Chrysler filed for bankruptcy protection Thursday afternoon in New York, a move President Obama said would give the company a “new lease on life.”
The president also announced that Chrysler has met his demand to strike a partnership with Italian automaker Fiat and said he thinks the alliance has a “strong chance of success.”
Chrysler faced a Thursday deadline to produce a restructuring plan, but some of the automaker’s creditors reportedly declined an offer Wednesday from the Treasury Department that would give the lenders $2.25 billion in exchange for forgiving Chrysler’s $6.9 billion debt.
Obama expressed optimism for the company’s future when it emerges from Chapter 11, calling bankruptcy a “quick” and “efficient” step on its path to “survival.”
“The necessary steps have been taken to give one of America’s most storied automakers, Chrysler, a new lease on life,” Obama said.
“This is not a sign of weakness,” he said of the looming bankruptcy proceedings.
The company will be eligible for up to $8 billion in federal aid to rebuild, according to senior administration officials. The officials say they expect the bankruptcy to last only 60 days, giving Chrysler time to finalize a partnership with the Italian automaker Fiat.
Chrysler CEO Robert Nardelli also said he will step down after the company emerges from bankruptcy protection. He said on the CNBC cable network that the Treasury Department did not ask him to resign but he felt it would be an appropriate time to leave after bankruptcy.
Chrysler announced it will idle all auto manufacturing as part of the bankruptcy-planned restructuring.
Not all lawmakers shared Obama’s optimism about the bankruptcy proceedings.
Rep. Thaddeus McCotter, R-Mich., released a written statement describing the proceedings as “cruel” and “forced.”
“The fate of Chrysler now rests in court proceedings of an unpredictable duration and ultimate determination,” he said. “Unconscionably, too many in our country consider our auto workers and retirees are disposable people — statistics not souls.”
Bankruptcy doesn’t mean the nation’s third largest automaker will shut down.
Along with the Fiat deal, the United Auto Workers ratified a cost-cutting pact Wednesday night. Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler’s debt in return for $2 billion in cash.
But the administration said about 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through. Those creditors said the proposal was unfair and they were holding out for a better deal.
When it files for bankruptcy, Chrysler will continue operating and Fiat will still sign on as a partner, sources said. The government already has promised to back Chrysler’s warranties in an effort to allay customers’ fears that the automaker won’t be around to honor them.
Obama’s auto task force rejected Chrysler’s restructuring plan last month and gave it 30 days to make another effort, including a tie-up with Fiat. Chrysler has borrowed $4 billion from the federal government and needs billions more to keep operating. Obama said Wednesday night, while the lender talks were still ongoing, that he was “very hopeful” that deals can be worked out to keep Chrysler LLC a viable automaker, and more hopeful than he was a month ago that the company will stay in business.
The UAW agreement, which would take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler’s U.S. facilities and to share key technology with Chrysler.
As for General Motors Corp., its bondholders want a majority stake in the restructured automaker in exchange for forgiving their claim to $27 billion of the company’s debt. GM has come out with a plan that would give the U.S. government a 50 percent equity stake in exchange for about $10 billion in loan forgiveness.
(Source: Fox News)
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3 Responses
If a politically connected creditor (the UAW, the government) can change the order in which creditors are paid so that the secured creditors get stiffed, then they have effectively undermined a huge part of American commercial law and transformed the country into an imitation of places such as Argentina or Russia where “connections” count more than law. Unless they settle, the matter will end up in the Supreme Court and will (combined with Kelso) offer a tremendous opportunity for the Republicans to make property rights a major issue (and all the more so with GM, many of which creditors are small investors rather than hedge funds).
This move was ileagal! They should have been allowed to go into regular Chap 11 reorganization. To have the govt involved so Obama could make sure that his hacks (read: the unions) are protected, is sickening!
Mark,
They are doing a regular Chapter 11. What is dubious is slipping money to some secured creditors (via TARP) to give up part of their claims, but not to all the secured creditors, and giving priority to unsecured creditors over secured creditors. It is good politics unless the Republicans get their act together and exploit it (cf. Kelso). Since Chrysler and the UAW, years ago, came up with a plan to pay workers with a claim on future earnings, the UAW is probably the largest unsecured creditor, so under normal rules, they would get a big chunk of the stock of the new Chrysler – though what they do with it is a problem (would they favor paying current workers, or favor funding retiree health benefits).