Why Chrysler needs to declare bankruptcy

By Felix Salmon
April 24, 2009

If Chrysler does come to some kind of agreement with its banks — which is by no means a foregone conclusion — then why would it still want to declare bankrutpcy next week? The WSJ gets half of the story when it says that bankruptcy “would let Fiat pick and choose which operations it wants”, but then goes and confuses matters by saying that Fiat is interested in Chrysler “in its totality.”

The answer is that it’s all about the dealers — which are the reason why I said GM should declare bankruptcy as long ago as last July. Detroit is hobbled greatly by its legacy contracts with its dealers, and bankruptcy is the only way of getting out of those contracts. In many ways, I suspect that the dealers have the most to lose from bankruptcy proceedings. Lucky they don’t have a particularly strong and unified lobby, I guess.

Update: Jeffrey Cane, who knows everything, tells me that Chrysler can only file for bankrupcy. It can’t declare bankrutpy, only a judge can do that.

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