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The Journal Gazette

1 million-plus jobs turn on quick deals

– and more than 100,000 in Indiana – are riding on whether the bankruptcies of Chrysler LLC and General Motors Corp. are quick and orderly, according to a prominent research center’s study.

But if Indiana Treasurer Richard Mourdock is successful in stopping the proposed sale of Chrysler – in which state bondholders would take a $6 million loss – it could drag out that bankruptcy and convince some GM bondholders to do likewise, experts said.

However, they said, the challenge to the deal is likely to fail.

The 2nd Circuit Court of Appeals on Friday denied Mourdock’s request to stop the sale of Chrysler’s good assets to a new company led by Fiat SpA. The U.S. Supreme Court must now decide whether it will hear the case; it said Monday that it needs more time to review the matter.

The jobs study, by the Center for Automotive Research in Ann Arbor, Mich., says that almost 250,000 U.S. jobs will be lost by 2011 if the Chrysler and GM bankruptcies go smoothly. It said Michigan, Ohio and Indiana, respectively, will be hardest hit, with 85,000 losses.

But if the bankruptcies are protracted, consumers will desert the carmakers, creating massive disruptions in the supply chain and huge job losses, the study said.

In Indiana, 13,000 jobs would be lost by 2011 under the best-case scenario. But if the bankruptcies become open-ended, 124,000 Hoosier jobs could be lost, the study said.

In its best-case scenario, the study assumes that both carmakers emerge from bankruptcy within 90 days. The restructured companies would never stop producing cars and trucks – and they would keep paying parts makers.

The study used government and industry data and a computer modeling service run by Regional Economic Models Inc., of Amherst, Mass.

Its estimates of job losses include losses at the carmakers and their suppliers as well as indirect job losses caused because people will have less money to spend at restaurants, stores and the like.

In the worst case, the bankruptcies would drag on indefinitely, possibly lasting a year or more. In that scenario, the automakers’ sales would plummet by 90 percent, the study assumed.

The disruption would force so many parts makers out of business that Ford Motor Co. and foreign-owned companies would see a 50 percent loss of U.S. production through the last half of 2009.

GM, which employs 2,600 at its Allen County assembly plant and 1,300 at its Defiance, Ohio, foundry, won’t vouch for the exact numbers in the Center for Automotive Research study. But the carmaker agrees with its overall conclusion, said Tom Wilkinson, GM’s director of news relations.

“We’re basically saying to consumers that we’re going to emerge soon as a new company,” Wilkinson said Monday. “If the headlines are full of the fact that we’re closing our factories and turning off the lights, consumers will go away and not come back.”

Typical corporate bankruptcies often take more than a year, said Dennis Long, a bankruptcy expert who teaches at the Indiana University law school. In those cases, a company stays in Chapter 11 while it restructures debt under a bankruptcy judge’s supervision.

“This is exactly the opposite,” Long said of Chrysler and GM.

Those two carmakers are selling their most valuable assets to new entities that won’t be part of the bankruptcy. What’s left will remain part of the bankruptcy case until it can be sold or otherwise disposed of, Long said.

The majority owner of the new Chrysler will be the United Auto Workers. The U.S. and Canadian governments will own most of the new GM. The governments and the union say they’ll sell their stakes as quickly as they can.

Indiana’s battle

A bankruptcy judge in New York last week approved the sale of Chrysler’s most valuable assets to a new company led by Italian carmaker Fiat SpA.

But Mourdock, the Indiana treasurer, objects to a decision by Bankruptcy Judge Arthur Gonzalez to pay the owners of $6.9 billion of Chrysler bonds 29 cents on the dollar.

The owners of 92 percent of the bonds agreed to the deal, and Gonzalez wrote that they would get far less if the deal isn’t completed and Chrysler is sold off piecemeal.

Last July, as gas prices spiked and Chrysler’s credit rating fell, Indiana funds bought $42.5 million worth of Chrysler bonds for 43 cents on the dollar, or $18.3 million. Under Gonzalez’ ruling, Indiana would get $12.3 million, a loss of $6 million.

Mourdock’s office said Monday that it didn’t know how much it cost to hire New York law firm White & Case LLP to represent Indiana in the Chrysler bankruptcy. But the treasurer’s office said legal bills would be capped at $2 million.

Mourdock didn’t respond to interview requests, but in a statement last month, he said he feared the precedent that would be set if secured bondholders got less in the bankruptcy than unsecured creditors.

“The court filing is aimed not only at recouping those losses but also reasserting the rule of law and preventing the federal government from pursuing policies that strike at the heart of the capital system,” he said.

Fiat has the option of pulling out of its deal with Chrysler if the courts don’t approve formation of the new company by Monday.

If the Chrysler sale is delayed past that point, something similar could happen with some of GM’s bondholders, said Long, the bankruptcy expert.

“Anybody who’s not satisfied about what they’re getting out of the GM sales order can do exactly what the Indiana pensioners have done,” Long said.

He said, however, that although Mourdock makes some good legal arguments, it’s unlikely he’ll win in court.

Appellate courts are hesitant to overturn trial courts unless they believe the trial court misinterpreted the law. In the Chrysler case, the dispute is over whether bondholders would get more from the settlement Gonzalez approved or from a more traditional bankruptcy proceeding, Long said.

Art Wheaton, an automotive expert with Cornell University’s Industrial and Labor Relations School in Buffalo, N.Y., agreed with that analysis.

“I think the folks from Indiana are doing this in good faith,” he said. “I just don’t think they’re going to prevail.”

But if anything happens to draw out the Chrysler or GM bankruptcies, that could create the “ugly” scenario that the Center for Automotive Research warned of, Wheaton said.

Tom Kelley, president of Fort Wayne-based Kelley Automotive Group, also thinks it’s unlikely the courts will stop a merger of Chrysler and Fiat. But he thinks that if the GM or Chrysler bankruptcy stretches out, the results won’t be as dire as the Center for Automotive Research warned.

“I think that’s unreasonable,” he said of the carmakers losing 90 percent of their sales.

mschladen@jg.net

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