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.

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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.