Chrysler Finally Goes Bankrupt
Chrysler has finally submitted to the inevitable and fallen into bankruptcy. The ramifications are huge for Chrysler and many other parties.
The great face off ended. The winners and losers are being tallied up. The bankruptcy filing of Chrysler is the culmination of a face off between President Obama, Chrysler, unions, Fiat and bondholders. The winners? Clearly, President Obama and Fiat. The losers? Clearly, the unions and bondholders of Chrysler. Let’s take a closer look.
The business model for the American automakers is outdated and broken. The companies have been staggering for a very long time and the recent economic downturn has pushed them over the edge. It has also created one of the great face-offs of our time. President Obama has pushed and shoved the unions and bondholders of the automakers to the edge. Those parties have pushed back. Ultimately, it is President Obama who shoved the hardest.
Leverage. It is the key to understand how President Obama won this battle. When a company goes into bankruptcy, it must have funding to survive the process. This is known as bankruptcy financing. The current credit crunch is such that there is no financing available. The only part that can provide it is the government. With this in mind, President Obama forced massive concessions on the unions and bondholders. When the bondholders refused to cave, he pushed the company into bankruptcy and the bondholders are going to be devastated.
The winners of this process are Chrysler and Fiat. Why? The government is providing over $8 billion in bankruptcy financing. This means Chrysler is going to come out of Chapter 11 a much smaller company, but one that is lean and mean. Fiat wins because it will partner with this company and not have to deal with bondholders and bad union deals.
There is also a secondary loser in the Chrysler bankruptcy. General Motors is in the same situation and guess who is blocking a resolution? Yep, the bondholders. They own over $20 billion in bonds. They must be shaking in their boots looking at the Chrysler bankruptcy. President Obama now has even more leverage to get what he wants!