TOPICS > Economy

Chrysler Deadline Nears as GM Looks to Downsize

April 28, 2009 at 6:30 PM EST
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After General Motors announced plans to cut another 21,000 jobs and Chrysler reached a deal with United Auto Workers that may help the automaker avoid bankruptcy, a New York Times reporter provides an update on Detroit automakers' latest efforts to stay afloat.
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JUDY WOODRUFF: Next, the latest on critical negotiations for Detroit’s automakers. Both Chrysler and GM need additional government loans to survive, but both must radically overhaul their businesses to receive the money, and both are moving towards doing so.

Chrysler has to present its plan to the Treasury Department by Thursday. And today, Chrysler has reportedly reached a deal freeing it from billions of dollars in debt obligations to its creditors.

Yesterday, GM said that it plans to dramatically shrink the company, eliminate 21,000 more workers and close 2,600 dealers.

To fill us in on the latest, we turn to Micheline Maynard of the New York Times. She’s a senior business correspondent covering the auto industry, and she joins us tonight from Ann Arbor, Mich.

Mickey Maynard, thank you very much for talking with us. First of all, fill us in on what you know about this deal that’s been reached tentatively between Chrysler and its major debt-holders.

MICHELINE MAYNARD, The New York Times: Thank you, Judy. Well, the major debt-holders are banks like JPMorgan, Morgan Stanley, Citibank, and these are some of the banks that took part in the deal when DaimlerChrysler sold Chrysler to Cerberus Capital Management, which is a private investment fund.

They were supposed to circulate $20 billion in debt, and this was back in the summer of 2007. They ended up holding about $7 billion of that debt. They weren’t able to find takers for it.

And so under the deal that tentatively has been reached with the Treasury Department, they will get $2 billion in cash or less than a third of that money and no stake in the new Chrysler. And that’s the settlement that these big banks have agreed to.

Now, there are other lenders. There are about 46 other lenders that are involved here. And as far as we know, they haven’t signed off on this yet.

Union to increase ownership stake

JUDY WOODRUFF: Why are the biggest debt-holders willing to go along with this deal, though?

MICHELINE MAYNARD: Well, I think, first of all, they've been carrying this debt for a long time. And as you said up at the top of your newscast, some of these are the banks that need liquidity. They need some money. And I guess a share of about $2 billion is better than nothing at all.

JUDY WOODRUFF: And why aren't the others who own the other 30 percent of the debt? And identify who those are.

MICHELINE MAYNARD: Well, those are people like hedge funds, smaller investment funds. These are people that speculate on companies like a Chrysler.

You know, back when the Daimler Chrysler deal was set up, the only risk to these people was missing out on a chance to make some money. It was before the markets fell apart, and companies were flipping, and there was an opportunity to make a lot of money.

So these hedge funds, these investors bought into the company, but they're not so eager to just take their cash and go home. There has been a proposal as these negotiations have been going on for these investors to get as much as a third of Chrysler, the new Chrysler, when all this is over with.

JUDY WOODRUFF: Well, if this were to work out, what would Chrysler look like? Who would own it?

MICHELINE MAYNARD: Well, that's a very interesting question, because Chrysler has been negotiating with Fiat of Italy. And, in fact, the government said a month or so ago that, if they could reach a deal with Fiat, that the government would put up $6 billion so that they could become either a unit of Fiat or do a joint venture with Fiat.

So the way it's looking is that Fiat would own up to 35 percent of Chrysler. The government would end up owning a piece of Chrysler. And then there's a health care fund that the UAW is going to take over to cover Chrysler medical benefits for the retirees, and that fund would actually get more than half of Chrysler.

JUDY WOODRUFF: So the union members would own more than half the company?

MICHELINE MAYNARD: That's right. It's not like Joe Autoworker would own Chrysler, but it would be the health care fund that's set up to administer their medical benefits. And this fund actually would get a representative on the Chrysler board with the approval of the UAW, or at least that's what they're telling the autoworkers this week. They're voting on a big package of concessions in order to make this deal come about.

Fiat decision is crucial

JUDY WOODRUFF: But now, in all of this, the company could still go through bankruptcy, is that right?

