Obama Backs Chrysler Bankruptcy As Wise Move

Chrysler filed for bankruptcy protection Thursday and announced it will temporarily halt most of its vehicle production while it completes a deal with Italian carmaker Fiat designed to revive its tattered fortunes.

President Barack Obama announced Thursday that Chrysler would head into bankruptcy with the aid of up to another $8 billion in taxpayer money, a last-resort attempt to quickly restructure the struggling giant.

He blasted hedge-fund creditors whom he said held

Chrysler Bankruptcy

out for a richer deal.

"No one should be confused about what a bankruptcy process means," Obama said. "This is not a sign of weakness but rather one more step on a clearly chartered path to Chrysler's revival."

As part of the deal, Chrysler is signing a partnership with the Italian company Fiat.

The government will be an investor in the revamped Chrysler and will help choose its new directors, but the Obama administration does not plan to help manage the company.

Bankruptcy doesn't mean the nation's No. 3 automaker will shut down.

A Chapter 11 bankruptcy filing will allow a judge to decide how much the company's creditors would get while the company continues to operate.

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The goal is for the whole process to happen quickly, Obama said, perhaps within a couple months.

The president said that Chrysler has been responsible for helping to build the American middle class, but over the years also had been weakened by "papering over tough problems and avoiding hard choices."

"For too long," Obama said at the White House, "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."

The Obama administration had long hoped to stave off bankruptcy for Chrysler but it became clear that a holdout group of creditors wouldn't budge on proposals to reduce Chrysler's $6.9 billion in secured debt.

Chrysler said Thursday that it will idle its plants during the legal proceedings. The company's chief executive, Robert Nardelli, said he will leave when the bankruptcy is complete.

Chrysler says it has sent workers home from at least two factories because parts suppliers have stopped shipping due to its bankruptcy filing.

Vice Chairman and President Tom LaSorda said in a conference call Thursday that workers were sent home from stamping and assembly factories in the Detroit suburb of Warren.

He says the company had no choice but to close the plants, which make parts for or assemble the Dodge Ram pickup truck.

Chrysler said earlier in the day it would stop most of its vehicle production for 30 to 60 days starting Monday.

LaSorda says the supplier problems should be under control by the time production resumes. When that occurs, the Auburn Hills, Mich.-based automaker would end up owned by the United Auto Workers union, the U.S. government and Fiat.

The Canadian and Ontario governments, which are also contributing financing, would have small stakes.

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But Fiat, which the Obama administration hopes can jump start Chrysler with its fuel-efficient and lower-emission technology, could end up the majority stakeholder. Fiat would initially get 20 percent, a share that could rise to 35 percent if certain benchmarks are met.

Fiat said Thursday it could get an additional 16 percent by 2016 if Chrysler's U.S. government loans are fully repaid.

Obama said Chrysler Financial, the arm of the company that makes loans to buyers and to dealers to finance their inventories, will be merged into GMAC Financial Services, once General Motor's finance arm.

The new GMAC will get government support. Chrysler's base of dealers would also be pared down.

And Chrysler's employee pension plans remain in force as the company seeks to complete its restructuring in bankruptcy, the U.S. pension insurer said on Thursday.

"As the bankruptcy process unfolds, the (Pension Benefit Guaranty Corp) will work with Chrysler, its unions, and all other stakeholders to ensure continuation of the pension plans," the agency's acting director, Vince Snowbarger, said in a statement.

Chrysler holds pension accounts for both factory and salaried workers.

The Treasury Department's auto task force has been racing in the past week to clear the major hurdles that prevented Chrysler from coming up with a viable plan to survive the economic crisis ravaging nation's automakers.

Along with the Fiat deal, the UAW ratified a cost-cutting pact Wednesday night.

Treasury reached a deal earlier this week with four banks that hold the majority of Chrysler's debt in return for $2 billion in cash.

But the administration said about 40 hedge funds that hold roughly 30 percent of that debt also needed to sign on for the deal to go through. Those creditors said the proposal was unfair and they were holding out for a better deal. "I don't stand with them," Obama said.

A person briefed on Wednesday night's events said the Treasury Department and the four banks tried to persuade the hedge funds to take a sweetened deal of $2.25 billion in cash.

But in the end, this person said most thought they could recover more if Chrysler went into bankruptcy and some of its assets were sold to satisfy creditors.

This person asked not to be identified because details of the negotiations have not been made public.

On Thursday, a group of funds identifying themselves as 20 of Chrysler's "non-TARP lenders" released a statement saying they had been sidelined during negotiations between lenders and the government.

The group, which said it holds $1 billion in Chrysler debt, complained that the four banks were "obviously conflicted" because they had accepted money from the government's Troubled Asset Relief Program while they had not gotten TARP money.

The group said its offer to the Treasury Department to reduce its claim to 40 percent was "flatly rejected or ignored." Fiat is getting its stake in Chrysler for giving the company access to its fuel-efficient technology, a move toward cleaner cars that the Obama administration thinks is critical to Chrysler's future survival.

The company has committed to building Fiat cars in Chrysler factories, to be sold as Chryslers.

Obama's auto task force in March rejected Chrysler's restructuring plan and gave it 30 days to make another effort, including a tie-up with Fiat.

Chrysler's bankruptcy filing said it owes more than $10 million a piece to 20 unsecured creditors, many of whom are vendors and suppliers.

At the top of that list were:

Ohio Module Manufacturing Co. ($70.3 million), BBDO Detroit Inc. ($58.1 million), Johnson Controls Inc. ($50.3 million), Continental Automotive ($47 million), Cummins Engine Co. ($43.9 million) and Germany-based Germersheim Spare Parts ($36.2 million).

- CNBC reporters contributed to this story

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