Issue of the week: Can Chrysler survive bankruptcy?

For the first time since Studebaker did it in 1933, an American auto company has filed for bankruptcy protection, said Jim Rutenberg and Bill Vlasic in The New York Times. Chrysler Corp. sought refuge from its creditors in federal bankruptcy court, after a minority of Chrysler’s secured creditors last week rejected the Obama administration’s plan to reorganize the sputtering automaker outside of bankruptcy court. Under the administration’s plan, the United Auto Workers would own 55 percent of the company, while Italy’s Fiat would own 35 percent. The plan required Chrysler’s 46 secured lenders, which are owed $6.9 billion, to forgive all but $2 billion of the debt. Holders of 70 percent of the debt, including several large banks, agreed to the proposal. But 20 investment firms objected, “leading the president to decide that bankruptcy could not be averted.”

The 20 holdouts had compelling reasons to reject the administration’s “cram-down deal,” said David Weidner in Marketwatch.com. They figure they can get a better deal in bankruptcy court, since by law, secured creditors usually have first claim on the company’s assets. But still, they are taking a big chance. The final decision on Chrysler’s fate rests with federal bankruptcy Judge Arthur Gonzalez, “a man not afraid to hurt people’s feelings and bank accounts.” There’s nothing to stop him from adopting the administration’s plan, which after all has the support of the majority of the secured creditors. In fact, this week he approved the government’s proposal for a bankruptcy-court auction that will almost certainly result in the sale of Chrysler to Fiat. All the same, bully for the holdouts, said Steve Stanek in Investor’s Business Daily. They “stood up for their shareholders and investors” with their protest against the unfairness of the government’s attempt to skirt “long-established law.”

It takes a lot of gall for hedge-fund managers to whine about “fairness,” said Steven Pearlstein in The Washington Post. Unless, of course, by fairness they mean “throwing 100,000 people out of work and denying retirees their pensions and their health benefits, just so they can liquidate the company and maybe squeeze an extra 15 cents on the dollar from their Chrysler debt.” But they could be fooling themselves. Chrysler’s assets consist mainly of “auto plants and machinery and large tracts of contaminated industrial land.” Do the holdouts really think buyers will be “lining up around the block for a chance to snatch up those babies”?

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But they’re not the only ones who may be deluded here, said Mickey Kaus in Slate.com. The Obama administration seems far too optimistic about Chrysler’s prospects under Fiat. Judging by the latest “grim” sales figures, car buyers don’t want Chrysler’s current offerings, and if Fiat and the UAW win control of the company, Chrysler “won’t have new products to sell for 18 months.” Nevertheless, the administration is now ramming its plan through bankruptcy court. But if Chrysler fails again, this time “after billions more in federal subsidies,” Obama might end up wishing he had let the company go “into an actual, non-prearranged, non-jawboned bankruptcy.” Because now, Chrysler’s failure will also be Obama’s.