Chrysler: No Roman Holiday Ahead

Chrysler: No Roman Holiday Ahead
The carmaker has 30 days to hammer out an alliance with Italy's Fiat. But owner Cerberus will lose in any case, and skeptics predict bankruptcy

General Motors (GM) lost its CEO on Mar. 29 as the price for a continued government lifeline. A day later, it became clear what Chrysler's owner, Cerberus Capital Management, will give up: its 80% equity stake in the carmaker.
Chrysler has 30 days to cut a deal with Italian automaker Fiat (FIA.MI). The Obama White House said on Mar. 30 it has determined that Chrysler's only avenue of survival is though an alliance with another automaker. Under any rescue plan, an Administration official said, Cerberus will have to forfeit its Chrysler stock, though it will retain control of Chrysler Financial, the carmaker's finance arm.
The White House auto industry task force said Chrysler's restructuring plan submitted in February failed to convince the panel that it can be a standalone company. If Chrysler cannot strike deals with banks, which hold $6.8 billion in secured debt, and the United Auto Workers union, which is owed $8.8 billion for future health-care obligations, and reach an alliance with Fiat, the U.S. Treasury will cut off Chrysler's financial support.
Jeep, Dodge Ram Are Valuable Assets
The automaker would then most likely enter Chapter 11 bankruptcy, with its more valuable parts being sold off. Most analysts agree that Chrysler's Jeep brand, its Dodge Ram pickup, and its minivan business are the most valuable assets aside from the book of auto loans at Chrysler Financial.
If Chrysler management and Cerberus can satisfy the White House auto task force in 30 days that creditors, the union, and dealers have agreed to adequate concessions, the government will grant $6 billion more in loans. That would help the automaker realize its alliance with Fiat and thus, the theory goes, save tens of thousands of jobs at Chrysler and its suppliers.
Chrysler CEO Robert Nardelli said Mar. 30 that the company had advanced with Fiat to a formal agreement, and that the company is progressing to something that will meet White House approval. In a prepared statement, Nardelli said: "By providing Chrysler with product and platforms, technology cooperation, and global distribution, Fiat strengthens Chrysler's ability to create and preserve U.S. jobs; gives U.S. consumers more choices for environmentally advanced vehicles; gives its dealers more of the products they need to be successful; helps stabilize the supplier base; and allows Chrysler to pay back government loans sooner."
No Consumer Reports Cars
That may be too rosy a scenario, though. In its refusal of Chrysler's existing restructuring application, the Obama task force noted the company's woeful record for product quality, as measured by J.D. Power & Associates and Consumer Reports. The Obama team also pointed to Chrysler's heavy spending on incentives to move unpopular vehicles and its lack of flexible manufacturing plants.
"While the company has made meaningful changes to its cost structure in the last few years, the combination of a fundamentally disadvantaged operating structure and a limited set of desirable products make standalone viability for the business highly challenging," the White House report said.
Chrysler received a $4 billion federal loan in December and was seeking $5 billion more. The Treasury Dept. will float an additional unspecified sum to Chrysler in the next 30 days to keep it operating until the final decision over more funding is made on Apr. 30.

Bankruptcy Is a Bargaining Chip
The threat of bankruptcy and the White House's clear willingness to allow Chrysler to fail may bring banks and the union to the negotiating table to take a haircut on Chrysler's debts. "There is a lot of unknown risk in what they will get in the kind of bankruptcy being contemplated," says bankruptcy attorney Douglas Bernstein of law firm Plunkett Cooney.
In Chapter 11, the government, bank creditors, and the union would all wind up with much less than what the automaker owes today.
Fiat so far has not pledged any funding to Chrysler, nor is it positioning itself to be responsible for any of the company's debts. Instead, it is looking to barter the transfer of small-car technology to Chrysler in exchange for an equity stake.
Fiat Brings Small Cars
The White House said Monday it has hopes for a Fiat agreement to preserve jobs, but it is demanding changes to the original deal the two companies cut. According to executives familiar with the negotiations, Fiat's stake could be as low as 20%, down from a initial share of 35%, possibly rising to 55% down the road. But before Fiat would be allowed to increase its stake, Chrysler would first have to pay back U.S. bailout money.
Fiat would bring small cars like the Fiat 500, small-car engineering platforms, and a family of small engines to Chrysler that will help the automaker meet stricter fuel-economy regulations. Chrysler's Nardelli says the technology it will receive is worth $8 billion to $10 billion. Chrysler is top-heavy with trucks and sport-utility vehicles, and hasn't the money to develop enough small cars on its own to meet the new standards.
But while Chrysler's Nardelli and Fiat CEO Sergio Marchione have been talking about enormous synergies from Fiat leveraging Chrysler's distribution network, and Chrysler getting Fiat's small-car and engine technology, success does not live on paper. There were to be enormous synergies between Mercedes-Benz and Chrysler after Daimler-Benz purchased Chrysler in 1998. The clashing cultures of two very different companies made that impossible.
"Fiat in a Dodge Blanket"
Indeed, there are plenty of skeptics who doubt that a Fiat alliance will be enough to make Chrysler a viable standalone company. "Fiat has small cars that Americans were interested in when gas prices were high, but right now there is limited demand for these cars," says Jeremy Anwyl, CEO of Edmunds.com, the automotive research Web site.
Fiat has little name recognition in the U.S., notes auto industry consultant Daniel Gorrell of AutoStrategem of Tustin, Calif.
"We have seen these sharing ventures before, and consumers have been very cool to vehicles that are built and or designed by one company and sold by another," says independent marketing consultant Dennis Keene. "How many car buyers are apt to pass up Toyotas, Hondas, Fords, and Chevys to buy a Fiat wrapped up in a Dodge blanket?"

