Chrysler and The Bankruptcy Filing

 by: Dirk Gibson  

 

 


The inevitably has finally come to be. The first of the big three American automakers has filed for bankruptcy with Chrysler turning the trick. So, just what does this mean to the industry as a whole? 

The days of the big three automakers resting on their laurels are long gone. The market has spoken and loudly. The companies have long faced an inevitable doom, but have been damaged beyond comprehension by the Great Recession. That being said, the bankruptcy filing of Chrysler is in many ways a positive development instead of a negative one. 

Chrysler has correctly used the threat of bankruptcy as a means to get its debtors the negotiating table. This was partly the motivation of Chrysler, but primarily the motivation of the task force of President Obama. Creditors never thought the President would risk the political fallout of a bankruptcy filing. They were wrong and now face the prospect of their positions being greatly diminished or even wiped out entirely. 

The Chrysler bankruptcy filing is also a big wakeup call for General Motors. More specifically, the bondholders of General Motors are not feeling too good today. Holding well in excess of $20 billion in GM bonds, they to have based their refusal to modify their positions on the belief President Obama would not let GM go into bankruptcy. That position, obviously, needs to be reevaluated today. 

So, what is to become of Chrysler now that it has filed? The answer is an interesting one because this is a unique situation. Many companies will position themselves for bankruptcy before filing, but Chrysler has done a tremendous job. Not only has it positioned the creditors into a bad position, but it has signed an agreement with Italian giant Fiat to partner up when it comes out of the case. 

Unique to Chrysler is the role the government is taking in the bankruptcy. The government will provide $8 billion in financing through the bankruptcy and upon emergence from the same. The government will also carry an ownership interest and have members sitting on the board of the company. This will essentially make Chrysler a partially government run business. This is unprecedented and nobody is particularly sure how the experiment will work out. 

The Chrysler bankruptcy was inevitable. General Motors is up next. The big three are in for some major changes, and they can be looked at as changes for the better.