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President Obama speaks to reporters on Thursday about Chrysler's bankruptcy, and what it means for the company's survival chances.  (Source: Doug Mills/The New York Times)

Bankruptcy will clear Chrysler's debts and allowed it to charge ahead, restructured, in its electric vehicle efforts.  (Source: UPI.com)

The bankruptcy means that a merger with Fiat will be coming within two months, and that Fiat's models, popular in Europe, will be coming to the U.S. One such performance rally model, the Fiat 500 Abarath SS, is pictured here.
Government may wipe out debtholders who refused to deal

After weeks of uncertainty, Chrysler has at last become the first of the Big Three to file for bankruptcy, in a process that some analysts expect may be replicated by at least General Motors in coming months.  Despite a last minute deal with major bondholders (banks), a deal with UAW and CAW, and a merger deal with Italian automaker Fiat SpA, the potential for recovery outside bankruptcy was sunk by bondholders with minor debt stakes --- hedge funds and investment firms.

Last night the group of 20 small investors rejected the government's proposed terms and offered up terms of their own.  In the end, government regulators with the Treasury Department decided instead to put Chrysler into Chapter 11 bankruptcy, with paperwork currently being filed in New York, this Thursday.

The move marks the second Chapter 11 bankruptcy for Chrysler and the conclusion of another saga in Chrysler's recent eventful, but troubled history.  Chrysler has bounced about, first sold to German automaker Daimler then to investment firm Cerebus.  Now at last, Chrysler has found itself under new management, being carefully guided by the government in its survival bid.

President Barack Obama, speaking to the press, praised the efforts of the American automaker to survive, while admonishing the bondholders who refused to deal.  He stated, "While many stakeholders made sacrifices and worked constructively, I have to tell you some did not.  In particular, a group of investment firms and hedge funds decided to hold out for the prospect of an unjustified taxpayer-funded bailout. They were hoping that everybody else would make sacrifices and they would have to make none."

In the end it appears that the bondholders that refused to deal will see their money wiped out by a bankruptcy, which will likely "surgically" remove the unsettled debts.  The bondholders will be forced to settle with a loss, a tax writeoff.  President Obama says that they are getting what they asked for by demanding unreasonable terms -- over twice the settlement of the large stakeholders.  He states, "I don't stand with them.  I stand with Chrysler's employees, their families and their communities. I stand with Chrysler's management, its dealers and its suppliers. I stand with the millions of Americans who own and want to buy Chrysler cars.  I don't stand with those who held out when everybody else is sacrificing."

Will Chrysler's brand image survive the bankruptcy?  President Obama believes so.  He states, "No one should be confused about what a bankruptcy process means.  This is not a sign of weakness, but rather one more step on a clearly charted path to Chrysler's revival.  The necessary steps have been taken to give one of America's most storied automakers, Chrysler, a new lease on life."

A full transcript of the President's speech is available here, courtesy of The Washington Post.

The President has ordered $3.5B USD in funding for the company, upon its entrance into bankruptcy.  An addition $4.5B USD will be granted when it exits the process and merges, officially, with Fiat.

In a letter, Chrysler CEO Bob Nardelli cheered the merger, writing, "This is a historic day for Chrysler. As a result of the comprehensive restructuring plan agreed to by many of our stakeholders, I am very pleased to report that Chrysler LLC and Fiat S.p.A. have reached an agreement in principle to establish a global strategic alliance. This agreement creates a new, competitive, global car company that will take over a majority of Chrysler's operations. With the completion of this alliance, Chrysler will be repositioned for long-term success, validating the great efforts and sacrifices that you have made to help us get to this momentous point."

The bankruptcy is expected to be settled in two months at most.  Once it is complete Chrysler faces, according to analysts, a tough challenge in developing synergy with Fiat, which is much more cash-strapped than former partner Daimler.  Even if it can work well with Fiat, it faces the challenge of revitalizing its sales and restoring consumer confidence in the brand.  Chrysler continues to move ahead, though, on promising key technologies like its electric vehicles, which go on sale in 2010.

The bankruptcy will not affect Chrysler Canada or Chrysler Mexico, but these separate units may soon follow in suit.

As a final note, one interesting thing about the bankruptcy is that it will further distance Chrysler from its struggling former financial unit, Chrysler Financial, also held by Cerebus, but now a separate company.  Chrysler is partnering with GM's financial unit, GMAC, instead.  Mr. Nardelli writes, "As part of the restructuring and with the backing of the U.S. Treasury, we have reached an agreement in principle with GMAC to become the preferred lender for Chrysler dealer and consumer business. This is very good news as GMAC will be able to offer the best long-term finance options for Chrysler dealers and customers with standard rate installment products."




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