U.S. Pushed Fiat Deal on Chrysler

By NEIL KING JR. and JEFFREY MCCRACKEN
June 6, 2009
Wall Street Journal

WASHINGTON — The Obama administration rushed an alliance between Chrysler LLC and Fiat SpA despite Chrysler’s worries about Fiat’s financial health and its willingness to share technology, according to internal company emails.

The emails show Fiat ignoring requests for documents and trying to change contract terms late in the talks. A Chrysler adviser at one point said the deal risked looking as if the U.S. auto maker and the Treasury Department, which helped broker the pact, were "in bed with a shady partner." In another note, an official referred to the Treasury Department as "God."

The documents, filed in the Southern District of New York as part of Chrysler’s bankruptcy proceedings, provide a glimpse at the tense debates that shaped Chrysler’s final days as it raced to find a suitor.

On Friday, a federal appeals court upheld Chrysler’s Fiat deal, dismissing a challenge by dissident Chrysler debt holders. But the court also issued a stay until 4 p.m. Monday — leaving a small window for Thomas Lauria, the lawyer pursuing the case, to appeal to the Supreme Court. One judge on the three-judge panel suggested the Supreme Court should have "a swing at this ball."

Mr. Lauria’s persistence led one government lawyer in the Chrysler case to dub him a "terrorist" in an email to a Chrysler adviser.

In a written statement, Chrysler said "comments extracted from emails exchanged in the heat of negotiations reflect the normal hyperbole that occurs in the final stages of negotiating any complex transaction." Chrysler said its concerns about the deal were answered.

Fiat said it "provided full access to all information relevant to the due-diligence exercise performed by Chrysler and the prospective lenders."

The revelations come as the Obama administration is rushing to get a bankruptcy court to sign off on the Chrysler-Fiat merger as early as next week. Fiat has the right to walk away from the deal if it isn’t consummated by June 15.

Chrysler filed for bankruptcy protection April 30 armed with $12 billion from the government. Earlier this week, the government ushered General Motors Corp. into what it hopes also will be a speedy bankruptcy.

In an interview, an administration official said any concerns about Fiat were resolved in the final week. The Italian company gave Chrysler and the U.S. "total access to technology" and revealed enough about its financial status to persuade the U.S. the company was not just stable, but strong, the official said.

The official called the negotiations "a high-wire act" in which a small team of government advisers had to quickly pull together a complicated deal. In such situations, "people speak in elevated tones," the official said. "People get threatening."

The emails, which run from mid-March until early May, were put into the court record following a request by Mr. Lauria, the lawyer fighting the bankruptcy on behalf of various Indiana pension and investment funds that hold Chrysler bank debt. They argue that the case has trampled on established bankruptcy law.

In early March, both Chrysler and the government seemed unsure about Fiat. In a March 10 letter to the Treasury auto team, Chrysler Chief Executive Robert Nardelli said he shared some of the government’s worries about a Fiat alliance, including that the introduction of Fiat in the U.S. "may have a negative impact" on General Motors and Ford.

Mr. Nardelli also noted how Treasury officials had complained Fiat was "not bringing enough to the table" and had to be forced to put up cash for an equity stake.

A Chrysler spokeswoman said Mr. Nardelli wouldn’t comment beyond his affidavit. In the affidavit, he said that by April’s end, "Chrysler’s management became comfortable with entrusting our precious assets to Fiat."

Chrysler’s advisers told the company their Italian counterparts were refusing to provide sufficient financial information to evaluate the deal. A team sent to Fiat headquarters in Turin, Italy, reported back on March 14 that "no financial due diligence … has or can be performed."

An internal memo 13 days later from Chrysler’s advisory team also said Fiat’s "off-balance-sheet investments" in joint ventures around the world posed an economic risk and a political risk," including the appearance that "Treasury/Chrysler" was "in bed with a shady partner."

Eight days before President Barack Obama announced his support for the alliance in an April 30 speech, Chrysler officials were still bristling over what they considered Fiat’s unwillingness to provide even basic information about its finances. "They requested us to re-submit a written request" for the information, one Chrysler official wrote on April 22 to Mr. Nardelli, the CEO.

Treasury officials, meanwhile, worried about Fiat’s willingness to share technology with Chrysler, one of the deal’s underpinnings. Fiat stands to get an initial 35% stake in Chrysler, and potentially 50%, based on its ability to help upgrade Chrysler’s technology. Fiat is putting in no cash.

On April 22, Mr. Manzo of Capstone, the Chrysler adviser, sent a note — like some of the emails, containing misspellings — to the Treasury’s Mr. Feldman to complain that Fiat "is trying to be squirely" about sharing technology.

Mr. Feldman emailed back: "We know."

Mr. Feldman declined to comment on the emails.

At the outset, the Chrysler team appeared leery of the role being played by the Treasury, which was leading the effort to save the auto maker. "I think we are clearly getting more cooks in the kitchen," Mr. Nardelli said in an email.

However, Chrysler quickly learned to defer to the Treasury team. In one email chain, Ron Bloom of the Treasury chastised a Chrysler official for trying to hammer out some lingering issues with Daimler, Chrysler’s former partner, without looping in the Treasury.

"I am more than a little surprised," Mr. Bloom wrote, that Chrysler was proceeding "without our approval."

Mr. Nardelli jumped in: "Ron, thought we were helping, how would you like to handle!"

Later, the Chrysler executives deleted Mr. Bloom from the address line, and continued talking. "I guess the UST is running it!" said Mr. Nardelli, referring to the Treasury.

"26 days and counting," said Tom LaSorda, Chrysler’s then-president, referring to the April 30 deadline to either do a deal or file for bankruptcy.

"Amen!" responded Mr. Nardelli.

Mr. LaSorda didn’t return calls seeking comment.

Despite the push to do a deal with Fiat, Chrysler advisers continued into April urging the Treasury to think again about a potential merger with GM. Earlier talks between the two auto giants had broken down in November, and the Obama administration put little stock in the idea.

On April 10, Mr. Manzo emailed Mr. Nardelli to say he told the Treasury to reconsider a GM pair-up. Four days later, Mr. Manzo sent an email to several Treasury officials, as well as Messrs. Nardelli and LaSorda, urging them to reconsider.

"We continue to believe that revisiting the combination/alliance discussion with gm from the fall is the best alternative for all parties," he said.

In an interview, Mr. Manzo said conflicts will happen when a company like Chrysler is asking for money from a lender, particularly the government. He also said the emails reflected his "fiduciary duty to get the best value" for Chrysler.

Just before the filing, tensions boiled over. Mr. Manzo offered a suggestion to Mr. Feldman about making a last-minute offer to Chrysler’s debt holders. "I’m now not talking to you," Mr. Feldman wrote back.

The next morning, hours before President Obama announced the bankruptcy, Chrysler President Mr. LaSorda emailed Mr. Manzo asking if Chapter 11 filing was inevitable.

"Not good," Mr. Manzo replied. "These washington guys want to show the market (gm, delphi….) that they can be tuff. We are the gueni pigs unfortunately."

—Alex Kellogg, Stacy Meichtry and Jake Seward contributed to this article.