Information Security & US & Life & Love & Fashion & Hacking & Passion

Banks and hedge funds that hold $6.9 billion in Chrysler LLC debt have proposed forgiving $2.5 billion of it in exchange for about a 40 percent stake a Chrysler-Fiat alliance, according to two people briefed on the proposal.

One of the people said the lenders delivered their counterproposal to Chrysler and the U.S. Treasury Department late Monday night. Neither person wanted to be identified because the negotiations are private.

The counteroffer comes as Chrysler races to meet a government-imposed April 30 deadline to swap debt for equity, cut labor costs and negotiate an alliance with Italy's Fiat Group SpA. If it misses the deadline, government aid will end and Chrysler likely faces liquidation.

Last week, creditors rejected a Treasury Department offer to reduce the debt to $1 billion, absolving Chrysler of about 85 percent of its secured loans. The counteroffer, which would swap about 35 percent of the debt for equity, falls short of government restructuring goals that called for Chrysler to retire at least two-thirds of its debt.

Messages were left with spokeswomen for the Treasury Department and Chrysler.

Chrysler is living on $4 billion in federal loans and could get another $500 million to survive through April. But without massive restructuring and a Fiat deal, government officials have said they won't lend the struggling automaker any more money.

The counteroffer from a steering committee would give the equity stake to first-lien lenders including Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs Group Inc., Morgan Stanley and several smaller banks, plus some hedge funds. Chrysler has about 45 first-lien lenders who would be first in line to get money if the company's assets were liquidated.

"The goal is something close to 40 percent of the equity" in the combined Chrysler-Fiat company, according to one of the people briefed on the lenders' proposal. "Taking equity is a risky proposition," the person said.

When the Bush administration agreed to give Chrysler and General Motors Corp. loans last year, they set targets for the companies to swap two-thirds of their debt for equity. The Obama administration has been less clear about how much debt must be exchanged, saying in a March 30 statement that Chrysler must have a "sustainable debt burden."

"This at a minimum will require extinguishing the vast majority of Chrysler's outstanding secured debt and all of its unsecured debt and equity, other than trade creditors providing normal trade terms," the statement said.

One of the people briefed on the counteroffer said the debtholders are aware that it doesn't meet the two-thirds debt-for-equity swap required by the Bush administration, but it would be a piece of an overall plan to wipe out most of Chrysler's debt.

Including the secured debt and government loans, Chrysler owes about $23.5 billion, including $10.6 billion to a United Auto Workers trust fund that will take over retiree health care costs starting next year. It also owes $1 billion each to its current owners, Cerberus Capital Management LP and Daimler AG.

The company is negotiating with the UAW to take equity for part of the trust fund obligation.

Bankruptcy experts have said the secured debtholders would be less likely to settle for pennies on the dollar because their loans are secured by Chrysler's physical assets and because they likely purchased credit default insurance that would repay them if Chrysler defaults.

Chrysler and Fiat are discussing a deal in which Fiat would take a 20 percent stake in the company in exchange for Fiat's small-car technology. Fiat CEO Sergio Marchionne is in the U.S. through today taking part in the negotiations.

AP Auto Writer Dan Strumpf reported from New York.

Copyright 2009 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

Unless demand for cars can be revived, it may not matter how much fat GM and Chrysler cut.

Chrysler asked government officials today for an additional $5 billion in loans to ride out the deepening economic slump.

A parallel set of talks between Chrysler LLC and the UAW over similar concessions were continuing over the weekend but little progress had been made in the past week, a person briefed on those negotiations said.

The breakdown of talks at GM and the stalled negotiations at Chrysler come with just three days remaining until both automakers must submit new restructuring plans to the U.S. government as a condition of their $17.4 billion bailout.

At GM, the UAW negotiators walked away from the bargaining table because of differences over how to pay the health care costs of retirees. No high-level negotiations were underway as of Saturday afternoon, although some working-level discussions continued, the person familiar with the talks said.

