- The Washington Times - Friday, April 24, 2009

The Obama administration, in negotiations over Chrysler’s fate, is demanding deep concessions from major banks that loaned the struggling automaker $6.9 billion, while making less strident demands of labor unions that helped get the president and other Democrats elected, said administration officials and industry observers.

The Treasury has asked for big sacrifices from JPMorgan Chase, Citigroup, Morgan Stanley, Goldman Sachs and other secured lenders - offering them only 22 cents on the dollar for the loans and a 5 percent equity stake in a future Chrysler-Fiat alliance - while asking for no new concessions from the United Auto Workers and assuring the unions that at most they would be subject to the wage and benefit curbs sought by the George W. Bush administration.

The $4 billion of loans Chrysler obtained from the Bush administration Treasury in January were contingent on unions agreeing to bring their wages and benefits in line with those of U.S. workers at plants owned by foreign automakers, and accepting half of company contributions to retiree health care funds in stock rather than cash. Still, the unions never openly agreed to the demands, and lately have concentrated their efforts on lobbying members of Congress to ensure that they escape relatively unscathed in the negotiations over the survival of the automakers.

When the White House’s auto task force visited Detroit last week, union leaders reportedly pulled out a U.S. map that highlighted each congressional district and how many auto workers and related union members were employed there, said sources close to the company.

In trying to pressure the banks into a meager settlement, the Treasury is using the leverage it gained by giving them bailout funds last year - and in several cases, against the will of the banks. Thus, JPMorgan Chief Executive Officer Jamie Dimon said last week that the $25 billion of bailout funds the bank reluctantly accepted has become a “scarlet letter,” which is being used to browbeat and downgrade the bank’s legal rights.

“The administration is protecting the unions and trying to come down very, very hard on the creditors,” said Peter Morici, business professor at the University of Maryland at College Park.

“The union is banking on the administration” doing what it takes to prevent the company from failing and putting thousands of union members out of work, he said. By putting “crass political considerations” ahead of the interests of the broader economy and taxpayers, the administration’s negotiations with Chrysler demonstrate “lemon socialism” at its worst, Mr. Morici said.

He added that if he were one of the banks, he would not accept the sacrifices sought by the administration without commensurate curbs on labor costs that ensure Chrysler can be viable in the future.

An administration official insisted that the White House is “engaged with all stakeholders to bring Chrysler and Fiat to a working partnership” by the end of the month. But the official refused to say what, if any, concessions the Treasury has sought from unions while confirming the deep cuts it is seeking from banks.

The administration has made further loans for Chrysler contingent on forming an alliance with Fiat that would return the company to economic health and profitability. While the administration has not sought new concessions from the unions, Fiat has demanded cuts in pay and benefits to bring the company’s workers in line with U.S. workers at plants owned by foreign automakers. But so far, the unions have not complied with Fiat’s demands either.

With only a week before the deadline imposed by President Obama for Chrysler to work out a deal with its unions and creditors or face bankruptcy, the administration and Chrysler are preparing a bankruptcy petition that could be filed at the end of next week.

“It should surprise no one that the administration is planning on contingencies,” the administration official said. “In a negotiation like this, everything is speculation until there’s a deal.”

While bankruptcy remains likely, analysts view the administration’s actions partly as a ploy to force bigger concessions from the banks. But ironically, the threat to force the company into bankruptcy seems empty if the goal is to protect unions, because analysts say the banks could expect to get a much better deal from a bankruptcy court, while unions likely would have to accept deep cuts at the hands of the courts.

Bankruptcy law places bank creditors, which in this case have liens on Chrysler’s factories and valuable brands such as Jeep, at the front of the line for compensation after the company’s assets are liquidated. Standard & Poor’s Corp. estimated that Chrysler’s lenders could expect to get 50 cents to 60 cents on the dollar for their loans in bankruptcy.

Union claims, by contrast, are not secured and are far behind banks in the bankruptcy pecking order. Workers’ jobs are not guaranteed in a corporate liquidation. In previous bankruptcies, courts have not only eliminated most of the jobs unions are seeking to protect, but have drastically slashed the pension and health care benefits of remaining workers and retirees.

Mr. Morici said the administration may try to railroad a pre-packaged bankruptcy through the courts that carries favoritism toward unions over banks, but that sort of interference in judicial processes would be “dangerous and politically jaundiced.”

“This sets a dangerous precedent for General Motors and Ford,” he said, both of which are watching the Chrysler negotiations for clues on how to handle their own union and creditor problems.

GM took further drastic steps to stave off insolvency Thursday by announcing the temporary closure of 13 plants in the United States and Mexico this summer, some for more than two months.

George Stephanopoulos, political commentator and host of ABC’s “This Week,” questioned whether Mr. Obama will follow through on threats to force the automakers into bankruptcy, given the threat to millions of workers and unions.

“The politics are perilous,” he said. “The White House can’t afford headlines in Michigan like the notorious New York Daily News headline that followed President Ford’s 1975 decision to refuse federal aid to NYC: ‘Ford to City: Drop Dead.’ ”

Mr. Stephanopoulos noted that the president promised the autoworkers, “I will fight for you,” even when he raised the possibility of bankruptcy for the first time last month. That is why the unions are giving him leeway to bargain with creditors for now, he said. “But look for them to join the pitchfork gang if bankruptcy proceedings begin before summer.”

The government has another reason for protecting union benefits besides political payback. Under ordinary bankruptcy procedures, it could be forced to take over responsibility for the auto companies’ giant pension plans, which are insured by the Pension Benefit Guaranty Corp. The autoworkers’ plans would be the biggest ever taken over by the agency and likely would put it deeply into deficit.

“This is high politics,” said Gary Chaison, a labor relations specialist at Clark University. “There are too many workers involved. The social implications are too big. I think any type of bankruptcy would have to protect the collective bargaining agreement and the pensions.”

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