Government preparing for Chrysler bankruptcy

The Obama administration has asked Chrysler to prepare for bankruptcy if the company cannot come to a restructuring deal with Fiat , as early as next week, according to a report in The New York Times.

On March 30, President Obama said that the restructuring plans “submitted by GM and Chrysler … did not establish a credible path to viability. In their current form, they are not sufficient to justify a substantial new investment of taxpayer resources.” The administration gave Chrysler 30 days to complete a merger with Italian automaker Fiat, and come to agreements with its bondholders and unions, or it would face bankruptcy. That deadline is fast approaching, and the government is reportedly asking Chrysler to prepare should the company fail to meet its obligations.

Yesterday, bondholders and Chrysler were still more than $3 billion apart in negotiations, while Canadian Auto Workers officials’ salary proposals were $15 an hour higher than Chrysler’s. Federal and provincial governments in Canada ordered the CAW back to the bargaining table yesterday. Later reports yesterday said that union negotiators were close to a deal.

Chrysler also owes $9.3 billion to a union health-care trust. In bankruptcy, The New York Times speculates retirees could receive far fewer benefits, partially funded by $2 billion promised by the U.S. Federal Pension Benefit Guarantee Corp., if the company were to fail.

Last week, executives of Chrysler Financial, the company’s finance arm, gave up further federal aid, when they refused to agree to salary cap terms attached to the aid.

Meanwhile, Fiat CEO Sergio Marchionne said his company’s tie-up with Chrysler was not necessarily a done deal.  If a deal is completed, Fiat would gain a 20 percent stake in Chrysler. (Initially, Fiat was to receive a 35-percent piece of Chrysler.)

Even with a Fiat deal, Chrysler says it will need an additional $6 billion in federal loan guarantees to avoid bankruptcy.

The Times suggests that under Section 363 of the federal bankruptcy code, the company could eliminate unprofitable operations, while merging product development and some dealers and factories with Fiat.

The government has agreed to back warranties for Chrysler owners in the event of a bankruptcy.

If the merger fails, Fiat has said it might look into buying GM’s German Opel division.

While Chrysler’s deadline is next Thursday, GM was given until June to restructure. According to the New York Times article, the Treasury Department is also exploring the bankruptcy contingency with regards to GM.

Yesterday, the Government Accountability office summed up what the government has spent so far bailing out the auto industry. The bottom line: $36.4 billion, so far.

—Eric Evarts

Comments

[Cale]

This reads like a hurricane prediction. You know once you've read the first paragraph that the news isn't good. But for some reason, you just can't help reading on and on and on. It's like some inexplicable fascination with disaster.

No offense meant to anyone that has to live where hurricane's actually happen. I'm sure there's nothing funny in the least about a horrible storm.

[Jeff Bartlett - Consumer Reports]

Having lived through hurricanes, I know what you mean. The auto industry maelstrom is both terrifying and fascinating. A real, serial drama with twists and turns at every corner. To be honest, it is tough to cover just the highlights and figure out which ones. Consumers and industry watchers need to know what is going on, especially as it may impact car purchase and ownership, but there is a real, heart-felt story beneath the headlines about the human toll this is having. I feel for the factory workers, managers, dealers, suppliers, and all the people inbetween who have been working hard and building a life, only to face such uncertainty and personal challenge. As much as we all visualize the larger chess game of how the OEMs will be positioned and which will survive this "game," it is important to remember and respect all the pawns.

[Diyan]

This is horrible news for Chrysler. Sounds like there may be more to this than we know.

[Mira's Desk]

It's not clear we are getting the entire story about Chrysler's small debt holders. Check out what the Non-Tarp bond holders have to say about the government's deal. http://pfx.me/KI

[WillG]

Bankruptcy is the right thing for the senior debt holders. They deserved to be paid! I read a great article about this titled "Killing Chrysler" found at http://economicefficiency.blogspot.com/2009/04/killing-chrysler.html.

It clearly laid out the details and considerations. Personally, I think it is time for the government to get out of the auto business and back into the business of national security.