Plan gives unions majority stake in Chrysler

To avoid a bankruptcy of Chrysler LLC at the end of the week, the Obama administration is trying to push through a deal that gives the automaker’s unions majority ownership - a deal that could blow up if the company’s lenders reject it.

The administration moved to put its labor allies in the driver’s seat a day after General Motors Corp. announced a restructuring plan that would give the government majority control of the auto goliath in exchange for wiping $27 billion of taxpayer loans off the books, while GM’s unions would get a 39 percent stake in the company.

The fate of Chrysler, a storied American company and global industrial giant, could be largely decided this week in response to what appears to be the government’s final offer. The future shape of GM, if government deadlines hold, will be decided within a month.

The Chrysler plan was panned by corporate and financial analysts as a bad deal that would not prevent the company from either going bankrupt or getting bailed out by taxpayers.

“Looks like unions win, bankers lose,” said Jack Welch, former chief executive of General Electric Co., whose widely followed management style made GE one of the most respected companies in the world when he ran it from 1981 to 2001.

The pending proposal for Chrysler eventually would give the United Autoworkers Union a 55 percent stake in the company. That would exceed even the 35 percent share eventually given to Fiat, Chrysler’s purported partner whose agreement to the deal will be critical if the company is to stay afloat. Chrysler’s secured bank lenders would get no more than a 10 percent stake along with $2 billion in cash to expunge nearly $7 billion in debt.

While the company’s biggest lenders appear to have agreed to take the cash, dozens of smaller lenders still have not signed off on the deal and still could force the company into bankruptcy. The administration has given the company a Thursday deadline to complete agreement on the restructuring deal.

Mr. Welch said the auto companies would be better off getting out from under government control and going bankrupt. They would be able to get a fresh start as new companies that would be free of debt and free of union constraints that have hobbled the American car companies and made them uncompetitive with foreign manufacturers.

He said the best hope for Chrysler is that its bankers will reject the government offer and force the company into a bankruptcy reorganization. But he said the government appears to be using the bailout funds it has given the top four bank lenders - JP Morgan, Citigroup, Goldman Sachs and Morgan Stanley - as a “club” to force the banks to accept the Chrysler deal.

Giving the union control of the company “seems fitting since the unions are one of the principal reasons why Chrysler went broke. They destroyed it and now they’re getting the spoils,” said Peter Schiff, president of Euro Pacific Capital.

Mr. Schiff said union management of the company is not likely to work, and Chrysler will either end up in bankruptcy or back on the taxpayers’ doorstep within months.

“I don’t think any real structural reforms are going to take place if we entrench the unions in control of the company,” he said. “What this is trying to do is preserve the labor union,” which would otherwise be wiped out in bankruptcy, he said. “We don’t want to preserve the labor union. The real reason they’re broke is year after year, Chrysler’s management caved into union demands.”

Mr. Schiff said the plan may lead to Chrysler being “continuously bailed out” by taxpayers, which would be easier for the administration to defend to Democrats in Congress if unions control the company.

But the plan may be rejected before it gets that far, he said.

“I don’t know why Fiat would want to be a minority shareholder” subject to the whims of the union, he said. Fiat, which hopes to use an alliance with Chrysler to gain a foothold in the U.S. market while transferring cutting-edge small-car technology to the American firm, would be better off buying pieces of Chrysler that it wants in bankruptcy, he said.

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