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GM And Chrysler Edge Towards The Cliff

The WSJ says that Chrysler, the government and the bank holdouts are still negotiating. According to the Journal the government has put a new offer on the table.

The Treasury now proposes that the banks and other lenders accept as payment 22% of the $6.9 billion they are owed plus a 5% equity stake in Chrysler, said several people familiar with the matter.

That’s up from an earlier Treasury proposal that the banks and other lenders accept 15% of what Chrysler owes them and receive no Chrysler stock.

The lenders, which include Citigroup Inc. and J.P. Morgan Chase & Co., rejected that offer outright and instead proposed Monday they get paid about 65% of the debt, or about $4.5 billion.

In addition, the lenders sought a 40% Chrysler stake and a seat on the company’s board, according to a copy of the proposal provided by individuals outside the lenders’ group.

That looks like a pretty big chasm to bridge by next Thursday. It’s hard to see how the government and Chrysler get even remotely close to the banks’ position without taking more than is tolerable out of Fiat and the UAW’s pockets. The banks also seem to feel pretty comfortable with their recovery predictions in the event of liquidation so there’s little economic incentive for them to come down much.

Unless the government decides to play hardball and force the banks to capitulate, I don’t see any alternative but bankruptcy. Frankly, I’m not too sure that the administration is all that concerned about that prospect. A Chrysler BK won’t be that much of a shock to the system and, assuming it goes smoothly during May, would take some of the jolt out of a follow-on GM filing. It would also give the government a heads up on what they might face in the first weeks of GM’s proceeding. Think of it as spring training before the regular season.

Meanwhile, GM (link) said it would close its plants for nine weeks this summer in an attempt to work off inventory and would not make a $1 billion payment due on its bonds on June 1. The company plans to lauch its exchange offer for the conversion of $28 billion of debt to equity next week.

The Curious Capitalist linked to a letter from Michigan’s Attorney General to GM in which he urges the company to file for bankruptcy in Michigan rather than a more remote locale. The post at the Curious capitalist will explain why this is important to Michigan but the mere fact the letter was written speaks volumes.

Anything could still happen but at this point it looks as if both of these companies are goners.

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