This should have happened months ago.
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Everyone knew that Chrysler had a date with destiny. They tried. But the President’s Auto Task Force could not pull it off.
They tried knocking a few heads together.
The unions agreed to several concessions. Some of the largest banks agreed to take $2 billion in cash in exchange for giving up $6.9 billion in secured debt. In the end, it was the hedge funds that refused to play ball.
Now it is up to a federal bankruptcy judge to sort it out.
Clinching the Outcome
While the administration was willing to give the holdout creditors a final opportunity to get on board, the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler's future success.
The Chrysler creditor group is led by J.P. Morgan Chase, the automaker’s largest lender. On Wednesday, J.P. Morgan convened the creditors to vote on the government’s proposal. After 90 minutes of heated discussion, the hedge funds refused to budge, paving the way for the unavoidable trip to bankruptcy court.
According to officials, the administration has been braced for this move, and still is prepared to provide adequate liquidity to grease the skids for a deal with Italian automaker Fiat.
Bankruptcy should make the shotgun marriage to Fiat go more smoothly. The bankruptcy process will allow Chrysler to clear out or to restructure hundreds of dealer franchise agreements that threaten to financially bog down the transition. Bankruptcy also will allow Chrysler to shed massive asbestos and environmental claims that could poison the deal.
Chrysler’s trip to the bankruptcy court is a defining moment for the company that made the minivan a suburban automotive staple, and was better known for its throwback muscle cars than for putting out a product that could build long-term consumer loyalty.
Since being jettisoned by Daimler, Chrysler’s demise has been inevitable. Nothing could keep the automaker from stumbling – not even the legendary Lee Iacocca.
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In the deal envisioned out of court, Fiat was set to become a 20 percent owner of Chrysler with the union retiree health-care trust fund holding 55 percent. Initially, the rest of the company was to remain in the hands of the federal government. Cerberus Capital Management LP, which now owns 100 percent of Chrysler, was happy to bow out in favor of the new ownership team.
One of the interesting sidebars of the negotiations has been the effort by the Obama administration to combine Chrysler Finance with GMAC, the lending units associated with Chrysler and General Motors. Such a move likely would have involved the FDIC in the continuing guarantee of auto debt. With the bankruptcy court finally in the equation, FDIC Chairwoman Sheila Bair must be breathing easier.
It Was All in Somebody’s Head
Chrysler’s move into bankruptcy makes a similar step by G.M. smoother.
The principal impediment to G.M. taking this step has been psychological. G.M. is an icon of U.S. industrial prowess. In the midst of the worst economic crisis in a generation, the idea of G.M. admitting that it no longer could pay its debts or remain viable in its current form was unpalatable.
Now that Chrysler has plunged, it’s likely that G.M. shortly will follow. Ford must be envious.
I’m just trying to figure out who Fiat chief Sergio Marchionne will pick as the new spokesperson for the minivan.
Maybe he’ll hire Italian fashion designers Armani or Valentino to re-design the interior couture. A little Italian flair might just be what Chrysler really needs to recapture its share of the American auto market.
John Cohn is a senior partner in the Globe West Financial Group, based in West Los Angeles. He may be contacted at www.globewestfinancial.com
