Slump, Debt Dashed Bid to Turn Around a U.S. Icon

By NEAL E. BOUDETTE, ALEX P. KELLOGG and JOHN D. STOLL The latest lap in Chrysler's wild ride began with a big bash and a borrowing binge. It was Aug. 3, 2007. Chrysler executives and employees were throwing a daylong party to celebrate a just-signed deal that gave the stalwart U.S. auto maker a new majority owner, private-equity giant Cerberus Capital Management. A team of acrobats performed flips and stunts while rappelling from the roof of Chrysler's headquarters. Daytime fireworks lit up the sky. The same day, thick mortgage documents started arriving in county clerk offices in Michigan, Ohio and Illinois. As part of its turnaround plan, Cerberus had Chrysler mortgage most of its crown jewels -- plants, real estate, machinery and intangible assets like patents and the Jeep brand name. Using those assets as collateral, Chrysler borrowed $10 billion. Timeline 1920s 1925: Chrysler Corporation, successor to Maxwell Motor Cars, is formed by Walter Chrysler. Sales reach 132,343 cars. 1928: Chrysler buys Dodge. Cornerstone of the Chrysler building in New York is laid. 1930s - 40s 1935: United Auto Workers union is formed by workers at General Motors and Chrysler. Chrysler joins the war effort, producing 18,000 Sherman Tanks and 500,000 Dodge Trucks. With many men off to the war, women enter the manufacturing work force. 1941: Willys-Overland builds what becomes known as the Jeep for the military -- a forerunner of today's SUVs. 1950s 1950: The UAW strikes for 104 days, gaining partial paid life insurance and medical insurance. 1955: Introduce 'Forward Look' styling featuring sweeping tailfins, sending its sales climbing. 1960s 1964: The 426 Hemi engine is introduced in NASCAR racing. Chrysler Credit Corp. is formed. 1970s 1971: Chrysler buys 15% interest in Mitsubishi Motors of Japan; Dodge imports Colts built in Japan. 1976: Chrysler wins U.S. Army contract to build XM-1 tanks. 1978: Lee Iacocca joins Chrysler as president; he becomes chairman in 1979. 1979-1980: Chrysler wins loan guarantees from the government. 1980s 1980: K cars are introduced. 1983: Chrysler pays off bank loans guaranteed by the government seven years early. 1987: Chrysler buys American Motors Corp. 1990s 1998: Merger with Daimler-Benz. Dieter Zetsche becomes CEO of Chrysler. 2000s 2001: Plymouth brand is phased out. 2004: Introduction of the Chrysler 300 and Hemi V8 engine. 2006: Falls to fourth place in U.S. market, behind Toyota. 2007: Chrysler is sold to Cerberus; Robert Nardelli is named CEO. 2008: Chrysler receives government loans. 2009: Fiat agrees to take a stake in Chrysler. Chrysler files for bankruptcy. Chrysler Brands The money was supposed to fuel Chrysler's recovery. It wasn't enough. As the U.S. economy slid into recession and auto sales plunged, the company blew through every last dollar it had, plus $4 billion more provided by the U.S. Treasury. For the past two months Chrysler and the government sought to avoid collapse, working out deals with the United Auto Workers union and Italian auto maker Fiat SpA. When the rescue effort collapsed late Wednesday, the sticking point was debt. The government proposed to pay creditors about 33 cents on the dollar, but half refused to go along for the ride. President Barack Obama threw in the towel. The company filed for Chapter 11 bankruptcy protection on Thursday. The auto maker that emerges will likely be smaller, designing trucks and sport-utility vehicles and making cars developed by Fiat. Chrysler's filing sounds a conclusive rattle in the long, painful decline of Detroit's Big Three auto makers. Like its age-old rivals General Motors Corp. and Ford Motor Co., Chrysler suffered from costly and inflexible union contracts, poor quality, bad management decisions and an economic downturn that put the brakes on consumer spending. In Chrysler's case, the seeds of its downfall, including the piling on of debts that proved to be overwhelming, were planted unknowingly in crises of the past. Cerberus's decision to borrow against company assets was a tried-and-true method of raising cash in tough times. Ford, in fact, is in better shape than GM and Chrysler because it raised billions in 2006 by mortgaging its plants. As people inside Cerberus see it, the borrowing plan would have posed no problem for Chrysler but for the meltdown in financial markets. 