Despite Deals, Chrysler's Fate Still Shaky

By Brady Dennis and Kendra Marr
Washington Post Staff Writers
Wednesday, April 29, 2009

The Obama administration's efforts to salvage Chrysler have kicked into high gear in recent days. A flurry of deals has unfolded that could give employees a 55 percent stake in the company, with Italian automaker Fiat eventually holding 35 percent, and the government and Chrysler's lenders owning 10 percent.

The agreements engineered by the federal government carry an unmistakable message: Those with the most at stake in Chrysler will rise and fall together. If Chrysler succeeds, they will profit. If it fails, they stand to lose.

Yesterday, administration officials confirmed that a preliminary deal has been reached with Chrysler's largest creditors -- four major banks that hold more than 70 percent of the company's debt. The agreement would give the creditors $2 billion in cash, a significant reduction from the $6.9 billion that Chrysler had owed.

The deal could keep the automaker out of bankruptcy, though officials acknowledged that doesn't appear likely. Chrysler's remaining debtors, a fractious group mainly composed of hedge funds, have not signed off on the agreement and could force the company into court as early as tomorrow.

"Bankruptcy is not our goal," said an administration official familiar with the discussions who was not authorized to speak publicly. "It's not an ideal place, no matter how surgical or quick you make it."

But, the official added, "we need to balance that against the need for Chrysler to shed a good deal of liabilities." He said government officials recognize that bankruptcy could further harm the automaker's reputation and scare away consumers, but he challenged the notion that bankruptcy would create additional job losses at Chrysler.

"We will only pursue bankruptcy if we conclude that the benefits substantially outweigh the costs," the official said.

Even with the major stakeholders on board, the administration still faces a significant obstacle in deciding what to do with Chrysler Financial, the firm's financing arm.

The Treasury Department is trying to broker a solution for the division, which is a primary provider of credit for Chrysler dealerships and car buyers. If Chrysler Financial were to collapse, dealers say, they could go under. Consumers would struggle to get car loans, and Chrysler itself could be threatened.

A source familiar with the matter described it as "the biggest remaining hurdle."

"We need to have a viable finance company in order for cars to be sold," the official said. "We have not cracked the code on that issue. That is a big issue that we are working 24/7 on."

Government officials are working on a plan that calls for one of Chrysler Financial's long-time rivals, GMAC, to provide loans to Chrysler consumers and dealers. In recent days, they explored merging the two companies but have determined there may not be time to pull off such a complicated deal, people familiar with the matter said.

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