At a meeting with executives from four of the nation's largest banks earlier this month, the chief of the government's auto task force, Steven Rattner, delivered a message that shocked some in the room.
To save Chrysler, he told them, the four banks and several other financial firms would have to surrender their claims to most of the $7 billion the automaker owed them. And what would the banks get in return for this sacrifice? Nothing.
"People's jaws just dropped," said a person familiar with the discussions.
The banks -- J.P. Morgan Chase, Citigroup, Morgan Stanley and Goldman Sachs -- have all since balked at the government's proposal. This week, they are drafting a counteroffer.
But those four banks are themselves recipients of billions of dollars in government largesse. Collectively, they have received $90 billion from the rescue program for the country's banks. Now, their critics say, the firms have an obligation to cooperate as the government seeks to save Chrysler.
"These are banks that have received substantial investments from the government," said Rep. Gary Peters (D-Mich.), whose district includes Chrysler headquarters. "We hope they will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs. People are angry that again it seems like the banks are standing in the way."
Representatives of the banks and the other lenders have formed a committee to handle negotiations.
"Together, we are focused on providing a thoughtful response to the initial proposal," they said in a public statement this week.
Privately, the lenders contend that the government offer was unfair.
"Ironically, politicians are accusing us of not wanting to lend more," said a source at one of Chrysler's creditors, referring to criticism that the reluctance of financial firms to make loans has stalled the economy. "But what's the incentive to provide loans if the government can come in at any time and trump you?"
Under the Chrysler rescue plan outlined March 30 by President Obama, Chrysler must strike a deal with its creditors and unions to reduce the company's debts. The company then must reach a pact to merge with the Italian automaker Fiat. If it does so by April 30, the government may extend an additional $6 billion in loans.
The requirements set out by the Obama administration leave the banks with a powerful role in determining the fate of the storied U.S. automaker.
If the bankers agree to lessen the burden of the Chrysler's $7 billion in secured debt, a deal with Fiat may go forward. If they don't, the Fiat deal would collapse and Chrysler likely would be liquidated, analysts said.
A liquidation would have serious financial consequences for the government and the banks, even beyond the loss of 180,000 jobs -- Chrysler's estimate of the number of employees and those of its dealers who would be affected.
If Chrysler is liquidated, according to people familiar with the matter, the banks could recover some of their loans and the government likely wouldn't because the bank loans take legal precedence.
About three-quarters of the $7 billion in Chrysler's senior secured debt -- or debt that takes precedence and is backed by assets -- is owed to the four major banks, the rest to an array of other financial institutions such as hedge funds. By contrast, Treasury officials expect that the government, which loaned Chrysler $4 billion earlier this year from the bailout program, would receive nothing back.
At the April 2 meeting at the Treasury, representatives of the banks and another firm, Elliott Management, met with members of the auto task force to negotiate a deal to reduce the loans.
Representing the Treasury were Rattner, the task force's senior adviser, as well as Ron Bloom, a former Wall Street investment banker who worked for the United Steelworkers of America. Also attending were Chrysler chief executive Robert L. Nardelli and Fiat's chief executive, Sergio Marchionne, according to people familiar with the matter.
At the meeting, Rattner and Bloom laid out the government's proposal for reducing Chrysler's debt. The government urged the banks to accept 15 cents in cash for every dollar that was owed them. While bank representatives were shocked at the meager proportions of Rattner's proposal, Chrysler's debt is currently trading at about that price. If accepted, the offer would reduce Chrysler's $7 billion debt to about $1 billion in cash.
During the negotiations, Treasury officials did not use their leverage as lenders to the banks to push them to accept the offer, people familiar with the meeting said. Treasury officials considered the bankers' shock at the proposal as much a negotiating posture as a sincere reaction, a source said.
J.P.Morgan, most recently as yesterday, and Goldman Sachs have said they want to return money from the government's Troubled Assets Relief Program as soon as possible.
Peters, the Michigan congressman, said the banks should take the market price. "Giving them more would be giving the banks another subsidy," he said.
But the banks balked at the offer because they estimate the loans are worth far more.
According to an analysis by Standard & Poor's, the loans would be worth 30 to 50 cents on the dollar if the company goes into bankruptcy and assets are sold to repay creditors. Likewise, Chrysler said that if it liquidates, the creditors would receive between 11 cents and 43 cents on the dollar, according to estimates it submitted to the government in February. More than a billion dollars could be at stake.
Though the two sides were far apart -- some of the bankers wanted at least 50 cents on the dollar for the loans -- representatives of the financial firms agreed to look at the Treasury's analysis behind the offer of 15 cents.
Late on Easter, the Treasury delivered 70 to 80 pages of documents outlining the government position. Since then, the banks have been developing a counterproposal, which could be delivered as early as today.