Chrysler LLC filed for an unprecedented, White House-sponsored bankruptcy Thursday, presenting a test for the nation’s economy and judicial system as the administration tries to ram a politically brokered deal through a New York bankruptcy court in 60 days.
President Obama, trying to save union jobs and benefits while promoting a new generation of “green” cars, said he was prepared to spend an additional $8 billion to try to reorganize the company in a way that leaves much of it intact but shifts control into the hands of unions, the government and Italian carmaker Fiat through a new alliance. Chrysler’s owners are bowing out, and its top creditors have accepted a $2 billion buyout, leaving only a few dozen hedge funds and other investors as holdouts on the deal.
The first court hearing is Friday morning and will likely offer the first clue as to whether the bankruptcy will be the quick, “surgical” one portrayed by the Obama administration.
Judge Arthur Gonzalez is scheduled to hear the first motions, which typically allow a company to continue paying workers and basic utility costs as it restructures.
Eventually, Judge Gonzalez will have to sort out the key issue that made bankruptcy necessary: the creditors that hold $6.9 billion of the Chrysler’s debt.
The bankruptcy of the storied Detroit manufacturer foreshadows an even more ambitious attempt by the White House to reinvent the biggest U.S. automaker, General Motors, at the end of May. The crisis in the auto industry, the core of the Midwest’s once-mighty manufacturing base, comes at a critical time for the economy when it was showing tentative signs of recovery.
“We’re in uncharted territory. There’s no way to know how this is going to work,” said James Blanchard, former Michigan governor and Democratic congressman who shepherded through Congress Chrysler’s first federal bailout - a $1.5 billion loan in 1979. That effort helped the company founded in 1925 by Walter Chrysler stay in business for 30 more years.
“I’m hopeful this pre-packaged bankruptcy will be short and sweet, and Chrysler and its workers can move ahead,” Mr. Blanchard said. “The president has done everything he can to try to make this work.”
Mr. Obama emphasized that the plan is designed to minimize disruptions at the automaker’s plants and showrooms while slimming down and modernizing the company so it can compete in the market for small, fuel-efficient cars where Chrysler has been largely absent in the past.
Chrysler will gain the small-car technology from Fiat, which will gain a 20 percent share of the company that eventually could increase to 35 percent once government loans are repaid. Union health care funds will control 55 percent of the reorganized company, and U.S. and Canadian governments will acquire 10 percent of the company in exchange for loans.
The Canadian government is providing the company with $2 billion in loans to supplement the $8 billion that the White House estimates that it must provide to shepherd the company through a quick bankruptcy as the company’s “debtor in possession.”
“I’m supporting Chrysler’s plans to use our bankruptcy laws to clear away its remaining obligations so that the company can get back on its feet and on to a path of success,” Mr. Obama said. “It’s a partnership that will save more than 30,000 jobs in Chrysler and tens of thousands of jobs to suppliers, dealers and other businesses that rely on this company.”
Despite the president’s pledge not to “disrupt the lives of people who work at Chrysler,” however, the company announced that is shutting down production at all its plants for the duration of the bankruptcy, which the White House hopes will last one to two months.
Mr. Obama vilified the handful of hedge funds and other lenders who declined to take 30 cents on the dollar for their loans, forcing the company into bankruptcy. Mr. Obama called them “speculators” and said he was determined to defeat them in court.
The White House pressured four major bank lenders that hold 70 percent of the company’s $6.9 billion in loans to agree to the deal, using the leverage it gained by providing them with more than $100 billion in bank bailout funds. With those banks and most other major stakeholders on board, a senior administration official predicted the reorganization plan would sail through bankruptcy court.
He said the administration selected the Manhattan court because it has experience dealing with expedited bankruptcies. Veteran Judge Arthur Gonzalez, who presided over Enron’s long and tortuous bankruptcy filed in 2002, will handle the case.
Mr. Blanchard said the administration secured a big concession from the United Auto Workers by getting agreement to provide the lion’s share of payments into an employee health care fund with company stock rather than cash. That is how the union is acquiring majority ownership of the company, though the union will be able to appoint only one director to the reorganized company’s board of directors.
The rest of the eight directors would be appointed by the government and Fiat. Chrysler’s chief executive, Robert Nardelli, who negotiated the restructuring plan with the White House, said he will be leaving the company after the bankruptcy in order to allow Fiat to appoint new management.
The administration was canny in securing an accord with Chrysler’s biggest creditors, Mr. Blanchard said, which will help overcome the largest hurdle in bankruptcy court. Bankruptcy law dictates that the court should adopt any settlement agreed to by two-thirds of a class of creditors.
“I’m disappointed with what I think was seven hedge funds simply refused to be a part of the deal,” said Senate Majority Leader Harry Reid, Nevada Democrat. “They will be part of the deal now. They’ll have no choice.”
The deal appeared to encounter little opposition from Republicans on Capitol Hill.
“At the end of the day, this is about the stakeholders - the employees, the shareholders, the bondholders - coming together to find a way to save Chrysler and GM without more taxpayer bailouts,” said House Minority Leader John A. Boehner, Ohio Republican. “Washington can prod. I’ve certainly prodded the auto companies for some time, but they have to do this. Nobody’s going to do it for them. And in the case of Chrysler, if that takes actually filing a bankruptcy proceeding, so be it.”
Not everyone agreed that it will be smooth sailing in bankruptcy court, where reorganizations of large and complex companies like Chrysler typically take years. The dissenting lenders can try to block the reorganization plan by arguing that it turns on its head the usual pecking order for corporate creditors. The norm places banks and secured lenders at the front of the line for repayment and unions at the back of the line.
Using the expedited bankruptcy procedures “sounds smart,” said Lauren Silva Laughlin, analyst at Breakingviews.com. But creditors who feel shortchanged “have decent grounds” for a legal challenge.
“It’s politically expedient to blame recalcitrant hedge funds for forcing the company into bankruptcy,” she said. “But treading on their rights as secured creditors is bad for capitalism and may hamper Obama’s exit strategy from Bailout America.”
• Christina Bellantoni, Joseph Weber, Kara Rowland, S.A. Miller and Sean Lengell contributed to this report.