Stick a Fork in Chrysler

The New York Times reported today that the U.S. Treasury Department is preparing a chapter 11 bankruptcy petition for the automaker Chrysler. The Times puts the filing date as early as next week.

The Treasury Department extended a $4 billion federal loan to Chrysler in January. Chrysler needs more cash but the Treasury tap is closed until it meets the governnment's terms. Chrysler has until April 30 to work out a deal with Fiat in which Fiat takes an equity position in Chrysler and Chrysler gets access to Fiat's small-car know how and distribution network.

Treasury and Chrysler are pushing Chrysler's lenders (most of whom have taken bailout money for their own balance sheets) to reduce the $6.9 billion in debt Chrysler owes them by 85%, or down to $1 billion. Recent but not up to the minute news reports note that creditors have counteroffered to take a 40% write down of debt and receive an equity position in the restructured company provided that Fiat puts up about $1 billion in new capital. Meanwhile, Chrysler is working on a deal with the UAW over the fate of union members' pensions and health benefits.

Why is Treasury so keen for a Chrysler bankruptcy? Chrysler's creditors hold security interests in the company's assets and Treasury currently stands behind them in the repayment line. Treasury wants any additional government loans to Chrysler to be first in line for repayment. In a chapter 11 case, the bankruptcy court can grant Treasury, as post-petition lender, first priority repayment rights over creditors' objection. That's a sweet deal for U.S. taxpayers.