The Treasury Department presented secured debtholders with a plan that would repay them 15 cents on the dollar, or about $1 billion – roughly the recent trading level of Chrysler's debt, the report notes.
The White House wants to see Chrysler enter a partnership with Italian automaker Fiat, or risk going out of business.
But the offer was rejected by the banks, led by JPMorgan Chase and Citigroup. They are seeking 65 cents on the dollar for their debt and a 40 percent stake in a re-engineered Chrysler.
The U.S. has said the automaker must reduce its debt in order to continue receiving government aid and avoid Chapter 11 bankruptcy.
The bank steering committee, which also includes Goldman Sachs and Morgan Stanley, represents 45 financial firms that hold $6.9 billion in Chrysler debt, claim the automaker's restructuring plans require too much sacrifice on the part of creditors and not enough on the autoworkers' union, reports the Times.
Chrysler was ordered to use stock to finance the $10.6 billion health care fund for retired workers, a move tentatively agreed to by the United Automobile Workers, though no schedule for the cash payments has been made yet.
There is a tentative agreement in place that would have Fiat take a 20 percent stake in the company and provide fuel-efficient technology but Fiat will not finalize any deal until Chrysler's debt and health care issues are resolved, according to the Times.
Negotiations between the Treasury Department and the banks is still ongoing.