After months of speculation and conjecture, President Obama has announced that Chrysler has filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court in New York, becoming the first major US auto manufacturer to declare bankruptcy since Studebaker in 1933.
The news of the bankruptcy filing comes in spite of Chrysler's recent breakthroughs with the United Auto Workers and Fiat, and the decision to file for bankruptcy came after a group of Chrysler's creditors broke of restructuring talks after rejecting the government settlement proposal. President Obama had harsh words for these investors in a press conference announcing the filing, saying "I don't stand with them." The President had much kinder words for the financial institutions that had agreed to the plan, as well as for the UAW, which gave the automaker broad concessions during a contract renegotiation concluded on Wednesday.
The union will receive a 55 percent stake in the company through its health-care fund, which was one of the reasons why the creditors refused to accept the government's restructuring plan. The group claimed that the union would receive more for its debt, even though secured lenders should receive priority in repayment.
The creditors also believed they could do better in a liquidation scenario, claiming that they could receive 65 cents on the dollar as opposed to the 33 cents they would get under the plan proposed by the government and Chrysler's four main creditors.
The government has submitted a restructuring plan as part of the bankruptcy filing. Under this plan, the federal government will provide Chrysler with $3-3.5 billion in debtor-in-possession financing. After the automaker emerges from Chapter 11, the government will provide $4.5 billion for Chrysler to restart its operations, adding up to a total government bankruptcy financing of around $8 billion.
That's in addition to the $4.5 billion the government has already given Chrysler.
President Obama assured taxpayers that the government would get its money back before the Italian automaker Fiat receives any stake in Chrysler. Fiat has agreed to take part in Chrysler's operations and begin manufacturing at least one car in a Chrysler factory. Fiat will contribute technology, but not financing at this point.
President Obama stated that the bankruptcy process offered "a road ahead to a stronger Chrysler." But any plan must still receive judicial approval. While it will be hard for a judge to reject a plan that has already been so thoroughly negotiated, there is still a large degree of uncertainty surrounding a Chrysler bankruptcy. Especially considering that the company and the government might not have the support they need under bankruptcy law to approve the proposed restructuring.
That could turn this surgical bankruptcy into a car wreck.