Chrysler and Obama now inextricably linked

McClatchy NewspapersApril 30, 2009 

WASHINGTON — The terms and conditions President Barack Obama imposed on Thursday's rescue of Chrysler inextricably binds the fortunes of the storied carmaker to the fate of Obama's young presidency.

Obama brokered the deal in which the Italian carmaker Fiat would take an ownership stake in Chrysler once the Detroit giant emerges from the bankruptcy protection it filed for Thursday.

Obama also is requiring that the new Chrysler-Fiat partnership manufacture more, smaller fuel-efficient vehicles in exchange for more than $10 billion in U.S. and Canadian aid.

"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. That's part of what has brought us to a point where they sought taxpayer assistance," Obama said Thursday, announcing both the Chrysler partnership with Fiat and what is hoped to be a surgical bankruptcy for Chrysler.

As if to cement his intellectual ownership of a carmaker with a new government-ordered mission, Obama added a salesman's pitch.

"If you are considering buying a car, I hope it will be an American car," the president said, not mentioning that Chrysler aspires to become a foreign-owned U.S. manufacturer like Toyota, Nissan and Honda.

Under the arrangement, Chrysler's $10 billion in new cash will be loans from the U.S. and Canadian governments. Fiat's 20 percent ownership stake can rise to 35 percent under regional production incentives. In exchange, Fiat will transfer billions of dollars worth of technology to Chrysler to enable it to make a line of cars that Obama has required must get at least 40 miles per gallon.

Fiat won't get a majority ownership stake until taxpayer bailout money has been fully repaid.

Chrysler acknowledged that some suppliers were halting shipments and, in a conference call with reporters, Chrysler CEO Robert Nardelli said that the carmaker would idle almost all of its North American operations immediately until it emerges from bankruptcy. This allows the company to become leaner and more competitive, he suggested.

"We have done one of the best jobs in the industry in getting inventory down ... this gives us an opportunity to come out the other side as lean as any automotive company has seen," Nardelli said.

The Chrysler-Fiat venture is unlikely to get these new fuel-efficient vehicles into the marketplace until 2012, the White House said in a briefing late Thursday. Still, environmental groups like the National Resources Defense Council applauded the Obama-brokered plan.

"You (consumers) didn't go to Chrysler thinking you want to buy an eco-car, you went to Chrysler to buy the HEMI! It was the complete antithesis," said Roland Hwang, transportation director for the NRDC, referring to a Dodge Ram that gets about 14 miles to the gallon. "Fiat is one of the most fuel efficient vehicle fleets in Europe."

Some auto industry watchers were more skeptical.

"The obvious conflict here is the market's preference for large, more-spacious vehicles," said Jeremy Anwyl, CEO of Edmunds.com, an automotive Web site for prospective car buyers.

Chrysler's product line includes popular mini-vans like the Grand Caravan, as well as trucks and jeeps. These presumably will continue to be a big part of the company's output.

"You just can't walk away from that and still pretend you are viable," said Anwyl.

Edmund's data shows that Chrysler's are selling for 22.6 percent off sticker price as buyers have been few and far between, far above the industry average discount of 16 percent.

Chrysler LLC was racing to beat a Friday deadline to either reach a deal with Fiat SpA or go into bankruptcy and perhaps liquidation. The United Auto Workers union and the Canadian Auto Workers union both agreed to steep cuts in pay and benefits to allow the deal to happen. So did large lenders to Chrysler such as JP Morgan Chase, who accepted a deal in which they would lose about 70 cents for every dollar worth of bonds they owned.

But a smaller group of banks that do not receive taxpayer bailout money and several lightly regulated hedge funds held out for a better deal. That led the administration and Chrysler officials to reluctantly seek to resolve the matter through a Chapter 11 bankruptcy proceeding in New York. That will leave a judge to settle the matter.

"They were hoping that everyone else would have to make sacrifices and they would have to make none," Obama said of the hedge funds, which he derided as "speculators."

The U.S. government, which will own 8 percent of the privately held automaker, is backing Chrysler's warranties during the restructuring process. Chrysler's roughly 3,200 dealerships will be pared down by an unspecified number and Chrysler Financial, the company's financing arm, is expected to be merged into GMAC, the financing arm of General Motors. As a bank holding company, GMAC has access to taxpayer bailout money.

Still Chrysler's shutdown across North America raises the stakes.

"The longer Chrysler is in bankruptcy, the less chance for a successful emergence from bankruptcy," said Rebecca Lindland, an automotive analyst for forecaster IHS Global Insight. "That was really a very surprising announcement, and really puts the company in more jeopardy ... that puts even more pressure on this idea that this is a quick bankruptcy."

The case will be heard by Judge Arthur Gonzalez, who presided over one of the nation's largest-ever bankruptcies, that of energy giant Enron Corp.

"We've gotten a terrific judge," said a senior White House official, who requested anonymity in order to speak more freely.

Chrysler officials insisted suppliers would continue to get paid what they've been owed. The Treasury Department recently unveiled a $5 billion revolving line of credit to ensure that large auto parts suppliers can borrow against their expected payments to continue their operations.

The historic developments at Chrysler may prove a game changer for talks on the fate of General Motors. GM had been given 60 days to work out a deal with its sundry stakeholders. Those talks may now take on more urgency, given the fact that the Obama administration has signaled it is willing to let a U.S. carmaker go into bankruptcy.

"It adds to the credibility of the government, because they show they're not bluffing about bankruptcy. It strengthens the government's hand," said Anwyl, the Edmunds.com CEO. "If Chrysler had not gone into bankruptcy, I think the government's credibility would totally have been shot. Now when GM says we may have to file, you know GM is not bluffing."

ON THE WEB

Fiat's statement

Chrysler's statement

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