Chrysler To File For Chapter 11 Bankruptcy

Following the breakdown bondholder negotiations with their debt reduction deadline fast approaching, Chrysler officials and the Obama administration announced that Chrysler will file for Chapter 11 Bankruptcy. The Obama auto task force successfully negotiated with four major banks that hold 70% of Chrysler's debt. The four banks agreed to accept $2 billion in cash in exchange for forgiving their share of Chrysler's debt. Negotiations with 42 other debt holders with the remaining 30% were unsuccessful. The bondholders, including a group of hedge funds, refused to cut a deal to forgive part of what they are owed. A Chapter 11 bankruptcy filing is the only way to force the bondholders to reduce Chrysler's debt.

The Obama administration promised billions of dollars in government funds to the automaker if it could make a significant reduction in its debt by April 30.

Speculation was rife that the Chapter 11 bankruptcy is a precursor to a deal with automaker Fiat. Officials from the Italian company did not confirm the signing of an agreement between the companies, but the announcement of a deal was expected shortly after the bankruptcy filing. It was expected that the $2 billion in cash would be handed over to the four banks after the deal with Fiat was completed.

Obama said that he expected the bankruptcy to proceed quickly. Chrysler was expected to file as early as April 30 or May 1. Because major debt holders were prepared to make concessions, the Obama administration declared itself confident that Chrysler will complete the bankruptcy quickly. Obama expressed optimism that the company would emerge from bankruptcy operating and in a stronger position.

Prior to the breakdown of negotiations, industry experts predicted that the bondholders would drive Chrysler into bankruptcy. After a bankruptcy that would be resolved as quickly as days or weeks, it was expected that Chrysler would sell its best assets to a new company. A retiree health care trust fund would hold 55% of the new Chrysler, with Fiat holding an initial 20%. The government and creditors would hold the remaining interest. Fiat's portion would eventually increase to 35% if Chrysler could meet performance objectives. After taxpayer loans are paid off, years down the road, Fiat could take a controlling interest in the company.

It was expected that the Chrysler bankruptcy would provide an opportunity for the Obama administration to test a plan for General Motors. GM has until the end of May to avoid bankruptcy. If Chrysler could emerge from a "quick rinse" in bankruptcy court, according to the administration's theory, a smaller, stronger company with decreased liability could provide a model for solving GM's problems.

Other experts remain dubious of the plan. The government has never intervened in the auto industry at this scale, and the entire country, already in the grips of the worst economic slump since the 1930s, could end up paying for the novel plan if the auto industry collapses. The car making industry is complex and difficult to predict, making it inapposite for overly simple solutions. David Cole, the president of the Center for Automotive Reasearch, warned that a "catastrophic collapse" of the auto industry could push the economy into a full blown depression.