Automaker Chrysler speeds towards bankruptcy

According to the Wall Street Journal, talks between senior US government figures and Chrysler's lenders broke down last night ahead of the Treasury’s midnight deadline. The collapse of the negotiations makes it almost impossible for the company - which employs 58,000 workers and owns brands like Dodge and Jeep - to avoid having to file for Chapter 11 protection.

Earlier in the week it had seemed likely bankruptcy would be avoided, when the largest of the carmaker's lenders, including Citigroup, JPMorgan Chase and Morgan Stanley, agreed to write off $4.9bn of debt, taking $2bn in cash in return for wiping out $6.9bn of borrowings.

However a small number of creditors were still holding out for a better deal. The company's management and government representatives negotiated deep into the night to try to resolve the issues but it appears the talks failed, making bankruptcy inevitable.

The key to the company's future lies with Italian conglomerate Fiat, which is likely to take over the ailing US carmaker, whether or not it files for bankruptcy.

President Barack Obama is due to make a speech today outlining the situation - two different versions are thought to have been prepared depending on the outcome of the negotiations - but it is likely that Fiat will take a 35 per cent stake, with the United Auto Workers union taking 55 per cent and the US government eight per cent.

WHAT THEY ARE SAYING
Lauren Silva Laughlin, on Breakingviews.com: "Bankruptcy is not the end of the world for Chrysler. It would allow the reorganisation to move ahead, potentially without a huge fight in court. Under section 363 of the US bankruptcy code, if the majority of debt holders accept a deal, the others are obliged to follow suit. With the banks on board, that threshold is met. A 363 filing may not be ideal for senior creditors, since they would be forced to accept the offer. But at least gives them a chance of reiterating their case – or even contesting the use of 363 in general – rather than yielding to the current offer. It may be why many of the secured creditors are holding out."

Lex, Financial Times: "It was criticised by the Treasury secretary as 'contrary to the principle of free enterprise', while General Motors' chairman called it 'a basic challenge to the philosophy of America'. But Chrysler's controversial 1979 rescue merely involved $1.5bn in loan guarantees that eventually netted the government a profit, and was for a more significant company – the nation's 10th largest manufacturer and a key defence contractor during the cold war. Nearly 30 years later, the government's investment is at far more risk and its interference in the private sector more troubling."