Taking Chrysler Through A Chapter 11

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Because Chrysler is now a private company, no one outside the corporation and its investors has a precise picture of its finances. Through the first nine months of this year, Chrysler sold 1.18 million vehicles in the U.S. — 395,304 less than the same period last year.

Having laid of tens of thousands of people and having closed some of its largest plants, the auto firm has probably reached the point where it has very few more costs to cut.

Chrysler’s two most obvious options are to sell to GM (GM) or set up a global joint venture with Nissan and Renault. GM could give Chrysler controlling shareholder Cerberus a piece of the new public company and perhaps larger ownership in the GMAC operation which used to be the car firm’s wholly-owned financial arm. Cerbusus already owns a piece of GMAC and would at least walk away with something.

The Nissan deal would allow Chrysler to cut costs over time by consolidating management, production, and labor expenses. All of that would take time, and the No.3 US car company does not have access to a great deal of cash in a credit crisis. Cerberus has probably decided to avoid throwing good cash after bad to keep the firm afloat.

Chrysler’s last option is a Chapter 11 filing. The action might allow Chrysler to improves its balance sheet, renegotiate parts contracts, and, most importantly, adjust the retirement and benefits agreements it has with the UAW. At that point, the company would be auctioned off in pieces. Some brands, starting with Jeep, are probably worth $2 billion or $3 billion based on what Ford (F) got for Jaguar.

Chrysler would probably face strikes by the UAW and legal actions from bond holders and creditors. A bankruptcy judge would almost certainly take the position that as a receiver it will decide what to do with assets and ask federal courts to sanction any labor stoppages as interference with it legal right to dissolve the company as is its right under Chapter 11 provisions.

A bankruptcy may be the least attractive choice to Cerberus and even to the UAW, but with sales falling it could be the only option by the end of the year.

Douglas A. McIntyre