Asking for Student Loan Forgiveness

Asking for Student Loan Forgiveness

Robert Applebaum's Facebook group and StudentLoanJustice.org are among those seeking an overhaul of the U.S. student loan system

In just two short months, Robert Applebaum has become something of a spokesman for a generation of people burdened with student loan debt. Applebaum, a 35-year-old attorney in New York, started a Facebook group in January called "Cancel Student Loan Debt to Stimulate the Economy," fed up with news reports about bank executives spending millions to redecorate their offices and receiving hefty bonuses. "I wanted to rant, so instead of sending an e-mail to a couple of my friends, I decided to start a Facebook group," says Applebaum, who finished law school owing $80,000 in student loans. "I figured maybe just a few of my friends would join."
He was wrong. By the end of the second week 2,500 people had joined, and the group now has more than 138,500 members, many of whom are pressing their representatives in Congress for legislation that would forgive student loan debt. "It's just snowballed," says Applebaum.
Student loan repayment can be difficult for young people starting off their careers and has become even more challenging now with the economic downturn, as recent graduates lose their jobs or struggle to land one. Groups like Applebaum's on Facebook, and other organizations such as StudentLoanJustice.org, are part of a new movement advocating for an overhaul of the country's troubled student loan system. Frustrated with often unaffordable monthly payments, loans that are nearly impossible to discharge, and restrictive loan repayment plans, student borrowers are pushing the government and private loan companies to devise new solutions.
Assets of a Couch and a TV
"I think the economic crisis and the sort of clamor from borrowers like we see on that Facebook group should help make that case," says Edie Irons, a spokeswoman for the Project on Student Debt, a Berkeley (Calif.)-based nonprofit that raises awareness about student financial aid. "The size of the group really illustrates how concerned people are."
Applebaum, who graduated from Fordham Law School in 1998, took a job as an attorney at the Brooklyn District Attorney's Office after graduation, at a starting salary of $36,000 a year. His salary was so low that he put his loans in forbearance for five years, until they ballooned to $100,000. "Despite having a law degree, I'm middle class and I don't have any money at all," he says. "I don't own a house or a car. My only assets are my couch and television."
Applebaum is one of thousands of graduates struggling with the repercussions of student loans years after graduation. There were nearly $131 billion in outstanding private loans in 2008, according to Mark Kantrowitz, founder of FinAid.org, which tracks the college financial aid industry. In addition, there is $544 billion in outstanding federal loans for fiscal year 2009, up from $502 billion in 2008, according to the Education Dept.
Shackled by Student Loans
Meanwhile, the average debts of students graduating with loans rose from $18,796 in 2006 to $20,098 in 2007, according to the Project on Student Debt.
For some, the debt is unshakable. Mel Crow of American Fork, Utah, owes $60,000 in student loans from his days at the Academy of Art University in San Francisco. He has spent the last five years struggling to find a computer animation job in his field, with no luck. His parents had to refinance their home so he could consolidate his loans, and he now pays them $500 a month with the $10.50-per-hour he earns at a local cosmetic company. If he defaults on his loan, his parents will lose their home, Crow says. Meanwhile, he and his wife, an algebra teacher, are barely scraping by, living in the basement of her parents' home. Because of Crow's debt, he says the couple will have to delay buying a home and having kids for several years.

"Sometimes I think going to school is the worst single mistake I've ever made," says Crow, a member of Applebaum's Facebook group and the first in his family to attend college. "I could have worked at Wal-Mart (WMT) for four years and been in a better position than I am now. I feel like I'm almost a slave to this debt."
Signs of Change
Others, like Eric Zapata, an aircraft mechanic in California, say their student debt is a constant worry. Zapata owes about $48,000 in student loans and worries he won't be able to afford an engagement ring for his girlfriend. "I've been saving now for two years, but I haven't been able to get the ring yet," he says. "The $400 in monthly [debt] payments just kills me."
There are already some signs that change is on the way, at least for those with federal loans. The Income-Based Repayment plan, part of the College Cost Reduction and Access Act of 2007, will provide some relief to federal student loan borrowers when it goes into effect on July 1. The program will cap most borrowers' monthly payments at less than 10% of their gross income for 25 years, after which any remaining debt will be forgiven. Another program, the Public Service Loan Forgiveness, allows borrowers to make income-based repayments and have their debt discharged after 10 years. "These programs actually provide some major help now and in the immediate future," says Irons of the Project on Student Debt.
But the situation is not quite as rosy for private loan borrowers. Many of these debtors have been unable to meet their monthly payments, putting their loans in forbearance for several years or, in the worst-case scenario, defaulting on their loans. Making matters worse for private borrowers is a clause in the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act that included private student loans as one of 10 debts that can't be forgiven in bankruptcy cases.
Continuing the Fight
Alan Collinge, author of The Student Loan Scam and founder of StudentLoanJustice.org, has been a student loan activist for nearly four years. He is working to reverse the bankruptcy laws and establish limits on how lenders pursue borrowers. Collinge graduated with three degrees in aerospace engineering from the University of California several years ago and $38,000 in student debt, which he's still working to pay off. He's traveled around the country talking to elected officials and working to restore what he considers "basic consumer" rights. As of yet, he's had no luck, but he hasn't given up hope. "Until someone shows me why student loans should specifically be exempt from bankruptcy protections, it's definitely a fight worth fighting," he says.