When President Obama outlined his plan to restructure Chrysler under bankruptcy-court protection, we shared his view that keeping a company “afloat on an endless supply of tax dollars” was no solution to the cratering of even iconic American companies.
We also admired his supreme confidence that the Chrysler bankruptcy will be a quick, official and controlled process. We just wished we were as confident as the president.
If the process is prolonged, the costs and complexity would likely ensure that the company would never emerge from bankruptcy proceedings, with dire implications for employment and economic recovery.
For the administration, the Chrysler bankruptcy filing became inevitable when a holdout group of the carmaker’s lenders rejected the government’s final offer to settle their debts, for about 33 cents on the dollar. The United Auto Workers union had already agreed to concessions to help keep the company afloat, as had large banks who hold most all of the company’s debt. Chrysler and the Italian carmaker, Fiat, had also agreed to a partnership that would enable Chrysler to tap into Fiat’s technology, designs and management.
By pushing the matter into bankruptcy court, the administration is assuming that the judge will also reject the holdouts’ demands. That would allow for a quick restructuring while keeping intact the previous agreements with the union, the big bank lenders and Fiat. In short order — 30 to 60 days by the administration’s estimate — Chrysler would emerge from bankruptcy with all the pieces in place to become in Mr. Obama’s words, “stronger” and “more competitive.”
There are reasons to hope it will work out that way. In particular, a judge may be unwilling to favor the dissident bondholders when other significant stakeholders have been able to come to agreement outside of court.
But short “prepackaged” bankruptcies generally succeed when all of the difficult issues are resolved ahead of time, requiring only a judge’s official approval. The judge in the Chrysler case may not see the remaining issues in the same cut-and-dried way that the administration does. Quickie bankruptcies like the one the administration envisions for Chrysler have also never been attempted for a company as big and multifaceted as a carmaker. If the Chrysler bankruptcy case does not proceed apace, the administration will need a new plan — and fast — to avoid pouring taxpayer money into a restructuring that may never yield the desired result.
If the bankruptcy succeeds, there is no guarantee that the Chrysler and Fiat partnership will succeed. A recent report by Fortune magazine detailed the likelihood of culture clash in a Chrysler-Fiat combination, given the companies’ complexity and different national identities. Remember the disastrous Daimler-Chrysler marriage?
It will also take some time, probably at least a couple of years, before the Chrysler and Fiat partnership yields any new cars. In the meantime, Chrysler’s own brands like Dodge and Jeep have been badly damaged by the company’s failing fortunes.
The Chrysler bankruptcy filing is a bold move for the administration, a refusal to blink when confronted with what it perceived as unreasonable demands. The object of the game — a strong and competitive Chrysler — is far from achieved.
Editorial, New York Times
Full article: http://www.nytimes.com/2009/05/01/opinion/01fri1.html/