“Chrysler LLC will file for Chapter 11 bankruptcy protection in a New York court Thursday senior Obama administration officials said, kicking off what the administration predicts will be a 30- to 60-day restructuring for the third-largest U.S. auto maker.
The U.S. government will provide up to an additional $8 billion in aid, including up to $3.5 billion in so-called debtor-in-possession financing, to ensure Chrysler survives the historic reorganization process and finalizes a partnership with Italian auto maker Fiat SpA (FIATY).
The administration had hoped to keep the car maker out of court but decided it was the only option after a deal to cut the company’s debt was rejected late Wednesday by several of the company’s lenders, a senior administration official said. President Barack Obama is set to deliver remarks on the matter at noon.
An administration official said Thursday a “stronger” Chrysler would emerge “with a balance sheet and a set of liabilities that are sustainable.””
As economist Peter Leeson writes, the death of a business is like death in real life: an inevitable but unavoidable fact of life. Profit streams tell businesses whether or not consumers value its product and if a businesses incurs losses for too long, it should be allowed to fail. But the death of a business may be more comparable to a cat with nine lives. Bankruptcy can allow a business a fresh start to restructure its assets and put them to more productive use. Debts are reduced or cancelled and contracts terminated or renegotiated, allowing firms to get a fresh start. And if a firm still cannot be made viable, bankruptcy also provides for an orderly and predictable process for getting assets—including plants and equipment—back into productive use by others.
If it’s Fiat that is willing and able to pick up the operations they deem economically viable, then so be it. We’d rather take our chances with another car company running operations than the government. Unfortunately, instead of removing themselves from the process, the federal government is offering to lend more taxpayer dollars to finance the court-run bankruptcy.
Peter Roff of U.S.News has a good take:
“Obama is the president of the United States, not the chief executive office of Chrysler LLC or any other automobile company. Maybe I missed something but it seems to me it’s not the job of the president to announce that a company is going into Chapter 11 or, for that matter, coming out of it. Well, it might be the job of a company president, but it’s not the job of the U.S. president. It used to be that liberals feared the alliance of big business and government. Now, under a liberal president, the government is becoming “big business,” in both meanings of that term.”