"It doesn't seem like the stakeholders are really prepared to give a whole lot," said independent auto industry analyst Erich Merkle. "It's a high stakes game of poker right now."

But now that the Bush administration has agreed to lend GM and Chrysler $17.4 billion to stave off bankruptcy, Mulally is running as fast as he can from those other guys. "We're in a different place," says Mulally, whose company had $19 billion in cash on Sept. 30 and isn't seeking an immediate cash infusion.

Don't be so sure. Ford, which lost $8.7 billion through September, may yet need taxpayer money. It is burning more than $2 billion a month and has asked for a $9 billion line of credit as a safety net in case industry conditions worsen. And it's looking more and more like Ford will need it.

Ford's financial projections are based on a rosier industry sales forecast--12.5 million vehicles (including heavy trucks) in 2009 and 14.5 million in 2010--than most industry experts predict. JD Power & Associates is forecasting 11.4 million light-vehicle sales in 2009 and 13.6 million for 2010.

IHS Global Insight is even more pessimistic. It now forecasts sales of 10 million to 10.5 million light vehicles for 2009, and 12.5 million units for 2010. GM's best case scenario is 12 million units in 2009 and 14 million in 2010, though its business plan is based on more conservative estimates. Last year, the industry sold 16.1 million light vehicles.

If Ford's assumptions prove too optimistic--as is likely--it too will be approaching Uncle Sam for help. "All automakers, including Ford, are going to need government money," says IHS Global Insight analyst Rebecca Lindland.

Self-interest required Mulally to stand up for his weaker competitors. A collapse of one or both would hurt suppliers and could potentially bring down Ford as well. But in the meantime, Ford is shrewdly portraying itself as the healthiest U.S. carmaker and quietly stealing market share from its crosstown rivals. Ford gained 1.4 points of market share in November, while GM lost 1.6 points and Chrysler lost 2.3 points.\

Christmas comes early for GM and Chrysler with $17.4 billion in aid, but many questions remain.

The White House has given Detroit an early Christmas present. Friday, President Bush announced the Federal government will provide immediate financial assistance to General Motors and Chrysler, which warned that, without aid, they might go out of business by the end of the month.

"In the midst of a financial crisis and a recession, allowing the U.S. auto industry to collapse is not a responsible course of action," Bush said.

Under the terms of the deal, the companies will receive $13.4 billion in emergency bridge loans. The money will be doled out from the $700 billion Troubled Asset Relief Program which the Treasury has at its disposal to alleviate the credit crunch. The companies will be eligible to receive an additional $4 billion in February. The bridge loans are expected to keep the companies afloat until at least March 31. If they have not been able to work out a viable plan for restructuring by that date, the administration will be able to recall the loans.

Without providing many specifics, Bush stressed that all parties involved--management, labor unions, creditors, bondholders, dealers and suppliers--will have to accept "meaningful concessions." Any money distributed from the TARP kitty includes restrictions on executive compensation and the ability for the government to take equity stakes in a company receiving assistance. Bush said bondholders will be forced to swap debt for equity and that workers will need to accept compensation "competitive" with foreign automakers operating in the United States.

In a statement, GM said the loans "will allow us to accelerate the completion of our aggressive restructuring plan for long-term, sustainable success." Chrysler Chief Executive Robert Nardelli said that his company will receive $4 billion in immediate assistance, which will allow the company to "move forward with the restructuring and streamlining of our organization that we began in 2007."

Not everyone in Detroit is so happy. Rep. John Dingell, D-Mich., a staunch Capitol Hill ally of the automakers, applauded the government's bailout, but said "it is irresponsible during a time of economic crisis for the White House to insist that workers take further wage cuts on top of the historic concessions they have already made."

The administration's announcement comes barely a week after congressional talks to provide government assistance to the companies fell apart in the Senate. General Motors (nyse: GM - news - people ) and Chrysler were relying on the Bush administration as their last and best hope for a bailout. Ford Motor (nyse: F - news - people ), which had previous asked for a government-issued line of credit, was not seeking an immediate bridge loan.