MICHELINE MAYNARD: This is right. And one of the reasons why is that Chrysler has about 3,600 car dealers. And, you know, that doesn't sound like a lot in the old days for Detroit, because car companies have thousands and thousands of car dealers. General Motors has about 6,000 right now.

But Toyota, if you think about it, Toyota is now bigger than Chrysler and they only have 1,300 car dealers in the United States, so they have about three times as many car dealers as they probably need, given the size they are.

But, you know, these car dealers are protected. The states have really strong franchise laws. And you would have to go state by state by state to get rid of dealerships, so it's easier to do under bankruptcy protection.

JUDY WOODRUFF: But last question on this Chrysler deal. It is tentative. And we won't know for, what, 48 more hours whether something has been worked out?

MICHELINE MAYNARD: Right. There's a very important meeting coming up, Judy, on Thursday night in Turin, Italy, and that's the board of Fiat. And they've said that they're going to make a decision on what they do concerning Chrysler.

It could be that they just decide to go ahead with the deal. It could be that they tell the Treasury Department that we think it would be better if they go into bankruptcy. Or they could just walk away from the whole thing.

Government ownership in GM

JUDY WOODRUFF: Now, separately, General Motors, we want to spend a couple of minutes on this. Tell us what is known about this announcement yesterday about, in essence, the company turning majority ownership over to the U.S. government?

MICHELINE MAYNARD: I know. It's kind of impossible to believe in when you think about what a mighty company General Motors once was, but General Motors is asking the government for a total of about $27 billion of federal assistance so that it can run the company over the next few years, and it's already gotten about $15 billion.

Well, the government essentially, if the plan goes through, would end up owning about half of General Motors. And then there's another one of these health care funds at General Motors that the union is going to administer. They'll get a big chunk of General Motors, too. And there will be about 10 percent left for the bondholders of General Motors.

JUDY WOODRUFF: The Obama administration continues to say it's not interested in owning a car manufacturer. Are there provisions in there for the government to unload that stake later on?

MICHELINE MAYNARD: Well, that very much depends on the health of General Motors going forward, because there's been a lot of talk about creating a new General Motors. You would take the good stuff at General Motors, like Chevrolet, Cadillac, some of the good factories that they'd like to keep, some of the good -- the dealers that are successful that they'd like to keep. And you create sort of a new General Motors.

And then all the rest of it would just have to be liquidated over the next few years. For example, they're talking about closing down Saturn by the end of this year. They're going to get rid of Pontiac and Hummer and Saab.

And so, basically, that new General Motors would probably be represented by new stock. That might be valuable some day. And some day the Treasury Department might want to sell that stock.

JUDY WOODRUFF: And they're also talking about laying off another, what, 21,000 workers? What's the reaction there in Detroit?

MICHELINE MAYNARD: Well, it's pretty sad. You think about it, way back, about 20 years ago, General Motors had almost 400,000 autoworkers working for it. And now it's got well less than one-fourth of that number.

So the city is very, very scared. In fact, one of the local TV stations put a poll up. And it was sort of a joke. They said, "Are you more worried about a GM bankruptcy or swine flu?" But the vote came out over 2-to-1 for a General Motors bankruptcy.

Many bondholders are individuals

JUDY WOODRUFF: Hmm. And same question I asked you about Chrysler. Under this scenario, does GM still go through some sort of bankruptcy procedure?

MICHELINE MAYNARD: That's a very good question. The deadline for General Motors is still a ways away. They have until the end of May to get all of this wrapped up. And so there will be some very intense negotiations going on with their bondholders.

Now, the bondholders are not happy at all, because the latest proposal that the bondholders will be voting on only gives them about 40 percent of what their debt is worth. And they're not happy about that at all.

I mean, these are not just the big banks. There are a lot of individual people who own GM bonds. I mean, those were really safe investments, and now they're apparently not very safe. So this will be a very interesting situation over the next month or so at GM.

JUDY WOODRUFF: Still some work to be done for GM and Chrysler. Micheline Maynard, thank you very much for talking with us.

MICHELINE MAYNARD: My pleasure. Thanks.