Obama plan could drive Chrysler to innovate or into ditch

WASHINGTON — President Obama's decision to save Chrysler by pushing it into bankruptcy Thursday puts the company in risky, uncharted territory for a major U.S. automaker and could portend a similar outcome for General Motors as it races to meet its own government restructuring deadline.

The dramatic move pins Chrysler's future on a top-to-bottom reorganization and plans to build cleaner cars through an alliance with automaker Fiat, an Italian company that may not be able to crack the code of American car buyers.

The Chapter 11 filing in a New York court provides a high-stakes test of whether people will buy cars from a company in bankruptcy even if the government stands behind the warranties, as the president has promised to do.

The plan, supported by the United Auto Workers (UAW) and 70 percent of Chrysler's major lenders, also signals to bondholders at General Motors that the Obama auto task force will act on its vow to take GM into a similar bankruptcy if they do not agree to swap their GM debt for shares in a reworked GM by June l.

Obama emphasized that Thursday's move was meant to secure Chrysler's future and a return on the government's investment, and that it was the best route to preserve the well over 35,000 jobs at the third-largest U.S. automaker. But as part of the plan, Chrysler said most of its factories will shut down Monday, and will restart when the company emerges from bankruptcy.

"The necessary steps have been taken to give one of America's most storied companies a new lease on life," Obama said.

Administration officials said no additional job cuts were anticipated. Since the UAW renegotiated its contract, cutting supplemental unemployment benefits, workers affected by the shutdown will receive a portion of their regular pay.

"A lot of us are scared," said Steve Grabowski, 33, who has worked at a Warren, Mich., parts stamping plant for seven years and was sent home Thursday. "We knew something like this was going to happen, but we didn't think it would be so soon."

Chrysler's bankruptcy filing is the latest step in a drastic reordering of the American auto industry, which has been crushed by higher fuel prices, the recession and customer tastes that are moving away from the gas-guzzling SUVs that were once big money makers.

Obama on Thursday criticized a group of investment firms and hedge funds that did not agree to a $2.25 billion cash offer to cancel $6.9 billion in Chrysler's debt, saying they were holding out "for the prospect of an unjustified taxpayer-funded bailout." Chrysler's main task in bankruptcy will be to force that deal on those lenders, which the administration said it had the necessary votes from enough Chrysler debt holders to accomplish.

"They were hoping that everybody else would make sacrifices, and they would have to make none. Some demanded twice the return that other lenders were getting," Obama said. "I don't stand with those who held out when everybody else is making sacrifices."

Fiat CEO Sergio Marchionne said he planned to spend time meeting Chrysler employees and touring its plants over the next few weeks.

He said Fiat was preparing for Chrysler to "re-emerge quickly as a reliable and competitive automaker." Fiat also plans to reintroduce brands like Alfa Romeo in North American markets.

Company executives told reporters Thursday that Chrysler vehicles with Fiat's fuel-efficient technology should reach showrooms in 18 months.

Under the bankruptcy plan, the government will provide $3.3 billion for Chrysler to operate in bankruptcy. UAW's health-care trust fund will own 55 percent of the new Chrysler, while Fiat will hold 20 percent, the U.S. government will hold 8 percent and the Canadian and Ontario governments will together hold 2 percent.

Fiat's stake could grow to 35 percent if Fiat meets certain milestones, such as building new models in Chrysler plants. In addition to the $3.3 billion, the government will also provide up to $4.7 billion for the new Chrysler once it emerges. U.S. Bankruptcy Judge Arthur Gonzalez — who also oversaw the bankruptcies of Enron and WorldCom — will preside over case, and Chrysler's first hearing is set for today.

It is an ambitious corporate rehab project for any management team: Cerberus, the secretive private-equity firm, failed in recent years to revive Chrysler after its ill-fated marriage to Germany's Daimler. The Obama administration's attempt similarly runs a number of risks.

While Obama promised a "quick" and "efficient" bankruptcy, and administration officials said they hoped it could be done in 30 to 60 days, many in the field warned that it could take much longer because of the size and complexity of the case.

Each passing day could weaken the company's prospects if customers and suppliers shun the brand. Chrysler announced Thursday that it is stopping production across the country for 30 to 60 days to reduce inventories.

The Obama administration will also give additional aid to GMAC so that it can take over lending to Chrysler's customers and dealers from Chrysler Financial, which the government has deemed not viable. And the Canadian government will also provide new financial aid to Chrysler's operations in that country.

The governments also will have a say in helping Chrysler and Fiat select a new board of directors.

The number of Chrysler dealers, now about 3,200, will be reduced through bankruptcy, but the administration officials did not say how many would be eliminated.

John McEleney, chairman of the National Automobile Dealers Association, said Chrysler and the government should not use bankruptcy to shed dealers.

"A rapid reduction in dealer numbers would not only do absolutely nothing to improve Chrysler's viability in the short term, but it would actually work against Chrysler's stated objective to increase revenue and cut costs," he said.

Strapped auto-parts suppliers and their tens of thousands of workers are counting on the bankruptcy process to get paid for sales to Chrysler, and the automaker probably will ask the bankruptcy judge to ensure payments to the most important parts makers, analysts said.

"The critical vendors will likely be protected," said Stephen Spivey, an auto analyst at Frost & Sullivan. "As long as Chrysler is not being liquidated, as long as it is just being restructured, they should make it."

Despite the turmoil with Chrysler and GM's looming deadline, Obama urged consumers to keep buying cars.

"If you are considering buying a car, I hope it will be an American car," he said.

Material from the Los Angeles Times, Detroit Free Press, The Associated Press, Bloomberg News and The New York Times was used in this report.