'Unprecedented' bankruptcy

BySharon Silke Carty, USA TODAY
April 30, 2009, 11:25 PM

DETROIT -- 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

General Motors, for one, will be watching closely to see how Chrysler's bankruptcy plays out. It may face the same fate in just a month, when its deadline from the government approaches.

But all automakers have an interest, because they share a supply chain. If the suppliers can't deliver parts, it could shut down production lines at Toyota, Honda and Ford.

Ford said Thursday it is closely monitoring the situation. "Our industry is highly interdependent, and the health of the supply base and dealer network is critical for all automakers," Ford said.

Lemos-Stein predicts there will be a lot of bumps in the road, including many auto-supplier bankruptcies in the coming months. Chrysler announced it is shutting down production today for 30 to 60 days, freezing the revenue stream for its suppliers. Many suppliers are already reeling from the news that GM is shutting down many of its assembly plants for up to nine weeks starting in May.

No one knows how long Chrysler's bankruptcy will take. Although the case was filed in the Southern District of New York, which has experience with speedy bankruptcy cases, judges are obliged to listen to each interested party that wants to be heard, which could drag out the process.

The automaker's bankruptcy filing listed assets of $39 billion. Its top 25 suppliers, attorneys and advertising firms are owed $575 million.

Already, people are asking for a voice in the bankruptcy. According to documents filed with the court, 14 auto suppliers say they are interested parties. Ford and Mercedes-Benz have filed asking to be notified of anything going on in the court. Al group calling itself the Committee of Consumer Victims of Chrysler LLC and the Ad Hoc Committee of Mesothelioma and Lung Cancer Claimants have filed. The list will likely keep growing.

There are other big questions, such as what happens to Chrysler's financial services arm? The government named GMAC as Chrysler's new financing company, and it's still unclear what that means for Chrysler Financial. That company is now at risk of bankruptcy, too, Lemos-Stein says.

There is also concern that the bankruptcy filing will scare away consumers, who might wrongly believe it means Chrysler is going out of business. Thursday, Obama pointed out that the government is backing Chrysler's warranties now.

"No one can blame car buyers who shied away from brands that were mentioned in the same breath as the word 'bankruptcy,' " said Philip Reed, consumer advice editor for Edmunds.com. "Now that their warranties are being guaranteed, Chrysler and GM vehicles are good deals which are worth considering."

"Last week, people were asking if there'd be a Chrysler. This week, the government's behind Chrysler," says Mike Boudreau, director of corporate reorganization firm O'Keefe & Associates.

History of troubles

The last American automaker to file for bankruptcy was Studebaker in 1933. After emerging from bankruptcy, it continued operating, albeit struggling at times, until the mid 1960s.

This isn't the first time Chrysler has found itself in trouble. In 1979, then-CEO Lee Iacocca persuaded the government to guarantee more than $1 billion in loans that the automaker wouldn't have otherwise been able to get. Chrysler returned to profitability in 1983 and repaid the loans early.

David Lewis, professor emeritus of business history at the University of Michigan's Ross School of Business, says Chrysler can turn itself around: "It has a way of coming through. Particularly now, with the government committed."

And with Fiat on board. Obama criticized Chrysler for having moved too slowly in the past, and for building cars that aren't fuel-efficient. Fiat has promised to bring a car to the U.S. that goes 40 miles per gallon, likely the Fiat 500, which could be imported in as soon as 18 months.

The automaker celebrated Cerberus' takeover with a big party on the company's front lawn.

Just 21 months later, with the company in shambles, Nardelli says he can't help but try to figure out what went wrong.

"You always as a management team look back and say, 'Coulda, woulda, shoulda.' But I think the rate at which the industry fell off due to the financial crisis ... I don't know if we could've done more than we did."