New Lease On Life For Chrysler

It's the end of the line as well as a new beginning for Chrysler. Please consider Chrysler to Enter Chapter 11, Form Alliance With Fiat.

Chrysler LLC will file for Chapter 11 bankruptcy protection Thursday, President Barack Obama said, kicking off what the administration predicts will be a 30- to 60-day restructuring of the third-largest U.S. auto maker.

At the same time, Chrysler entered into a partnership with Italian auto maker Fiat SpA, Mr. Obama said in a noon address. Mr. Obama said the partnership would not only let Chrysler survive "but to thrive."

The U.S. government will provide up to an additional $8 billion in aid, including up to $3.5 billion in so-called debtor-in-possession financing, to ensure Chrysler survives the historic reorganization process.

In exchange for the aid, the U.S. government will take a "small equity" stake in the new company, which will be partly owned by Fiat. According to a White House fact sheet, the U.S. Treasury will hold 8% of the reorganized company, while Fiat would hold 20% and the governments of Canada and Ontario would receive 2%.

Also as part of the deal, Chrysler's lending arm, Chrysler Financial, will be folded into GMAC LLC, which will become the main financing source for all Chrysler vehicles.

Bank holdouts may get blamed for pushing Chrysler into court. But there are other reasons behind the move.

One reason Chrysler needs to file for bankruptcy protection is so that Fiat can clear out hundreds of auto dealers from its sales network, which is easier to do in bankruptcy, where dealer franchisee agreements can quickly be rejected or amended. The auto maker also has asbestos and environmental liabilities that Fiat doesn't want and are more easily shed in bankruptcy court.

Chrysler Getting ‘New Lease on Life’ in Bankruptcy

President Obama declares Chrysler Getting ‘New Lease on Life’ in Bankruptcy

“The necessary steps have been taken to give one of America’s storied automakers, Chrysler, a new lease on life,” Obama said in remarks at the White House. “This process will be quick, it will be efficient.”

The president faulted some of Chrysler’s smaller lenders, including hedge funds that he didn’t name -- “a small group of speculators” -- who refused to make the concessions agreed to by the company’s major debt holders and workers.

Chrysler will be in bankruptcy for one to two months and GMAC LLC will become its new finance arm with a fresh infusion of capital from the government, according to an administration official who briefed reporters before Obama spoke. The Auburn Hills, Michigan-based automaker will receive $4.5 billion in exit financing, the official said.

Chrysler’s bankruptcy filing will be made imminently and the court process will be used to extinguish some contracts and to thin the company’s dealership body, the official said. Payments to auto-parts makers and other contractors will continue to be made.

There will be no immediate plant closures or job cuts as a result of the bankruptcy filing. Chrysler will be sold to a new company created by the government using a provision of Chapter 11 of the U.S. bankruptcy code. The Canadian government will contribute a portion of the funding for Chrysler’s so-called debtor-in-possession financing.

Irrational Blame Placed On Hedge Funds For Bankruptcy

Note the attitude of President Obama, in blaming hedge funds and “a small group of speculators” for causing Chapter 11. Instead, Obama should be praising whoever forced this decision.

Chrysler can dump asbestos issues, close dealerships, and shed other debts in a bankruptcy process far easier than in an agreement outside of bankruptcy court.

The same applies to GM. And for that matter, the same applies to banks. Indeed, attempts to prevent bankruptcies are irrational. Trillions of dollars of taxpayer money were wasted on numerous bailouts, for no good reason. Chrysler just proved life goes on, and indeed goes on better after bankruptcy than workarounds that leave debt and other inefficiencies on the books.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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