Chrysler To File For Bankruptcy

Cars Bankruptcy Talks With Small Debtholders Break Down But White House Still Hopeful Company Will Survive..

by CBS/AP

Published: Thu, April 30, 2009 - 8:56 am CST Last Updated: Thu, April 30, 2009 - 8:58 am CST

CBS/AP) Struggling automaker Chrysler will file for bankruptcy after negotiations with a group of debtholders crumbled overnight, administration officials confirmed to CBS News.

The Obama administration had long hoped to stave off bankruptcy for Chrysler LLC, but it became clear that a holdout group of hedge funds wouldn't budge on proposals to reduce Chrysler's $6.9 billion in secured debt, according to the officials. Clearing those debts was a needed step for Chrysler restructure by the Thursday night deadline.

Bankruptcy doesn't mean the third-largest U.S. automaker will shut down. And the privately-held Chrysler is expected to sign a partnership agreement with the Italian company Fiat as early as Thursday as part of its restructuring plan. A bankruptcy protection filing would allow a judge to decide how much the company's creditors would get.

The White House is still optimistic that Chrysler can survive as a viable company.

"Chrysler now has a new opportunity ... to restructure and emerge stronger going forward," an administration official told CBS News White House correspondent Mark Knoller.

President Barack Obama is expected to discuss the nation's auto sector at noon EDT.

Mr. Obama will use the opportunity to say that filing for bankruptcy "will help put Chrysler on a path to financial viability," an official told CBS News.

While the official says there has been no "dramatic breakthrough" in efforts to keep negotiations going between the Treasury Department and Chrysler lenders, the White House views the coming bankruptcy filing as dramatic in itself, reports CBS News White House correspondent Peter Maer.

The administration insists the effort to seal an 11th-hour deal still has the full support of all of Chrysler's key stakeholders including the largest creditors.

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 United Auto Workers ratified a cost-cutting pact Wednesday night. Treasury reached a deal earlier this week with four banks that hold the majority of Chrsyler'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 were holding out for a better deal.

Speaking of the hedge funds who rejected the Treasury Department's deal, an official told CBS News "their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders nor will it impede the new opportunity."

The official, who has knowledge of the negotiations, tells CBS News, no one hedge fund has veto power over the automaker's future.

A third 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.

When it files for bankruptcy, Chrysler would continue operating and Fiat would still sign on as a partner on Thursday, the people said. The government already has promised to back Chrysler's warranties in an effort to allay customers' fears that the automaker wouldn't be around to honor them.

One of the conditions of the bankruptcy is for Chrysler CEO Robert Nardelli to step down, an administration official confirmed to CBS News chief political consultant Marc Ambinder.

The court proceedings are expected to last 60 days.

President 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. The company has borrowed $4 billion from the federal government and needs billions more to keep operating. President Obama said Wednesday night while the lender talks were still ongoing that he was "very hopeful" that deals can be worked out to keep Chrysler LLC a viable automaker, and more hopeful than he was a month ago that the company will stay in business.

The UAW agreement, which would take effect May 4, meets Treasury requirements for continued loans to Chrysler Corp., and includes commitments from Fiat to manufacture a new small car in one of Chrysler's U.S. facilities and to share key technology with Chrysler.

Sergio Marchionne, CEO of the Italian automaker, told reporters earlier this month that he could run Chrysler. Mr. Obama said Wednesday that Fiat's management "has actually done a good job transforming their industry."

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