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Lenders Appear To Be Driving Chrysler To Bankruptcy
Joann Muller April
DETROIT -Just hours after President Barack Obama told the nation he was hopeful Chrysler would become viable and that it might be able to avoid bankruptcy, talks between his automotive task force and lenders reportedly broke down, raising the likelihood of a Chapter 11 filing as early as Thursday.
The Wall Street Journal reported that talks broke down after the president’s task force was unable to persuade hedge funds and other lenders to accept a sweetened offer of $2.25 billion in cash in exchange for forgiving $6.9 billion in Chrysler debt. Treasury officials were unavailable for comment.
“As we get down to the wire, there will be much speculation but we will refrain from commenting,” said a Chrysler spokeswoman.
An expedited court process could be a test run of the government’s plan for General Motors, which has until the end of May to try to avoid bankruptcy, industry analysts say.
The plan would be for Chrysler’s best assets to be sold to a new company that would emerge quickly from bankruptcy proceedings, perhaps in a matter of days or weeks. The new Chrysler would be owned 55% by a retiree health care trust fund and 20% initially by Fiat, with the remainder held by the government and creditors. Eventually, if Chrysler met certain performance objectives, Fiat would get 35%. Then, years from now, once the taxpayer loans are paid off, Fiat would be entitled to take a controlling interest.
Such a bankruptcy for Chrysler would test the administration’s theory that a major carmaker could undergo a “quick rinse” in court, shedding unwanted liabilities, and emerge as a smaller but healthier company.
Yet David Cole, president of the Center for Automotive Research, cautions that the complexities of car making doesn’t lend itself to simplistic approaches. “If this industry goes down in a catastrophic collapse, it will be more expensive than a bridge loan, and with the state of the economy it will drive us into a depression,” he said. “The last thing this administration wants is to be known as the 21st-century Herbert Hoover administration. The risk is very, very real.”
The government’s intervention in the auto industry is unprecedented, with many of the rules being made up on the fly. Industry experts are hard-pressed to predict what will happen. “I think there will be a short bankruptcy to see if it works,” said Sean McAlinden, chief economist for the Center for Automotive Research. “If it doesn’t, they’ll need a new plan for GM.”
Although the government is clearly in command of the troubled industry for now, Obama said Wednesday night that he doesn’t want that to last forever. “I don’t think taxpayers should simply attach an umbilical cord between the U.S. Treasury and the auto companies so they are constantly getting subsidies.”
But he does believe it’s his role to push the automakers to make tough decisions and be competitive. “I’m not an auto engineer. I don’t know how to create an affordable, well-designed plug-in hybrid. But I do know if the Japanese can design an affordable plug-in hybrid, then doggone it, the American people ought to be able to do it, too.”
Long term, he thinks Detroit automakers will be very successful. “Those companies that emerge from this crisis, when you see pent-up demand coming back, they’re going to do really well, not just in the United States, but globally. I want to help them get there.”
During a Town Hall meeting near St. Louis earlier Wednesday, Obama addressed the Chrysler situation specifically.
“We don’t know yet whether the deal is going to get done,” he said. “I will tell you that the workers at Chrysler have made enormous sacrifices–enormous sacrifices–to try to keep the company going. One of the key questions now is: Are the bondholders, the lenders, the money people, are they willing to make sacrifices, as well? We don’t know yet, so there’s still a series of negotiations that are taking place.”
But Obama made clear what he hopes will result.
“We’re hoping that you can get a merger where the taxpayers will put in some money to sweeten the deal, but ultimately the goal is we get out of the business of building cars, and Chrysler goes and starts creating the cars that consumers want. And one of the potential advantages of a merger is new technologies where Chrysler starts making fuel-efficient, clean-energy cars that will meet the needs of the future market.”
He also promised that despite the expense to taxpayers, the government would protect health care and pensions for autoworkers, who helped get him elected. “My attitude is we got here not because our workers didn’t do a great job trying to build a great product; it was because management decisions betrayed workers.”

Forbes – April 30, 2009