By Brady Dennis, Tomoeh Murakami Tse and Kendra Marr
Washington Post Staff Writers
Thursday, April 30, 2009 2:49 PM

Chrysler, the country's third-largest auto company, filed today for Chapter 11 bankruptcy protection under a plan that President Obama said will give the troubled automaker "a new lease on life."

"I have every confidence that Chrysler will emerge from this process stronger and more competitive," Obama said at a noon press conference, adding, "This is not a sign of weakness, but rather one more step on a clearly charted path toward Chrysler's revival."

Chrysler, one of the three pillars of the American auto industry, filed for bankruptcy this afternoon after last-minute negotiations between the government and the automaker's creditors broke down yesterday. U.S. officials had offered Chrysler's secured lenders $2.25 billion in cash if they would agree to writedown the $6.9 billion in secured debt that the company owed. But a small group of hedge funds refused the 11th-hour deal.

An administration official this morning expressed disappointment, saying the holdouts had failed to "do the right thing," but that "their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders, nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward."

"I don't stand with those who held out when everybody else is making sacrifices," Obama said at the White House today.

Shortly before the president's remarks, a group claiming to represent the holdouts on the deal released a statement claiming that they had been "systematically precluded" from direct negotiations with the government in favor of creditors who had previously received assistance from the government.

Chrysler chief executive Robert Nardelli announced today that he will return to Cerberus Capital Management as an adviser.

"Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat," said Nardelli in a statement. "I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance."

The company's bankruptcy filing, and the U.S. government's attempt to save it, amounts to another extraordinary intervention in the economy and a landmark event in the history of the American auto industry.

Under the administration's detailed plan for a "surgical bankruptcy," ownership of Chrysler would be dramatically reorganized, the leadership of Italian automaker Fiat would take over company management and the U.S. and Canadian governments would contribute more than $10 billion in additional funding.

Company and government officials had feared that a bankruptcy would stain the brand, shake customer confidence and erode sales, but the administration said it would seek to use the process to create a new Chrysler company. Its ownership would be divided, with the company's union retiree health fund receiving a 55 percent stake, Fiat would claim as much as a 35 percent share and the United States would take 8 percent. The Canadian government would receive two percent.

The automaker's current majority owner, the private-equity firm Cerberus Capital Management, would have its holdings wiped out.

During the bankruptcy, the governments would provide $4.5 billion in new funds, with 80 percent coming from the United States and 20 percent from Canada, which hosts a number of Chrysler operations. As the company emerged from its reorganization, the United States and Canada would provide another $5.63 billion, the sources said. The U.S. funds come from the government's Troubled Assets Relief Program.

The U.S. and Canada would be given the highest priority among Chrysler's creditors after the company emerges from bankruptcy.

Particularly striking to some economists and historians is that the plan turns over ownership of a major U.S. industrial company to an employee-run trust, a deal that is "unprecedented on this scale," according to Harley Shaiken, a University of California at Berkeley professor and expert on unions.

The government plan also calls for ensuring that Chrysler maintains substantial U.S. manufacturing operations. It requires that at least 40 percent of company sales volumes remain manufactured domestically, or for the company's total production in this country to remain at least at 90 percent of its U.S. production last year.

"Anyway you cut it, the union is going to be a major presence at the company," Shaiken said.

One key issue, however, will be who appoints the restructured Chrysler's board of directors.

The government's bankruptcy plan envisions a company with nine board seats, three of them appointed by Fiat. It does not specify who would appoint the rest.

In April, Nardelli sent a letter to employees indicating that the U.S. government would play a key role.

"Upon successful completion of the alliance, a board of directors for Chrysler will be appointed by the U.S. government and Fiat," he wrote. "The majority of the directors will be independent (not employees of Chrysler or Fiat)."

Fiat intends to form an alliance with Chrysler even as the company goes into bankruptcy. While four of Chrysler's major creditors -- J.P. Morgan Chase, Citigroup, Goldman Sachs and Morgan Stanley -- had agreed to the Treasury's last-ditch effort to help Chrysler avoid bankruptcy, other lenders, mainly hedge funds, had held out. The holdouts included Oppenheimer Funds, Perella Weinberg Partners and Stairway Capital, two sources said. The last two have funds that invest in "distressed" companies. It is not known which companies ultimately failed to reach agreement with the government.

Today, a group of about 20 firms who declined to go along with the deal to save Chrsyler from bankruptcy released a statement claiming that the proposal to keep the automaker out of bankruptcy was unfair.

The group, which does not identify its members but sources said includes Perella Weinberg, Stairway Capital and OppenheimerFund, said they had been "systematically precluded" from engaging in direct negotiations with the government, which they said had been largely done by four large banks that own 70 percent of the $6.9 billion in loans. Goldman Sachs, Citigroup, JPMorgan and Morgan Stanley had all agreed to the government's offer of $2.25 billion, or 33 cents on the dollar, for the loans.

"We have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds," the lenders who rejected the government offer said.

The holdout lenders -- who said their combined debt holding represents about $1 billion of the $6.9 billion owed to senior secured lenders -- struck back at comments from an unnamed administration official this morning that blamed them for causing the imminent bankruptcy. The group said they had offered to accept 60 cents on the dollar, despite "long recognized legal and business principles" that gives senior lenders such as themselves the right to be repaid in full before others recover anything in bankruptcy court.

"Our offer has been flatly rejected or ignored," the group said. "In its earnest effort to ensure the survival of Chrysler and the well being of the company's employees, the government has risked overturning the rule of law and practices that have governed our world-leading bankruptcy code for decades."

be inevitable.

Bankruptcy enables a company to shed some debt and other obligations, and a court could force the recalcitrant hedge funds to accept the deal that the large banks have.

The court proceedings could also help the company cut the costs of closing some of its 3,200 Chrysler, Jeep and Dodge dealerships. Because some state franchise laws prevent automakers from forcing dealers to close, it can be expensive to buy them out.

Staff writers David Cho, Peter Whoriskey and Steven Mufson contributed to this report.