Chrysler offers 0% after $1.5B bailout

Government loans Chrysler Financial to make loans to its customers, prompting zero-interest financing offer.

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By Chris Isidore, senior writer

Was the Senate right to release to Obama the second half of $700 billion bailout?
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NEW YORK ( -- The Treasury Department, expanding its bailout of Detroit, announced Friday that it will loan Chrysler Financial $1.5 billion, opening the way for Chrysler to offer buyers interest-free loans to revive slumping sales.

The Chrysler 0% offer came less than an hour after Treasury announced the bailout. The offer, available on select Chrysler, Dodge and Jeep vehicles, applies to loans of no more than five years.

The government loan to Chrysler Financial is not on terms quite that attractive, but it makes money available to the firm much more cheaply that it has been able find in private markets. The firm will pay the one-month Libor rate, plus 1% in the first year of the five-year loan, and Libor plus 1.5% in the subsequent years.

The government loan is separate from the $4 billion that Treasury agreed to loan Chrysler last month to keep the automaker from running out of the cash it needs to continue to operate.

The so-called captive finance arms are crucial to the automakers because they provide loans to both their customers and their dealers. In the current credit crunch, the finance units' difficulty in grouping those loans together into securities has cut them off from funds needed to make additional loans.

The credit squeeze exacerbated the decline in auto sales at General Motors and Chrysler LLC in recent months. In December, GM reported a 31% drop in U.S. sales from a year earlier, while Chrysler's sales plunged 53%.

"We appreciate the Treasury Department's support and their commitment to increase the availability of financing for consumers," said a statement from Chrysler Financial CEO Thomas Gilman. "This funding will better position us to withstand the current economic challenges until funding becomes available through more traditional commercial sources."

The loan is similar to the $6 billion that GMAC, the finance unit associated with General Motors (GM, Fortune 500), received from Treasury on Dec. 29.

But GMAC, as a bank holding company, received a $5 billion capital injection directly from the Treasury, as well as another $1 billion in Treasury funds via GM. By contrast, Chrysler Financial is receiving only a loan.

A government official who briefed reporters Friday declined to comment on how much money Chrysler Financial had been seeking.

"This was the result of many long conversations," he said. "This is what we determined we are comfortable giving them at this point."

The government official said that Treasury has also held talks with Ford Credit, the finance arm of Ford Motor (F, Fortune 500), but declined to characterize whether they are ongoing.

Ford said in a statement that its position has not changed. "We did not and are not seeking short-term financial assistance for our automotive operations from the government. What is in the news is Ford Credit's discussions with the government regarding ways to restore liquidity to the financial markets to help us provide financing to our customers and dealers."

The automaker said Ford Credit has been trying to access the government's Term Asset Backed Securities Loan Facility (TALF), another government program to spur lending, and get the FDIC to approve an application that would allow it to become a bank.

The money for Chrysler Financial comes from the Troubled Asset Relief Program (TARP), the $700 billion pool of money approved in October to help banks and Wall Street firms. The program has now pumped about $25 billion in loans and capital infusions into the automakers and their finance arms.

The disbursement comes from the initial $350 billion in TARP money available since last fall, according to a government official. A Senate vote on Thursday released the second $350 billion pool from TARP.

Treasury's loan to Chrysler Financial will be secured by the newly originated consumer car loans issued with the money. To top of page

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