Last-ditch efforts to forge an agreement to rescue the U.S. automakers fell apart late Thursday, Dec. 11, when union officials refused fast and deep cuts in worker pay. The collapse created the real possibility that General Motors (GM) and Chrysler will face bankruptcy in a matter of weeks, unless the Treasury Dept. acts to prevent it.

Senate Minority Leader Mitch McConnell (R-Ky.) said on the Senate floor Thursday night that a refusal of the United Auto Workers, headed by Ron Gettelfinger, to agree to lower wages and benefits at parity with workers at Toyota (TM) and Honda (HMC) in the U.S. by a date certain in 2009 was the last sticking point preventing Republicans from supporting the bill.

"We were three words away from a deal," said Senator Bob Corker (R-Tenn.), who spent all day trying to broker an agreement between Republicans, the union, and the auto companies. Tennessee is home to a GM and Nissan (NSANY) plant, as well as a future Volkswagen (VOWG.DE) plant and several supplier facilities.

Officials from the UAW did not return phone calls at press time.

"It's disappointing that Congress failed to act tonight," the White House said in a prepared statement. "We think the legislation we negotiated provided an opportunity to use funds already appropriated for automakers and presented the best chance to avoid a disorderly bankruptcy while ensuring taxpayer funds only go to firms whose stakeholders were prepared to make difficult decisions to become viable."

"A Loss for the Country"

The Senate rejected the bailout 52-35 on a procedural vote after the talks collapsed.

Senate Majority Leader Harry Reid (D-Nev.) called the bill's collapse "a loss for the country," adding: "I dread looking at Wall Street tomorrow. It's not going to be a pleasant sight."

The bill called for $14 billion to be divided between GM and Chrysler, both of which are at the financial breaking point as the recession and consumer credit crunch have crippled their finances. The companies, anticipating failure in the Senate, have hired bankruptcy law firms. Ford (F) has said it doesn't need federal assistance now but has asked for a $9 billion line of credit in case sales deteriorate below the current level.

According to Corker, bond holders that conferred with lawmakers Thursday agreed to take a 70% writedown on debt they hold from the automakers, and to take half of the remainder in stock. GM has $42 billion in debt, not counting payments the company must make to the union's health-care trust in 2010. As part of the deal, the UAW also agreed to take half of its future $21 billion in payments to its health-care fund in stock. "The companies would have been stronger than they have been in 40 years, or headed for Chapter 11," said Corker.

Senator Debbie Stabenow (D-Mich.) took a harsh and emotional tone with Republicans who voted against the bill. "Evidently the only thing that matters to those on the other side of the aisle is that workers make too much money," she said.

The House may have passed a rescue package for the auto industry, but Senate Republicans could stop it cold.

Chrysler's Hidden Coffers

Why is Cerberus, one of the world's richest private equity firms, begging for a bailout?

Why is Cerberus, one of the world's richest private equity firms, begging for a bailout?

When I wrote about the bailout blunders of the auto industry two weeks ago, I thought the Big Three had most likely topped out on the political outrage meter. But that was before the shady story of Cerberus, the uber-connected private equity firm that owns Chrysler, reared its three ugly heads over the weekend.

Buried on the business page of The New York Times Saturday were the details of Detroit's biggest snow job yet--literally as well as figuratively. Turns out that Cerberus CEO John Snow, who spent three-and-a-half lackluster, and some might say lap-doggish, years as President Bush's second Treasury secretary, is leading a who's who of crony capitalists in a lobbying campaign for a taxpayer bailout to "salvage Cerberus' investment in Chrysler."

That's right. Not to save the jobs of Chrysler employees or America's disappearing manufacturing base, mind you, but to prevent "one of the world's richest and most secretive private investment companies" from having to take a relatively modest financial hit and use some of its own capital to prop up the smallest of the major automakers.

