By Peter Whoriskey, Brady Dennis and Kendra Marr
Washington Post Staff Writers
Friday, May 1, 2009
Chrysler, the nation's third-largest automaker, filed for bankruptcy protection yesterday, with President Obama promising that court relief would give the company a "new lease on life."
The administration's efforts to avert a bankruptcy filing were frustrated by some hedge funds, which Obama referred to as "a small group of speculators," that rejected the government's final offer to settle their claims against Chrysler out of court.
Now largely under government control, Chrysler will seek in court to strip itself of its overwhelming debts. Then, according to the administration plan, the company will get roughly $10 billion in new government aid and be merged with Italian automaker Fiat.
It is an ambitious corporate rehab project for any management team: Cerberus, the secretive private-equity firm, failed in recent years to revive the company after its ill-fated marriage to Germany's Daimler. The Obama administration's attempt similarly runs a number of risks.
While Obama promised a "quick" and "efficient" bankruptcy, and administration officials said they hoped it could be done in 30 to 60 days, many in the field warned that it could take much longer because of the size and complexity of the case. Each passing day could weaken the company's prospects if customers and suppliers shun the brand. Chrysler announced yesterday that it is stopping production across the country for 30 to 60 days to reduce inventories. Because the United Auto Workers renegotiated its contract, cutting supplemental unemployment benefits, workers affected by the shutdown will receive a portion of their regular pay.
Moreover, there is no guarantee that a slimmed-down, Fiat-managed company would fare significantly better than Chrysler has in the past against foreign competition such as Toyota and Honda, which essentially dethroned the American automakers years ago.
"For too long, Chrysler moved too slowly to adapt to the future, designing and building cars that were less popular, less reliable, and less fuel efficient than foreign competitors," Obama said. "That's part of what has brought us to a point where they sought taxpayer assistance."
The administration's efforts on behalf of Chrysler foreshadow what may be a vastly larger effort later this month, when it is scheduled to complete the makeover of American corporate icon General Motors.
Like Chrysler, GM has been weakened by massive debt and propelled by the economic crisis to the brink of bankruptcy.
The dual rescues within the auto industry have placed Obama in the odd position of salesman-in-chief.
"If you are considering buying a car, I hope it will be an American car," Obama told a television audience yesterday.
He also noted, as showroom salesmen now do, that the government has guaranteed the warranties of both companies, so consumers can get full coverage even if one of them goes bust.
The government is also arranging a deal under which GMAC, the automaker's financing company, would provide loans for Chrysler dealers and car buyers, replacing Chrysler Financial, which will be shuttered. Both the Treasury Department and GMAC are trying to persuade two other federal agencies, the Federal Deposit Insurance Corp. and the Federal Reserve, to provide support to the company. So far neither has agreed.
For now, however, much of the administration's efforts have gone into reshaping Chrysler into a newly competitive corporate entity.
The automaker's current majority owner, Cerberus Capital Management, is relinquishing its entire stake in the company.
The new majority owner will be Chrysler's union retiree health fund, which would receive a 55 percent stake in the new company. Fiat would get a 20 percent stake, with its share potentially rising to 35 percent over time based on performance. The United States would take 8 percent, while the Canadian government, which is also providing financing, would receive 2 percent.
Chief executive Robert L. Nardelli, who was installed by former owner Cerberus, is stepping down, and Fiat's leadership will take over. Chrysler's board will include four representatives named by the U.S. government, three by Fiat, one by the union's health trust fund, and one by Canada.
Nardelli, who will return to Cerberus Capital Management as an adviser, said he has "no golden parachute."
"We did a heck of a lot to try to salvage this company," Nardelli said in a conference call with reporters yesterday.
Though Obama administration officials emphasized time and again that bankruptcy was not their preferred option, they said the filing was essentially provoked by a small group of Chrysler's creditors who refused to accept the government's out-of-court offers.
The president yesterday praised Chrysler's management, union workers and the majority of the company's lenders, led by J.P. Morgan, for their "unprecedented sacrifices." Those groups were willing to make concessions out of court, he said.
But a number of hedge funds and other investment firms, who had invested in loans to Chrysler, refused to accept the government's final offer of 33 cents in lieu of every dollar owed. Their rejection precipitated the bankruptcy filing, administration officials said.
Calling them a "small group of speculators," Obama said they "were hoping that everybody else would make sacrifices and they would have to make none. Some demanded twice the return that other lenders were getting."
"I don't stand with them. I stand with Chrysler's employees, and their families and communities."
A group of about 20 investment firms that declined to go along with the deal released a statement yesterday rejecting the government's characterization and criticizing the negotiating process.
The group did not identify its members, but sources said it includes Perella Weinberg, Stairway Capital and OppenheimerFunds.
The group said its members had been "systematically precluded" from engaging in direct negotiations with the government.
Those negotiations had been dominated by four large banks that own 70 percent of Chrysler's debt -- Goldman Sachs, Citigroup, J.P. Morgan and Morgan Stanley. Each has received government bailout loans through the Treasury's Troubled Assets Relief Program.
"We have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds," the lenders said in a statement. "In its earnest effort to ensure the survival of Chrysler and the well-being of the company's employees, the government has risked overturning the rule of law."
One of the key aspects of the bankruptcy will be its duration, many analysts said, and administration officials promised a relatively quick one. They noted that most parties involved have already agreed to concessions.
But some bankruptcy specialists warned that the court process can be unpredictable and difficult to manage in the case of a company as vast as Chrysler. Fearing the worst, for example, the National Automobile Dealers Association, which represents Chrysler dealers, has hired law firm Arnold & Porter to protect dealer investments.
The administration's assertion that the bankruptcy could wrap up within 60 days "is something I would expect someone who has never been involved in a bankruptcy would say," said Jean Robertson, chair of business restructuring at Calfee, Halter & Griswold. "There is nothing typical about this case. It's like Frankenstein, and Frankenstein isn't pretty."
Richard C. Breeden, the former Securities and Exchange Commission chairman and court-appointed monitor of WorldCom during its massive bankruptcy, said the time spent under court protection may be less important than the quality of the results.
"One of the most devastating situations is when companies go into bankruptcy and don't cut deeply enough," he said, citing the example of US Airways. "That would be truly devastating here. If you don't use the tools of bankruptcy to cut enough cost and fail again, then your customer impact is vastly greater and you put yourself on a path to liquidation."
Jim Arrigo, owner of two Florida Chrysler dealerships and chairman of the national Chrysler dealer council, said that despite the bankruptcy filing, he remained "very optimistic."
"Unfortunately some people out there in the banking industry have not come to table," Arrigo said. "They alone are responsible for us going into this. But as long as we come out the other side, that's all that matters."
Staff writers Binyamin Appelbaum and Tomoeh Murakami Tse in New York contributed to this report.