20th-Century Icons Throughout most of the 20th century, Chrysler, GM and Ford generated wealth that drove the U.S. economy and helped raise Americans' standard of living. But since the oil shocks of the 1970s and increasing competition from foreign-owned auto makers, the Big Three have been in retreat. They are, in fact, no longer so big. Less than 30 years ago, the trio accounted for practically every car made in America. This year only a little more than half the cars built in the U.S. will be "made by Detroit," according to CSM Worldwide, a forecasting firm. In 2010, CSM projects, foreign-owned auto makers will make more cars in the U.S. than Ford, GM and Chrysler. GM is also undergoing a government-led restructuring and a bankruptcy filing is a possibility. GM, too, will shrink. Ford has more cash and believes it can weather the recession without government aid. Chrysler Corp. was formed in 1925 when a former star executive at GM, Walter P. Chrysler, reorganized the ailing Maxwell Motors Co. and renamed it after himself. He sold cars with touches of luxury at modest prices. By the mid-1930s, the formula had elevated Chrysler to the top of the U.S. auto business, along with GM and Ford. Like its rivals, Chrysler began to struggle in the 1970s when Japanese cars of surprising quality began winning over American drivers. In 1979, it was saved from bankruptcy by a government bailout and a charismatic chief executive, Lee Iacocca. Amid that crisis, Chrysler sold its European operations. The move raised cash but would leave the company at a disadvantage two decades later, relying on North American sales in an increasingly global auto market. In the 1980s, Chrysler pioneered the minivan and paid off its government loans. By the mid-90s, it was one of the most profitable car makers in the world, with its strong minivan sales and its Jeep brand benefiting from the growing U.S. love affair with SUVs. But management was under pressure, most visibly from billionaire shareholder Kirk Kerkorian, to deliver more value. In 1998, Chrysler joined with Germany's Daimler-Benz AG in a landmark merger that rewarded shareholders. Soon, however, Chrysler sales tanked when its new minivans proved to be slow-sellers. In 2001, the German parent sent Dieter Zetsche, an affable engineer from its Mercedes division, to fix the American unit. Part of Mr. Zetsche's prescription was to lean more heavily on Mercedes for engineering. That cut costs and helped Chrysler produce a successful rear-wheel drive sedan, the Chrysler 300. But it also meant the company lost some of the expertise and capabilities of a stand-alone auto maker, another seed of trouble. By 2004, it looked like Mr. Zetsche had pulled off a miraculous turnaround. That year, Chrysler made €1.9 billion in profit. With gas prices low and U.S. automakers winning customers with bigger and faster cars, the company was pumping its profits with its big Chrysler 300 and its V8 Hemi engine. Things soured in 2006 as gas prices crept higher and Americans began shying away from big vehicles. By then, Mr. Zetsche was back in Germany, having been named chief executive of DaimlerChrysler. In the third quarter of 2007, Chrysler ended its string of 12 profitable quarters. Easing the Blow To help ease the blow, Chrysler sought concessions from the big auto-workers union. Chrysler, like Ford and GM, was groaning under the weight of decades of labor contracts that provided generous health care for active workers plus hundreds of thousands of retirees and their dependents. In 2005, GM lost $11 billion and the following year Ford lost $10 billion. To help them, the United Auto Workers agreed to cuts in retiree health care. The union took a harder line with Chrysler. Despite the U.S. unit's losses, it argued, parent company DaimlerChrysler was still making money. With discussions at an impasse, Mr. Zetsche tried to appeal one last time with UAW President Ron Gettelfinger by phone. The union boss wouldn't budge. Livid, Mr. Zetsche stormed out of his office, say people familiar with the matter, and snapped: "What do we have to do? Lose $10 billion to get a level playing field?" Within weeks of the union rebuff, senior German executives began exploring the possibility of selling Chrysler. Mr. Zetsche acquiesced. About six months later, the buyer was named -- the secretive Cerberus, which had made billions of dollars with a blueprint of buying troubled companies, slashing costs and selling again quickly. When the deal was announced in May 2007, Cerberus founder Stephen A. Feinberg went to the company's sprawling headquarters to meet its top management. He wore an American-flag lapel pin and he told his audience of about 300 executives that he drove an American-made pickup truck. People who attended the meeting say he said he wanted to save this icon of American industry, not to bleed it of assets and value. He also met with union boss Mr. Gettelfinger. Although Mr. Feinberg is famously camera-shy, he allowed a Chrysler photographer to shoot him and the union boss together, a person familiar with the matter said. The photographer was instructed to make two prints of the shot -- one for each subject -- and then to permanently erase the digital files, this person said. Under the terms of the deal, Daimler essentially gave the company -- it was basically debt- and cash-free -- to Cerberus, with the latter agreeing to invest $5.4 billion into the car company. But Cerberus needed cash to pay suppliers, develop new models and keep plants running -- and for