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Chrysler driving without a map

President Obama’s decision to save Chrysler by pushing it into bankruptcy Thursday puts the major U.S. automaker in risky, uncharted territory and could portend a similar outcome for General Motors Corp. as it races to meet its own government restructuring deadline.

The administration is betting Chrysler’s future on the company’s ability to emerge quickly from what can be a complex and unpredictable legal process. Obama also is tying the company’s fate to Fiat, an Italian owner that may not be able to crack the code of U.S. car buyers.

The Chapter 11 filing in a New York court provides a high-stakes test of whether people will buy cars from a company in bankruptcy even if the government stands behind the warranties, as the president has promised to do.

Obama spoke about bankruptcy Thursday as an unfortunate but necessary step. He blamed the move on hedge funds and investment firms -- already highly unpopular for their role in the financial crisis -- that would not agree to sharply reduce what the automaker owes them.

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“I know that there are some who will insist that bankruptcy, even for these limited purposes, is a step that should not have been taken,” Obama said. “But it was unsustainable to let enormous liabilities remain on Chrysler’s books, and it was unacceptable to let a small group of speculators endanger Chrysler’s future by refusing to sacrifice like everyone else.”

Some of the debt holders blasted back, saying they had a responsibility to their investors to recover more of what they are owed. They complained of being treated worse than other creditors.

Obama’s decision sends a sharp message to Chrysler’s bigger rival, GM, and its stakeholders as their June 1 deadline looms: He is not afraid to resort to bankruptcy if needed. GM has acknowledged it may have to restructure in court.

The White House’s deep involvement in the Chrysler bankruptcy proceedings means Obama will be blamed if it turns out badly by hurting union members and retirees, said Neil Newhouse, a Republican pollster.

“After 100 days in office, this is another sign that he is taking ownership of the nation’s economy,” he said.

Administration officials said they were confident that the bankruptcy, which is necessary to pave the way for the Fiat alliance, would be completed in 30 to 60 days.

Some bankruptcy experts said that may be overly optimistic. The judge will have a host of competing constituencies to weigh, including dealers, parts suppliers, union workers and creditors.

“How long this lasts is anybody’s guess, but 30 to 60 days is highly unlikely,” said Douglas Bernstein, a bankruptcy lawyer at Plunkett Cooney in Bloomfield Hills, Mich.

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Delays could prove costly to Chrysler workers and the struggling economy. Chrysler said it would shut down most of its plants Monday and keep them idle until the bankruptcy was completed. Some workers were sent home Thursday after some parts suppliers, spooked by the bankruptcy filing, stopped shipments to Chrysler.

The new Chrysler will depend on Fiat’s technology and its small cars, which administration officials said would be available in U.S. showrooms in 2011 -- much sooner than many experts had predicted. Still, the small cars may not appeal much to U.S. consumers if gas prices remain low. Fiat struggled in its earlier attempt at cracking the U.S. market, abandoning it in the 1980s.

But Fiat has undergone a dramatic turnaround under Chief Executive Sergio Marchionne, who will play a still-unspecified role in the new Chrysler. Chrysler Chief Executive Robert Nardelli said he would stay with the company through bankruptcy, then resign.

Fiat, with its cutting-edge technology, provides experience in building fuel-efficient engines, a focus of the Obama administration and an area in which Chrysler lags behind.

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“I doubt that you can have massive demand for smaller cars in the U.S.,” said Pierluigio Bellini, an IHS Global Insight analyst based in Italy. “But I think there could be demand for more-efficient engines in larger cars.”

Fiat also can provide a stronger presence in Europe and Latin America, where Chrysler’s Jeep brand is particularly popular.

Last month, Obama rejected Chrysler’s restructuring proposal and set conditions for continued government aid. He said Thursday that the Auburn Hills, Mich., company had met those conditions but that bankruptcy was needed to complete the deal.

The U.S. government will provide $3 billion to $3.5 billion to keep Chrysler operating during bankruptcy and an additional $4.5 billion to help it exit bankruptcy in an alliance with Fiat. The money comes on top of $4 billion lent to Chrysler in January. A senior administration official said the government stood to lose much if not all of that initial investment.

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The government of Canada, where Chrysler also has operations, will provide $1 of financing for every $3 provided by the United States, administration officials said.

Also as part of the deal, GMAC Financial Services will receive additional U.S. funding to provide financing for the sale of Chrysler cars to consumers and dealers. Chrysler’s financing arm, Chrysler Financial, did not warrant additional government money and will eventually go out of business, the administration said.

The U.S. government will get 8% of the new Chrysler, with the Canadian government receiving 2%. The Treasury Department will select four independent directors for the board “but thereafter will not play a role in the governance or management of the company,” the White House said.

The bankruptcy filing came after intense negotiations with some of Chrysler’s smaller debt holders broke down Wednesday night. Obama had made reducing the $6.9 billion that Chrysler owed its creditors a condition for continuing to extend government aid.

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Obama administration officials said they were pleased with the judge assigned to the case, Arthur J. Gonzalez of the U.S. Bankruptcy Court for the Southern District of New York, who handled the bankruptcies of Enron and WorldCom.

Obama praised the partnership with Fiat, saying it gave Chrysler “a chance not only to survive but to thrive in a global auto industry.”

That agreement allows Fiat to obtain a 20% equity stake in Chrysler, with incentives to increase its share of the company to 35%. Fiat will be rewarded for providing distribution for Chrysler cars outside North America, introducing a fuel-efficient engine to be manufactured in Chrysler’s U.S. factories and building, in Chrysler factories, a car that gets 40 mpg.

Much of the hard work in restructuring Chrysler has been accomplished. The United Auto Workers union on Wednesday overwhelmingly approved a revised contract that significantly cuts the amount owed to a trust fund for retiree benefits. The trust would become the majority owner of the new Chrysler with a 55% equity stake.

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And four major banks, which together hold 70% of Chrysler’s debt, agreed this week to cut what they were owed. The deal calls for Chrysler’s debt to be exchanged for $2 billion in cash when the Fiat alliance is completed.

But 42 other Chrysler debt holders, including many hedge and investment funds, have not agreed. A bankruptcy proceeding is the only way to force them to reduce how much they’re owed, administration officials said.

Hedge funds are “the easy target, but they’re doing what they’re supposed to do,” said Tom Whelan, head of Greenwich Alternative Investments, an investor advisory firm in Greenwich, Conn. Accepting less than what the law may entitle them to as so-called secured creditors would open the funds to lawsuits from angry investors, he said.

Some experts said the Chrysler bankruptcy made it more likely that GM would end up in the same spot. GM faces many of the same government-imposed challenges -- pruning dealers, shrinking capacity, mollifying creditors -- and may have to go the same route to solve them, Bernstein said.

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GM insists that the dramatic restructuring plan it unveiled Monday puts it much further along the road toward recovery. But some workers at a GM truck assembly plant in Fort Wayne, Ind., were nervous.

Robert Metford, a 41-year-old line worker, said he had spent months cutting his family’s budget to prepare for an 11-week furlough that begins next week. Now, he’s wondering whether GM will join Chrysler in U.S. Bankruptcy Court by the time he returns to work.

“We’re just hoping for the best,” Metford said, “and trying to prepare, just in case.”

jim.puzzanghera@latimes.com

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martin.zimmerman@latimes.com

Times staff writers P.J. Huffstutter in Fort Wayne, Ind., Peter Nicholas in Washington and Tom Petruno in Los Angeles contributed to this report.


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