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Chrysler bankruptcy: speed is of the essence

Damage to the economy may be limited so long as bankruptcy is handled quickly. Obama is confident; others are skeptical.

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It’s important to get the company in and out of bankruptcy fast, analysts say, to avoid damaging Chrysler's own prospects and the fragile economy.

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“If they get it done quickly, then there will be a relatively minimal impact on the economy,” says Joel Naroff of Naroff Economic Advisors in Holland, Pa. “The suppliers won’t panic; the companies that do business with them won’t panic. But the longer it goes, the bigger the impact on all the suppliers, and the problems are a lot greater.”

One potential problem ahead could involve the dealer network. Senior officials at the White House, in a background briefing Thursday morning, indicated they expect Chrysler to reduce the number of dealers over time. The bankruptcy filing allows the company to do this despite some state franchise laws. Later on Thursday, this prompted a warning from John McEleney, chairman of the National Automobile Dealers Association.

“A rapid reduction in dealer numbers would not only do absolutely nothing to improve Chrysler's viability in the short term, but it would actually work against Chrysler's stated objective to increase revenue and cut costs,” he said in a statement.

As for Chrysler’s long-term viability, the White House is hoping that the proposed alliance with Fiat will give the company new technology. In return, Fiat is to get a 20 percent stake in the “new Chrysler.” It stands to gain another 5 percent if it increases Chrysler’s sales outside the US, Canada, and Mexico and another 10 percent if it introduces a car in the US that can get 40 miles a gallon and if it accomplishes other mileage efficiencies.

One of Fiat’s ownership partners will be the United Auto Workers Union, which will hold 55 percent of the company. In return for the stake, Mr. Naroff estimates, the UAW took a cut of about $7.5 billion on its pension fund and a total of $15 billion to $20 billion in future salaries and benefits.

On Thursday, Mr. Obama praised the lenders that represented about 70 percent of the money owed by Chrysler. These banks, led by JPMorgan Chase, agreed to a reduction of about two-thirds in the face amount of their loans.

According to Obama, some hedge funds and investment banks held out for at least twice that return. Many of these are secured lenders and are arguing that they are being treated worse than some unsecured creditors. Now, it will be up to a bankruptcy judge to sort it out.