still remains critical to the company's future, some industry and government officials said. A collapse of the financing arm could take down many dealers, which rely on short-term loans to buy the cars that sit on their lots. Chrysler sales could also grind to a halt as consumers struggle to get car loans. In the present environment, it would be difficult for dealers and customers to get financing from banks.
Dale Early, owner of Deerbrook Forest Chrysler and Jeep in Kingwood, Tex., said that close to 70 percent of the vehicles on his lot are financed through Chrysler Financial. When they are sold, he uses the proceeds to repay the loans.
"Chrysler Financial is vital to our success," Early said. "Chrysler needs a captive finance arm to survive."
Chrysler Financial is running out of money and has had to rely on $1.5 billion in loans from the federal government. The company also has a line of credit from several major banks, but the interest rate is so high that it cannot use the money profitably.
Furthermore, if Chrysler files for bankruptcy, a prospect that many officials say is highly likely this week, the banks can pull their lines of credit from Chrysler Financial.
GMAC, which has received $6 billion in government support, is in better shape, but without further government help, it does not have enough money to buy Chrysler Financial or to fund its loans even if a deal went through, government sources said.
A source familiar with the discussions cautioned that "this would be a very difficult acquisition to engineer and would require several pieces to fall into place."