Chrysler lenders face backlash, tough fight

DETROIT (Reuters) - The deal that could have saved Chrysler LLC fell apart over the objections of a handful of fund managers and touched off an immediate debate over the responsibility of investors and the role of government.

The 20 or so funds that balked at the terms of a government-brokered deal to cut Chrysler's $6.9 billion in debt were blamed by critics -- including U.S. President Barack Obama -- for pushing the U.S. automaker into bankruptcy on Thursday.

Now, the funds face a tough fight in bankruptcy court and the court of public opinion.

In a televised appearance from the White House, Obama termed the dissenting Chrysler debtholders "speculators" who had endangered the automaker's future by holding out.

"I don't stand with those who held out when everybody else is making sacrifices. That's why I'm supporting Chrysler's plan to use our bankruptcy laws to clear away its remaining obligations," Obama said.

Michigan Governor Jennifer Granholm vowed the three fund management firms whose opposition to the Chrysler deal was made public -- Oppenheimer Funds, Perrella Weinberg Partners and Stairway Capital -- would not get any state business.

Other states with significant auto-related business were considering similar moves.

One of the holdout creditors, Perella Weinberg, switched sides on Thursday, saying it had concluded the Treasury's offer was "in the best interests of all Chrysler stakeholders, and our own investors and partners."

The funds said in a joint statement they were being vilified for trying to protect the interests of their own investors, including unions and pension and retirement plans.

NEXT STOP: BANKRUPTCY COURT

The next showdown will be in bankruptcy court where Chrysler and U.S. officials will ask a judge to force dissenting creditors to accept the same $2 billion offer that institutions holding 70 percent of its debt have approved.

Since the beginning of negotiations with U.S. officials earlier this month, Chrysler creditors objected to what many saw as the Obama administration's determination to tip the restructuring to benefit the United Auto Workers union.

The UAW ranks as an unsecured creditor for the $10.6 billion Chrysler owes to a retiree health care fund, but the union fund will be given 55-percent of the restructured company and 50-percent payout in cash.

Secured creditors, who have the first claim on Chrysler's assets, objected to their lower payout and campaigned in vain for equity and a seat on the new company's board.

An Obama administration official said the task force had to accommodate the UAW. "You have to remember we need the workers to come to work every day," the official said.

But others agreed with the criticism that the Obama administration was trying to subvert long-held principles of corporate restructuring and legal precedents.

Peter Kaufman, head of restructuring at the Gordian Group said the proposed deal would become the poster child for how to "abuse" a certain section of the bankruptcy code."

"Some judge somewhere along the way is going to stand up for the rule of law," Kaufman said. "The government is preferring the unions and employees over secured creditors."

NO UNITED FRONT IN TALKS

From the start, the Chrysler debt talks were hindered by the diverging interests of the 46 lenders and the fact that the four banks, who hold about $4.5 billion of debt, took charge of negotiations, sources familiar with the negotiation said.

The banks -- JPMorgan Chase & Co, Goldman Sachs Group Inc, Morgan Stanley and Citigroup Inc -- agreed to a $2 billion cash offer to extinguish Chrysler's debt late Monday, the people briefed on the talks said.

The banks took the offer on Tuesday to the other creditors in an effort to get broad support for the deal, one source with direct knowledge of the closed-door discussions said.

Elliott Management, one of the funds on the lenders' steering committee, voted in favor of the deal, but other fund management companies rejected it, the source said.

That dissident group of about 20 lenders, who hold about $1 billion in Chrysler debt, said they had been "systematically precluded" from negotiations with the government."

"We have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds," the funds said in a statement.

The four main Chrysler banks have received about $90 billion in funds from the government's bank bailout program.

In a final, sweetened offer on Wednesday, U.S. officials offered Chrysler lenders $2.25 billion in cash and delivered an ultimatum: take the offer or take your chances in court.

Rep. Gary Peters, a Michigan Democrat whose district is home to Chrysler's headquarters, said the effort to win over the dissenting creditors continued into Thursday.

"They could have taken the offer even early as this morning prior to the president's announcement," Peters said. "There was no shortage of opportunities. But they were still unwilling to move."

(Additional reporting by Emily Chasan, Michael Strong, Joe Giannone, Karen Pierog; Editing Bernard Orr)