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Chrysler's Fate Still Shaky Despite Deals
Loan Arm's Overhaul Remains Key Hurdle

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.

GMAC, one of the 19 financial firms currently undergoing a stress test by bank regulators, will likely need to raise more capital and obtain other forms of federal support to provide loans to Chrysler Financial's customers, according to government sources. But that would require the government to waive longstanding rules that prevent regulators from helping commercial enterprises. The Federal Deposit Insurance Corp., for one, is balking at the Treasury plan.

An important step in the Chrysler restructuring came over the weekend, when the United Auto Workers reached an agreement with Chrysler. The deal essentially relieves Chrysler of a portion of the $10 billion it owes to the union's retiree health fund, and in return gives the union a majority equity stake in the company.

Some critics have argued that the administration has treated the union more favorably than Chrysler's creditors. Though every stakeholder has made sacrifices, said one administration official, it was essential to devise a restructuring plan that Chrysler employees would embrace.

"We need workers to come to work every day," the official said. "We needed to be sure that we had a workforce here."

The multifaceted agreements surrounding Chrysler offer a window into how the government might choose to deal with General Motors during the coming month.

Like Chrysler, GM is likely to emerge with multiple owners. Under the proposed restructuring, the government could wind up with a majority ownership stake, with the union and debt holders each receiving sizeable shares in the company. Still, it remains unclear how stock ownership will translate into operational control at GM or Chrysler. Some labor experts said the union's stake in GM and Chrysler could lead to conflict between retirees and active employees, as their interests inevitably diverge.

Chrysler's employees have toyed with the idea of ownership before.

In 2007, a group of UAW members, operating independently of the union's headquarters in Detroit, proposed buying Chrysler from its German owner Daimler and taking it private as a employee-owned company.

Analysts also point to the lesson of United Airlines: In 1994, the carrier gave its workers a 55 percent stake in the carrier in exchange for pay and benefit cuts.

One of the key players in securing that deal for United workers was Ron Bloom, now a lead member of the Treasury's auto task force, who also has helped steelworkers acquire stakes in their companies.

The United deal didn't succeed. Workers and management fought over the airline's direction. Unable to resolve its labor-relations problems, United filed for bankruptcy protection in 2002, nearly wiping out the value of workers' stock.

Staff writer David Cho contributed to this report.

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