Sending shock waves through the entire auto industry and ripples beyond, Chrysler on Thursday became the first automaker since the Great Depression to file for bankruptcy-court protection.
It was done in by its emphasis on trucks and big cars at a time fuel prices sent buyers scurrying for smaller vehicles, and by the recession that flattened new car sales around the globe.
Those factors brought Chrysler — smallest and most vulnerable of the Detroit 3 — to its knees, begging for emergency federal loans. President Obama took a hard-line stance, refusing any more taxpayer money unless Chrysler could show it was likely to survive.
Close, but not quite. The automaker, and Treasury officials who had been negotiating on its behalf with holdouts among the creditors, had to throw in the towel.
What happens to Chrysler could determine how faltering General Motors is treated; whether suppliers can stay in business and furnish components to other makers; and whether a sour economy can swallow tens of thousands of newly unemployed when Chrysler closes dealerships, idles plants and wrecks businesses as diverse as diners and boat sellers whose customers built or sold cars.
Obama and Chrysler promise the bankruptcy filing is just a sensational way of dealing with some truculent issues, such as renegotiating the company's debt.
Chapter 11 allows Chrysler to continuing operating under the protection of bankruptcy court while attempting to restructure its balance sheet. The company had nearly done that in time to meet Thursday's deadline, but a minority of creditors refused to accept the Treasury's offer of 32.6 cents, cash, for every dollar of the $6.9 billion debt the bondholders owned — up from an initial offer of 29 cents. That scuttled the whole deal.
Auto suppliers and dealers are already under extreme pressure. No one knows if buyers will continue purchasing Chryslers, even though the government backs their warranties.
The court process will be quick, Obama and Chrysler insist, and will result in a healthier company. Chrysler and Fiat have signed a deal to merge, unions in the U.S. and Canada have agreed to concessions that will bring labor costs down, and the remaining issue is Chrysler's debt.
"I know there are some who will insist that bankruptcy, even for these limited purposes, is a step that should not have been taken," Obama said Thursday. "But it was unsustainable to let enormous liabilities remain on Chrysler's books. ... So I recognize that the path we're on is hard. But as is often the case, the hard path is the right one."
The bankruptcy filing "is unprecedented," says Gregg Lemos-Stein, a credit analyst at Standard & Poor's. "It's been generations since we've had a major automaker bankruptcy in this country. ... I think it will be a test of this premise that you can have a controlled bankruptcy at an automaker."
Chrysler CEO Bob Nardelli, who left as CEO at Home Depot in 2007, will step aside once the company emerges from bankruptcy to make room for a new CEO, who will be picked by the company's new board of directors. Nardelli says he's leaving without a severance package from Chrysler but will continue to work for private-equity firm Cerberus Capital Management as an adviser: "I just pick up my pencil and walk out the door," he says.
All eyes on Chrysler