As a result, the New York Times and Wall Street Journal, both citing people familiar with the discussions, said Chrysler was expected to file for Chapter 11 protection later in the day.

The reports said several hedge funds and other lenders rejected Treasury's sweetened offer of $2.25 billion for forgiving $6.9 billion of Chrysler's debt.

In addition, the United Auto Workers union announced late Wednesday night that its membership at Chrysler had overwhelmingly ratified a concession contract reached between the company and union leadership on Sunday night.

As a result of that deal, the UAW will own 55% of Chrysler. Fiat will own a 20% stake with the option of increasing it to 35%. The U.S. government will own 8% and Canada will have a 2% stake.

The union issued a statement Thursday afternoon saying it supported the bankruptcy process and the combination of the company with Fiat. It said it would ask the bankruptcy court to quickly approve the merger of the two companies as well as the new labor agreement

“There have to be three near- miracles” for a partnership with Fiat SpA to succeed in rescuing Chrysler LLC, says Dennis DesRosiers, an auto consultant in Richmond Hill, Ontario.

“First, Americans have to embrace small cars,” he says. “They never have.” Neither have they bought Italian small cars in any volume; nor have small cars been profitable for any auto company in North America that wasn’t Japanese, says DesRosiers, a market research consultant for 24 years.

That kind of challenge is nothing new for a company born 84 years ago in Walter P. Chrysler’s reorganization of the Maxwell Motor Co. The bankruptcy filing yesterday by the Auburn Hills, Michigan-based automaker is the company’s fourth near-death experience since 1979. President Jimmy Carter’s $1.5 billion government loan guarantee that year helped Lee Iacocca avert failure and turn himself into a Detroit icon.....

By Jeff Green and Caroline Salas
May 4 (Bloomberg) -- General Motors Corp. may be more likely
to end up in bankruptcy based on the Obama administration’s
willingness to place Chrysler LLC into court protection to
safeguard union health-care benefits.
With GM and its biggest bondholders at odds over resolving
$27 billion in unsecured claims by a June 1 deadline, the
Chrysler model indicates that President Barack Obama may resort
to bankruptcy to end any impasse over that debt, said Martin
Fridson, chief executive officer of New York-based credit
investment firm Fridson Investment Advisors.
Chrysler filed for protection April 30 after the U.S. was
unable to persuade secured lenders to swap $6.9 billion in
claims for $2.25 billion in cash. A union retiree health-care
trust was offered a 55 percent stake in Chrysler.
“This confirms the fear, which right along has been that
the Obama administration is more sensitive or beholden to the
unions than the bondholders,” he said. “It makes it clear that
GM bondholders aren’t likely to be able to work out anything
outside of bankruptcy.”
GM bondholders proposed April 30 they get a 58 percent
ownership stake in the Detroit-based automaker in exchange for
their $27 billion in unsecured claims. Bondholders are objecting
to GM’s proposal they get a 10 percent share of GM equity while
a union health fund would get $10 billion in cash and as much as
a 39 percent stake for their $20 billion in unsecured claims.
Renee Rashid-Merem, a GM spokeswoman, Roger Kerson, a UAW
spokesman, and Jenni Engebretsen, a Treasury spokeswoman,
declined to comment on the matter. A spokesman for the
bondholders could not be reached immediately.

Dry Run for GM

GM said last week it must cut $44 billion in obligations
from its books, including $10 billion of loans from the U.S.
government, to return to an operating profit next year and win
permission from the Obama administration to keep $15.4 billion
in loans and win $11.6 billion more.
“There’s no question Chrysler” acts as a dry run for GM,
said Sean Egan, president of Egan-Jones Ratings Co. in
Haverford, Pennsylvania. “It was designed that way because
Chrysler is a much more manageable entity. The impact on the
economy, on employment, is a microcosm of what is likely to
happen with GM.”
GM’s $3 billion of 8.375 percent bonds maturing in July
2033 fell to a record low of 8.3 cents on the dollar April 30,
down from 21 cents at the beginning of this year, according to
Trace, the bond-price reporting system of the Financial Industry
Regulatory Authority. The debt traded May 1 at 8.6 cents to
yield about 95 percent.

Competing Concepts

GM proposed that bondholders exchange 225 shares of stock
for each $1,000 of principal. At least 90 percent must accept
the offer to shed enough debt for the automaker’s plan to work.
In the counterproposal by the ad hoc committee of GM
bondholders, they would get 58 percent of the stock in a
reorganized GM, with 41 percent going to a union health-care
trust and the last 1 percent to existing shareholders.
The committee had been in contact with about 100
institutions representing $12 billion in GM debt including San
Mateo, California-based Franklin Resources Inc. and Loomis
Sayles & Co. of Boston, a person familiar with the negotiations
has said.
Even if there is appetite for an agreement, it’s unlikely
the thousands of GM bondholders can be pulled together in time,
said John Casesa, managing partner at New York-based consulting
firm Casesa Shapiro Group.
“The Chrysler bankruptcy can either scare them into
settling or maybe make them more likely to take GM into
bankruptcy,” Casesa said. “I don’t get the sense that the
bondholders are ready to give in.”

