Chrysler lenders give in on restructuring

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By Patrice Hill

A scrappy group of dissident lenders that challenged President Obama's restructuring of Chrysler LLC fell apart Friday in a development that signals a major political victory for the White House and likely paves the way for a rapid exit from bankruptcy for the beleaguered automaker.

The dissolution of the lender cabal clears away the largest obstacle standing in the way of the White House's plans to sell the bulk of Chrysler's assets to Italy's Fiat Group SpA and start making smaller, more fuel-efficient cars in the United States. The company hopes to emerge from bankruptcy in a record time of less than two months.

The hold-out lenders charged that Mr. Obama, who had called them "speculators" and questioned their patriotism as well as blamed them for the bankruptcy, used undue political pressure, even though they were pursuing their legal rights in bankruptcy court, where the claims of such secured lenders normally prevail.

"After a great deal of soul-searching and quite frankly agony, they concluded they just don't have critical mass to withstand the enormous pressure and machinery of the U.S. government," said Thomas Lauria, the group's lead attorney.

The White House's auto task force asked the lenders to accept about 33 cents on the dollar for $6.9 billion of loans and offered them no equity in the company, while unions were given a 55 percent majority stake in exchange for expunging $4.6 billion of debt to a retirement fund.

What started out as a dissident group of a couple dozen hedge funds and other investors led by OppenheimerFunds Inc. dwindled to only six and then fell apart by the end of the week after the group realized there weren't enough of them to take on the White House and Democrats in Congress, who owe their election in part to labor unions.

The group's dissolution accelerated on Friday after Oppenheimer withdrew from waging an aggressive court challenge, saying it had "determined that the senior creditors can no longer reasonably expect to increase the recovery rate on the debt they hold by opposing the task force's restructuring plan."

The White House's success at dividing and conquering the creditors began even before the April 30 bankruptcy filing, when it persuaded four large banks acting as Chrysler's top lenders to accept the deal. The White House used as a cudgel the more than $100 billion in bailout funding given to the banks since last fall, including JP Morgan, Citigroup, Goldman Sachs and Morgan Stanley.

The White House made further incursions against the group earlier this week when it persuaded the Manhattan, N.Y., bankruptcy court led by Judge Arthur Gonzalez to force the secretive hedge funds and other investors in the holdout to disclose their identities in court - a tactic that led many to withdraw from the challenge rather than expose their wealthy clients to political criticism and public scrutiny.

That left only six funds, led by Oppenheimer, that were willing to openly fight in court - not enough to persuade the bankruptcy court to hold up the government plan.

Other members of the group quickly bowed out, including Perella Weinberg Capital Management, Stairway Capital Management, Group G Capital Partners and Schultze Asset Management.

Stairway said it only wanted "fair and equitable" treatment for its investors, and criticized the Obama administration for brushing aside the many investors represented by the lender group.

"As American taxpayers, we appreciate the unprecedented efforts taken by the current administration to stabilize the economy and the auto sector; but as fiduciaries to our investors we take exception to being compelled, as Chrysler senior secured lenders, to unfairly shoulder the burden relative to various junior creditors," Stairway said.

In announcing the filing for Chapter 11 bankruptcy reorganization last week, Mr. Obama accused the lenders of seeking an "unjustified taxpayer-funded bailout."

Earlier this week, the group disclosed in a court filing that its members had dwindled to nine funds representing $295 million - or just 4 percent - of Chrysler's total secured debt. Originally, the group was estimated to include about 20 lenders holding about $1 billion in debt.

In their opening moves in court, the lenders had sought to block the sale of Chrysler assets to Fiat and argued against giving Chrysler access to $4.5 billion in bankruptcy financing from the government. Both motions were approved by Judge Gonzalez, signaling he was sympathetic to the government's case.

While the victory in court may allow a newly reorganized Chrysler to emerge quickly from bankruptcy as sought by the White House, Steve Malanga, analyst with RealClearMarkets.com, said it likely will lead to an extended government intervention and bailout to save Chrysler because the company's underlying problems have not been solved.

"This is only the beginning, not the end, of all the levers that the federal government is going to have to pull to save a persistently troubled company," he said, predicting many more billions will be spent trying to prop up Chrysler.

The reorganized Chrysler will face the same tough competition from foreign auto companies as the old Chrysler, and the same problems with "recalcitrant" consumers who "disdain the Chrysler brand, especially when it comes to small, fuel-efficient cars that the company will now produce," Mr. Malanga said.

Chrysler will also continue to have "big cost disadvantages" because of the high union wages and benefits left largely untouched by the reorganization, he said.