Of course, Cerberus is sparing no expense to spare their investors any exposure. Together with Chrysler, it has spent $7 million to hire such high-rent lobbyists as Dan Quayle (who runs one of Cerberus' international units), former Sen. John Breaux (D-La.) and former Bush legislative liaison David Hobbs. Their goal: $7 billion from the auto industry bailout package Congress is working on now and another $8.5 billion in loans from the Energy Department that have already been authorized.

The more I dug into this private duplicity, the more nostalgic I got for the PR stupidity of the Big Three CEOs and their corporate jets. It smells that bad of boondoggle. And even worse, somehow this stink has largely escaped the detection and scrutiny of the bipartisan leadership of Congress. Indeed, both sides seem ready to compound their complicity in the lousy deals that Henry Paulson cut in the Wall Street bailout by handing over billions more to Chrysler without forcing the Snow men at Cerberus to show why they need it.

At a bare minimum, there is something deeply unseemly and unsettling about one influence-peddling ex-Treasury secretary using his special access to personally lobby his even more bank-beholden successor for favors. If I were running the House or Senate banking committees, I would be asking some tough questions about this conflict of interest cornucopia before giving Chrysler a dime--starting with what kind of financial connections Paulson's old firm, Goldman Sachs (nyse: GS - news - people ), has to Cerberus.

But that's the least of it. I am not a finance expert, but what makes this episode so outrageous is that even a casual observer can see what a taxpayer ripoff Cerberus appears to be getting away with--but Congress and the Bush administration somehow cannot or will not. Why are they unable tell the obvious difference between General Motors (nyse: GM - news - people ) and Chrysler? GM is broke, can't get a loan and is actually facing an emergency. Via Cerberus, on the other hand, Chrysler has access to loads of capital, and the only thing collapsing is its credibility.

General Motors, Ford Motor and Chrysler's desperate pleas for government aid were heard. Over the weekend, legislation to provide the big three with short-term loans to get them through the new year is being drafted, following an agreement between Speaker of the House Nancy Pelosi and President George Bush on how to fund the rescue.

Pelosi on Friday agreed to go the White House route and use loans from the Department of Energy originally intended to insure the companies would develop green cars in the future, rather than tap Treasury Secretary Henry Paulson's $700 billion Troubled Asset Relief Program funds.

Mark Zandi, the chief economist of Moody's Economy.com told the Senate that an automaker's bankruptcy would be "cataclysmic." With unemployment at 6.7%, gross domestic product in a tailspin and the banking sector wobbling like a newborn doe, the White House and Congress remain understandably averse to cataclysms.

"We must first prevent additional job loss from occurring. We cannot let the auto industry collapse, which would be catastrophic to our economy," said a Friday statement from Sen. Chris Dodd, the chair of the Senate Banking Committee, signaling his support.

President Bush's remarks Friday were much the same: "It is important that Congress act next week on this plan. And it's important to make sure that taxpayers' money be paid back if any is given to the companies."

It's a much better outcome for the automakers than after their first trip to Capitol Hill, where they flew in on private jets, presented vague plans and were sent home empty-handed. But before Detroit starts cheering, they'd be smart to recall a similar situation a couple months ago. If the $700 billion bailout of the financial system holds any lesson it's this: The car companies are not out of the woods yet.

Paulson's request for $700 billion two and a half months ago is fresh in the minds of those on Capital Hill. Deny him the money, he said, and the economy would implode. Any future economic problems (which by September were inevitable) could be blamed on the inaction of Congress. Despite the threat of apocalypse, they balked for two solid weeks as volleys of constituent disapproval filled the e-mail inboxes of Congress. At one point, the House's Web server crashed from the load. He ultimately got his money, but only after a political brawl unparalleled in recent memory.

America's automakers may be even less loved than America's bankers. All of this has the strong ring of deja vu, and just as rank and file Congressmen balked at bailing out Wall Street, embarrassing party leaders and forcing a dramatic showdown on the Hill, the deal for Detroit is far from done. The challenge is not writing the legislation this weekend. It's getting it passed next week. Are Pelosi and the Democrats up to the challenge? Detroit sure hopes so.