that, it mortgaged plants and property. JP Morgan Chase & Co., Citigroup Inc. and Goldman Sachs were the lead banks, and by the fall Chrysler had $10 billion in its accounts. Almost right away, however, the company paid back $2.5 billion of the loan -- cash that it would need less than a year later. To run Chrysler, Cerberus brought in Robert Nardelli, the former CEO of The Home Depot Inc. Mr. Nardelli proposed improving Chrysler's quality, slashing costs and lowering production so that the company didn't have to push cars and trucks into the market with hefty discounts. In the first half of 2008, though vehicle sales were slipping, Chrysler made a small operating profit. But trouble was brewing. Gasoline prices had shot up to $4 a gallon. Chrysler's model line was heavily skewed toward trucks, SUVs and minivans as consumers gravitated toward small cars and hybrids. At the same time, the subprime-mortgage crisis was worsening and credit was tightening -- meaning consumers would have a harder time buying cars, and Chrysler Financial would have a tougher time borrowing. When summer arrived, Cerberus's plan to turn Chrysler's auto-loan arm into a big money-maker unraveled. In July, Chrysler Financial needed to renew a $30 billion credit agreement, but already-skittish bankers balked. After a few weeks of tense talks, Chrysler Financial was able to get a financing agreement for $24 billion, but the terms were tough. It had to stop offering leases on cars and trucks, and couldn't offer loans to consumers with marginal credit. Making fewer loans, it would have a harder time raising new funds, and Chrysler's ability to sell vehicles would be crippled. In August 2008, the first full month without leasing, Chrysler's sales fell 35%. In September, Lehman Brothers collapsed and Wall Street fell into turmoil. With shaken consumers staying away from dealerships, Chrysler and other makers slashed production. Revenue plunged, and soon Chrysler was burning millions of dollars in cash a day. Looking for Handoff By then, Cerberus was seeking a way to hand off the car company to a partner. Cerberus officials held talks about merging Chrysler into GM, but these fizzled when GM's own troubles deepened. The best hope at the time appeared to be an alliance with Nissan Motor Co. and Renault SA. By November, Chrysler's sales were in free fall. Chrysler Financial was so short of funds that it practically stopped approving loans altogether, leaving many dealers with no way to get financing to those customers who were ready to buy, people familiar with the matter said. Inside Cerberus's Manhattan offices, the firm's top officials realized an auto-financing business was profitable only if it's connected with a healthy car company. "We had this stupid illusion that the finance company could have value on its own," said one person familiar with Cerberus's thinking. "We were wrong." By this time, a new potential partner had emerged. On Jan. 20, 2009, Chrysler and Fiat announced they had a tentative partnership deal. In exchange for a Chrysler stake, Fiat would provide engines as well as small and midsize cars that Chrysler could build and sell in the U.S. But Fiat said the deal would go forward only if Chrysler got $3 billion in additional loans from the U.S. government. At a March 5 meeting, Fiat's chief executive, Sergio Marchionne, led the Obama administration's auto-industry task force through a 75-page presentation outlining Fiat's plan for working with Chrysler. The task force was concerned about some of the terms, specifically whether Chrysler could preserve enough manufacturing jobs in the U.S. In a March 25 follow-up meeting, Mr. Marchionne delivered adjustments to the government's liking. "The Treasury essentially forced Chrysler and Fiat to rewrite their agreement," a person involved in the discussion. At the end of March, the government gave Chrysler 30 days to finalize a deal with Fiat. If it did, the Treasury would put $6 billion more into Chrysler. Finalizing a Fiat deal would require a new cost-cutting deal with the UAW and an agreement from creditors to reduce Chrysler's debts. By the middle of April, the only major hurdle appeared to be the holders of Chrysler's remaining $6.9 billion in debt. Some, including J.P. Morgan, which had received tens of billions of dollars in aid from the Treasury's TARP program, took a relatively conciliatory line. On Tuesday, the Treasury offered creditors $2 billion in cash in exchange for giving up the $6.9 billion in debt. The major banks agreed. Some smaller investment funds refused to budge. On Wednesday afternoon, the Treasury increased its offer by $250 million to $2.25 billion. J.P. Morgan gave the other 45 banks and hedge funds 90 minutes to vote on it. A large number of the funds voted no and refused to budge, paving the way for an all-but-unavoidable trip to bankruptcy court. Write to Neal E. Boudette at neal.boudette@wsj.com and John D. Stoll at john.stoll@wsj.com