Whirlwind auto deals raise conflict questions

By Jui Chakravorty Das and Kevin Krolicki

NEW YORK (Reuters) - The Obama administration's dash through the bankruptcies for General Motors Corp GMGMQ.PK and Chrysler is nearly done, but the debate about the government's conflicted role in reshaping the American auto industry has only just begun.

While the administration has been praised for its rapid reorganizations of GM and Chrysler, it has also been blamed for placing itself and its officials in situations with conflicts of interest.

The U.S. government stepped in to save GM by becoming its largest creditor and majority investor, positions that inevitably clashed with its role as regulator and referee of its pending deals with outside investors.

"Whenever you have a group that is regulator, owner and funder, there is a massive conflict of interest," said David Logan, associate dean at the University of Southern California's Marshall School of Business.

One of the most controversial moves came when the White House-appointed task force pushed Chrysler's secured lenders to accept 29 cents on the dollar owed for $6.9 billion in loans.

It did so by negotiating first with a group of banks led by JPMorgan Chase & Co (JPM.N). Banks in the group had received federal bailout money under the Troubled Asset Relief Program, prompting criticism the U.S. Treasury Department had wielded undue leverage to get the banks to accept a low payout for the debt.

That drew a complaint from hedge funds that also held Chrysler secured debt.

"I'm sure in the fullness of time we'll all look back and think of things that might have been done differently, or perhaps should have been done differently," Steve Rattner, head of the autos task force, said this week.

"These were tough, tough choices and we still have some in front of us and we're making them as best we can," he said.

GM's proposed deal to sell the Hummer brand to China's Sichuan Tengzhong Heavy Industrial Machinery Co could be one of those tough choices.

Some bankers say the deal might need approval from the U.S. Committee on Foreign Investments because of the indirect military links on both sides. If it does, the deal would go for review to a group chaired by the U.S. Treasury, the same arm of the U.S. government that owns 60 percent of GM.

PLUGGING THE DELPHI DRAIN

Over the past four years, GM has lost $82 billion. It has been kept in operation since the start of the year with $60 billion in funding from the United States and Canada.

As its crisis deepened, GM's fate also became intertwined with that of its bankrupt former subsidiary Delphi Corp (DPHIQ.PK).

It spun off the auto parts supplier in 1999 but has been hurt by Delphi's cash-draining bankruptcy for the past four years because it still relies on the company for key parts.