Government Role

Obama’s auto task force ousted Chief Executive Officer Rick
Wagoner at the end of March, saying GM’s plan to return to
profit wasn’t aggressive enough, and ordered new CEO Fritz
Henderson to cut the automaker’s debt by more than initially
demanded.
The U.S., which would hold at least half the equity in a
reorganized GM in the automaker’s proposal, also ordered acting
Chairman Kent Kresa to replace the majority of the GM directors
as soon as possible.
“Obama has said the government doesn’t want to run a car
company, so why not take the bondholders’ deal, which gets them
out of ownership?” said Pete Hastings, a fixed-income analyst
at Morgan Keegan & Co. in Memphis, Tennessee. “The 10 percent
ownership offer is ridiculous, so their best shot is to try and
win in court.”

‘Labor’s Interest’

The bondholders shouldn’t be surprised that the unions are
getting preference over investors in an Obama administration,
Egan said.
“If the government is providing money to these entities,
they’re going to be looking out for labor’s interest first and
foremost,” he said.
“ You may claim it’s unfair, but that’s the political
reality and the time and cost of suing the federal government is
prohibitive in most cases.”
The government was more likely to get its way in Chrysler
because a majority of lenders were already supportive of the
U.S. offer for their debt, said Mirko Mikelic, who helps manage
$19 billion at Fifth Third Asset Management in Grand Rapids,
Michigan. Mikelic dumped GM debt last year and still manages
some debt in GMAC LLC, the automaker’s former finance unit.
There seems to be little likelihood of a similar majority
agreement at GM, he said.
The longer the GM bondholders have held out, the worse the
offers have gotten, according to Egan.
“You’re better off acting early,” he said.

For Related News and Information:
GM stories by Bloomberg: GM US <EQUITY> CN BN <GO>
U.S. auto industry: NI AUT <GO>
Autos and U.S. economy: TNI AUT USECO <GO>
U.S. auto bailout: STNI AUTOBAILOUT <GO>
U.S. auto sales chart: SAARTOTL <Index> GP <GO

May 4 (Bloomberg) -- A group of Chrysler LLC’s secured lenders is seeking to block the bankrupt company’s plan to sell its business at auction this month, arguing that the U.S. government is violating federal law to preserve the automaker.

Report: Chrysler unlikely to repay $8.5 billion in government loans

The U.S. and Canadian governments have combined to loan Chrysler $4.5 billion in debtor-in-possession financing during its bankruptcy, but neither country will likely be repaid for the loans. Additionally, Chrysler will be off the hook for the $4 billion it received from the U.S. government in January.

Ron Manzo, one of Chrysler’s senior financial advisors, revealed to The Detroit News that it is “highly likely” neither government will receive repayment from Chrysler on the loans. Moreover, Chrysler is not required to pay any interest on the $4.5 billion loan. About $3.34 billion of that loan belongs to the U.S. Treasury Department and ultimately U.S. taxpayers.
A source familiar with the situation also revealed to The Detroit News that Chrysler likely won’t repay a $4 billion loan issued by the Treasure back in January.
Despite having $8.5 billion in limbo, the United States and Canada plans to loan Chrysler another $6 billion when it exits bankruptcy. However, both governments will prohibit Fiat from taking a majority stake in Chrysler until all loans are repaid.

You can call the plan to merge Chrysler and Fiat good for the economy. You can think it creative.

You can say it’s the start of “a vibrant new company,” as Chrysler LLC Chairman Robert Nardelli did last week.

But there’s one word that you can’t call the Chrysler bankruptcy package: legal.

The plan would overturn basic rules of bankruptcy by setting up a sort-of sale to sidestep pesky legal requirements. It would bulldoze well-established rights of secured creditors, property rights the U.S. Constitution guarantees.

So if U.S. Bankruptcy Judge Arthur Gonzalez follows the law, the Chrysler rescue plan dies. If he blinks and approves it, secured creditors everywhere should feel a shiver of unease, and quick sales of insolvent companies to avoid court scrutiny would multiply.

The other option is a settlement, and that might well be where this is headed.

I hate to say it, but the dissident Chrysler lenders are right, the ones President Barack Obama described as greedy hedge funds selfishly blocking Chrysler’s survival.

The president’s fist-waving looks a lot like the posturing lawyers use to scare an adversary into surrender, never mind the law. In fact, several are giving up the cause.....