When Chrysler could have sold for $1

FORTUNE -- One of the lesser-known stories of the Obama Administration's auto bailout is how close Chrysler came close to following the fate of Lehman Brothers and being allowed to fail.

A majority of the Treasury Department's auto task force actually voted in favor of withholding further aid from the automaker. And it was only after a tense 45-minute meeting in the White House that President Obama agreed for the federal government to rescue Chrysler.

An insider's account of the Chrysler drama is recounted by Steven Rattner, head of the auto task force, in a new book Overhaul, to be published in October by Houghton Mifflin Harcourt. (I've covered his account of the revolving door at GM's corner office in a previous column.)

The story began to unfold in October 2008. After General Motors went hat in hand to the government for help, Chrysler followed a week later, signaling that it was desperate for cash.

Chrysler chief Bob Nardelli testified before the Senate Banking Committee on November 18, along with his two fellow CEOs, and again on December 8, looking for $7 billion to keep the company afloat.

After the Senate failed to act, Nardelli wanted Treasury to force GM to buy Chrysler. But although Chrysler's Jeep brand, minivan franchise, and full-size pickup business were attractive, GM decided that the overlap of brands and dealers would make a merger too cumbersome.

With no progress on the merger front, Rattner reports that Steve Feinberg of Cerberus Capital, Chrysler's owner, called Treasury Secretary Henry Paulson at 2 a.m. on the morning of December 19th with an incredible offer: He proposed turning Chrysler over to the U.S. government for $1. Rattner says the Treasury team mistook Feinberg's offer for a joke and didn't respond.

Later that month, President Bush authorized $17.4 billion in TARP money for GM and Chrysler. White House staffers had bought the president a weed whacker for Christmas the year before. In 2008, they joked that they bought him Chrysler.

The automaker was worth more alive than dead. Liquidation would yield just $1 billion. But Chrysler's problems -- loss of market share, overwhelming structural costs, outflows of cash -- were staggering. The auto task force created by new President Obama figured bankruptcy was inevitable.

By the time the auto team met with White House chief of staff Rahm Emanuel in the West Wing, they doubted whether Chrysler should be allowed to continue to survive as an independent entity. Emanuel was characteristically blunt: "Why even save GM?" he asked, according to Rattner. Reminded of tens of thousands of autoworkers whose jobs were at stake, he barked out "Fuck the UAW."

In addition to GM, Nardelli had reached out to Ford and Carlos Ghosn of Renault-Nissan for help, but to no avail. Lacking new designs and unable to meet tightening fuel economy standards, it pinned its hopes on a prospective alliance with Fiat. But when it presented a plan to Treasury on February 25, it provided only sketchy details and no scheme to reduce a heavy $6.9 billion debt burden.

Rattner met with Fiat Sergio Marchionne a few days later. Asked if he would put up capital as part of the deal, Marchionne said the equivalent of "No way."

On March 13, the auto task force met to decide Chrysler's fate. Those who opposed further aid argued that its demise would improve the odds of survival of GM and Ford because most would-be Chrysler buyers would shift to other domestic brands. By one analysis, GM would capture 300,000 additional customers -- a quarter of Chrysler's business -- if Chrysler failed. That would increase GM's profit by $2.4 billion and add $10 billion to its market value.

A Chrysler liquidation would vaporize 300,000 jobs industry wide including 40,000 at Chrysler. But some argued that the loss would be minimized as others filled in the gap. Besides, continuing to bail out Chrysler would send the wrong signal about the administration's willingness to make hard decisions.

In the end, the argument to save Chrysler was based more on political and social reality. Saving the automaker would prevent the loss of those 300,000 jobs and President Obama being blamed. Ripple effects might include Michigan's state unemployment fund going broke.

White House Chief Economic Adviser Larry Summers said it was better to invest $6 billion in Chrysler's survival than pay several billion for its funeral. He and others praised a Fiat merger, in part because it would preserve the future opportunity to merge with GM.

Summers pressed the task force members to apply probabilities to their projections. He asked for a show of hands: If you assume the probability of saving Chrysler for five years is 50%, would you save it? The task force members voted four to three against it. Rattner couldn't make up his mind but eventually voted in favor of a bailout. Summers had the tie-breaker and said yes as well.

A memo with the arguments for both sides was prepared for Obama. An entire session of the morning daily briefing on March 26 was set aside to discuss it. After 20 minutes, the president decided the decision was too important to rush and delayed it until evening.

Meeting in the Roosevelt Room of the White House, Obama heard arguments for 45 minutes. Polling data was discussed showing public opposition to the bailout, as was the impact of Chrysler's failure on unemployment. At the end of the meeting, Obama asked "Does anyone else have anything to say?" And then he decided. "I'm prepared to give Chrysler 30 days to see if we can get the Fiat deal done on terms that make sense to us."

Chrysler went through bankruptcy so its debts could be eased and it could continue in business. And negotiations with Fiat turned out to be tougher than expected -- due in part to Marchionne's explosive temper --- but it finally went through and the automaker was saved. But for a long time, its survival hung by the narrowest of threads.