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.

Jim Young/Reuters
President Obama spoke about Chrysler and the auto industry as he stood with his auto task force at the White House on Thursday. “I am supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success,” he said in a statement.

Chrysler’s road to recovery has taken a new turn: bankruptcy court.

After negotiations with some of its debtholders broke down Wednesday night, a judge in New York will now try to sort out the complex financial affairs of America’s No. 3 domestic automaker.

Even though the company couldn't avoid bankruptcy, the White House, which has been the lead broker in the negotiations, acted as if it had won a hard-fought victory since it garnered substantial concessions from most of Chrysler's lenders and the unions. Because of those concessions, the company will be in and out of bankruptcy court within two months, the White House maintains.

If the bankruptcy is indeed short, the damage to the economy may be limited, analysts say. For many Americans, the main difference they will notice in their town could be a dealer shutting down, since Chrysler can use the bankruptcy process to pare down its dealer base.

The bankruptcy was announced Thursday by President Obama – an indication of its political importance to the White House.

“I am supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so the company can get back on its feet and onto a path of success,” said the president in a statement. “No one should be confused about what a bankruptcy filing means. This is not a sign of weakness, but one more step on a clearly charted path that Chrysler provided.”

Chrysler will continue to try to sell cars during the bankruptcy process and will receive up to $3.5 billion in additional funding from the US government. It will continue to honor its warranties. It is also charging ahead with a plan to ally with Fiat, the large Italian automaker, which is to provide the company with the technology to produce fuel-efficient vehicles.

According to senior officials at the White House, the bankruptcy will be over within 30 to 60 days. Then, the government will provide $4 billion so the company can exit bankruptcy.

But some outside experts think the White House is overly optimistic about how fast it can get the troubled company out of bankruptcy.

“I would be shocked if the bankruptcy judge can manage a bankruptcy as complicated as this one, with as much money involved and interested parties, in 30 to 60 days,” says S. David Cohen, a professor at Pace Law School in White Plains, N.Y. “Maybe more like 18 months.”

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.

“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.

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