Chrysler Probably Headed for Bankruptcy Today

US automaker Chrysler LLC appears to be heading for Chapter 11 bankruptcy as early as today. Its major creditors appear to be willing to write off much of the $7 billion in debt they are owed, but some hedge funds don't like the strings the Treasury is attaching to a rescue package. These guys think they'll get a better deal in bankruptcy court. However, Chapter 11 may not be the end of the company as it could clear the way for a Fiat buyout with support of the United Auto Workers.

The UAW has approved concessions (quite painful concessions at that) by margins of between 80% and 95% depending on job classification. While the precise details have yet to come out, the UAW looks like it is writing off $7 billion that Chrysler owes in exchange for 55% of Chrysler's privately held stock. That 55% would be used to fund health costs and other benefits to retirees and current employees. UAW President Ron Gettelfinger said, "Our members have responded by accepting an agreement that is painful for our active and retired workers, but which helps preserve U.S. manufacturing jobs and gives Chrysler a chance to survive."

Less fortunate are those suppliers to whom Chrysler owes money. These are the firms that make brake pads, fan belts, seat upholstery and such. They will likely get very little in bankruptcy court, just pennies on the dollar. Few of them are large enough to take that kind of hit without laying off some of their own staff. For the already floundering economy in Detroit and environs, this is about as welcome as Ebola.

A few weeks ago, the word “bankruptcy” gave rise to worries about closure and liquidation. President Obama said yesterday, though, “The fact that the major debt holders appear ready to make concessions means that even if they ended up having to go through some sort of bankruptcy it would be a very quick type of bankruptcy and they could continue operating and emerge on the other side in a much stronger position.” He knows perfectly well that he won't carry Michigan in 2012 if Chrysler vanishes.

The state's governor, Jennifer Granholm, made a last minute appeal to the hedge funds who were scuppering the rescue plan, “On behalf of Michigan, on behalf of the thousands of people who will be affected if this company is forced into bankruptcy, I am publicly asking these hedge funds to not be greedy but to do what the banks have done and what everyone else around the table has done — take the concessions.” If the world has learned anything about hedge funds in the last year, it is that they are built on greed.

In the end, Fiat is likely to sign on as a partner with about 35% of the stock, the US government would get 8% and the Canadian government would receive 2%. The UAW would wind up with the lion's share of the firm, but Fiat would appoint the board and top management. Given the success that Daimler had running Chrysler (basically none), the firm might come out of bankruptcy leaner and meaner, but one has reservations about it surviving if the economy doesn't experience a sharp bounce in the coming months.

© Copyright 2009 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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