The Long and Short of the New Chrysler

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Chrysler headed to bankruptcy on Thursday after talks between Treasury Department officials and the automaker's creditors fell apart as lenders balked at what amounted to a paltry $0.33 on the dollar of the $6.9 billion in debt they held.

Despite President Obama's assurances that Chrysler's bankruptcy will be quick and surgical, don't be fooled. This could be a long, drawn-out battle in the courts. While JPMorgan Chase (NYSE: JPM  ) , Citibank (NYSE: C  ) , and Goldman Sachs (NYSE: GS  ) were among those lenders willing to accept less than a third of the debt they held, don't blame the holdout creditors for this mess. Treasury has dirt on its hands right up to its elbows.

As with General Motors' (NYSE: GM  ) plan to have the government own it at the expense of the creditors, Chrysler's lenders were also being put on an unequal footing. Indeed, the workers will end up being the majority owner here, because their health-care trust fund is granted a 55% share, with Italian carmaker Fiat getting, at most, 35% of the company. The governments of the U.S. and Canada will split a 10% stake between them 80-20, respectively, but the president has pledged the full backing of the Treasury to make this succeed.

The plan is a disaster. Gutting the debt holders would ensure that few lenders will be eager to rush in to help Chrysler, if they're needed. With taxpayers as a stakeholder in the business, we'll be on the hook for more financing to protect our "investment."

Yet nationalizing Detroit, as the Chrysler and GM reorganization plans so clearly do, would put the government in direct competition with Ford (NYSE: F  ) , which has sworn off government handouts and is trying to rebuild its business on its own. Ford is hobbled every time Chrysler and GM get taxpayer assistance.

In a capitalist society, poorly run businesses fall by the wayside and resources are allocated to the most efficient operators. If Chrysler or GM fall, Ford, Nissan (Nasdaq: NSANY  ) , or Honda (NYSE: HMC  ) would profit. Instead, by propping up Chrysler in bankruptcy, Treasury is rewarding the least profitable operators. But what's worse is that it hampers a more resilient Ford from gaining market share.

Yet another hurdle facing Ford is the federal government funneling even more cash to GMAC so that it can help finance the purchase of Chrysler's cars. In a rather unprecedented step, the financing arm of GM will now help consumers purchase a competitor's car. Ford, though, will still have to struggle on its own.

We can also dispense with the notion that we're trying to preserve a part of the American auto industry. It's clear that with the international operations of all automakers, calling any one car company American or foreign is disingenuous. But the virtual forced sale of Chrysler to Fiat shows that keeping Chrysler "American" was just a red herring. Fiat is interested in getting access to Chrysler's dealership network with as few encumbrances as possible, including its asbestos and environmental liabilities. That's easier to accomplish through bankruptcy.

Though Chrysler might have to endure more cuts, taxpayers will feel their wallets being carved up, too.

Nissan is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

Read/Post Comments (10) | Recommend This Article (11)

Comments from our Foolish Readers

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  • Report this Comment On May 01, 2009, at 10:05 PM, devilinside wrote:

    Yep! It's going to be a very long drawn out BK. Someone should tell Obama to put up some real money at risk and then see if he is willing to condemn those that did. Did he really expect the bond holders to do their patriotic duty and take a loss when they didn't have too. What sane and rational person would do that?

    Obama has no idea how to run a country let alone run a business. I love how all the rethoric gets laid on the greedy investor. Those bond holders are every day people trying to eek out a living and put something aside for their retirement. And if those hedge funds had bowled to his request there would have been lawsuits and the SEC coming down on them for it.

  • Report this Comment On May 02, 2009, at 1:33 AM, chopchop0 wrote:

    As much as I don't care for either obama or bush, something tells me that Bush would be slightly less socialist in dealing with chrysler and GM

  • Report this Comment On May 02, 2009, at 9:18 AM, pbh1000 wrote:

    Help me understand why you have said this is nationalizing Detroit? I fully understand the comments about the BK probably being drawn-out, Ford being treated inequitably - but the governments (US and Canada) own only 10% of the new Chrysler? The remainder is private. How is that 'nationalizing'? Also, the governments were the lenders of last resort (meaning they can impose difficult - if not wise - terms, as is typical).

  • Report this Comment On May 02, 2009, at 9:48 AM, RaulChapin wrote:

    Thank you for the article, the bankrupcy gave me a weird taste in the mouth... something seemed odd... also the "bad guys" speech that Obama gave was just irresponsible and insane... does he really expect the debt holders to be happy about getting 33 cents on the dollar... the banks could not care less, they are getting such huge bailouts, that the last thing they want to do is bite the hand that feeds them!!!

    I guess the next anti free market and productivity step from the new administration is going to be to put import quotas or extra taxes on "Foreign" cars... ie anything not owned by the UAW...

    Bread and Circus... but above all, Circus

  • Report this Comment On May 02, 2009, at 10:17 AM, NoMoeMoney wrote:

    For some reason, the idea that the auto unions will have the controlling interest (with Fiat close behind) in Chrysler reminds me of the day when AMF owned Harley-Davidson. Good luck with the product line.

  • Report this Comment On May 02, 2009, at 10:54 PM, sciencedave wrote:

    No surprise--the taxpayers will end up footing the bill, absorbing the debts, paying for the retirements of many UAW employees as we are doing with most union retirements systems including many state employees (that's right, they are union also...gee why are many states having such big deficits). The unions are bankrupting America with their self-interest, outrageous contract agreements, and hostage negotiations--- all because they refuse to compete on a global platform. And the US government supports this..why?...because most government employees are union also.

  • Report this Comment On May 02, 2009, at 11:52 PM, AWF wrote:

    Well Said !!

  • Report this Comment On May 03, 2009, at 7:25 PM, Sunny1ChiTown wrote:

    Buy Ford!

  • Report this Comment On May 04, 2009, at 2:38 AM, WillyMiller wrote:

    The so-called "nationalizing" of Chrysler and GM is not an overt act by the Administration but a response to pathetic leadership at the corporate level of these fine manufacturers. The banks are unable to provide the funding to the auto makers as they were unwilling to provide funding to Chrysler when Lee Iacocca took the reins from the (what did he call them?) bean counters who were not focused on the business of the business of making automobiles that people want to buy.

    Chrysler and GM have the product that is marketable and the need for reliance on Government assistance is indicative of a lack of vision and skill in the executive chambers. They're taking their losses in lost sales rather than taking the losses in the sale of their 'excess' and 'undesired' product line. Convert those assets at a loss to convert the product line to a marketable advantage and they could weather the crisis without assistance and maintain healthy economic conditions in their communities.

    But then I'm not as bright as they are, or maybe not as devious and dishonest to the owners of the company stock, whatever.

  • Report this Comment On May 04, 2009, at 11:19 AM, BMFPitt wrote:

    I currently own a Chevy Malibu. That is the last GM car I will ever own, not becuase I'm unhappy with it - it's a great car - but because I cannot in good conscience support a company that has stolen so many of my (and my future children's and grandchildren's) tax money.

    And I'm not one of those types that says that all taxes are evil/theft/etc. I just despise any bailed out company.

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