Chrysler succumbs to bankruptcy after struggle
After months of struggling to stay alive on government loans, Chrysler finally succumbed to bankruptcy Thursday, pinning its future on a top-to-bottom reorganization and plans to build cleaner cars through an alliance with Italian automaker Fiat.
The nation’s third-largest car manufacturer filed for Chapter 11 bankruptcy protection in New York after a group of creditors defied government pressure to wipe out Chrysler’s debt. The company plans to emerge in as little as 30 days as a leaner, more nimble company, probably with Fiat as the majority owner. In return, the federal government agreed to give Chrysler up to $8 billion in additional aid and to back its warranties.
“It’s a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry,” President Barack Obama said from the White House.
Chrysler said it will close all its plants starting Monday and they will stay closed until the company comes out of bankruptcy. At least three Detroit-area factories sent workers home Thursday after suppliers stopped shipping parts over fears they would not be paid.
CEO Robert Nardelli announced he would step down when the bankruptcy is complete and take a post as an adviser with Cerberus Capital Management LP, which will give up its 80 percent ownership of Chrysler under the automaker’s plan. Vice Chairman Tom LaSorda, who once ran the company when it was owned by the German automaker Daimler, said he would retire.
“A lot of us are scared,” said Steve Grabowski, 33, who has worked at a Warren, Mich., parts stamping plant for seven years and was sent home Thursday. “We knew something like this was going to happen, but we didn’t think it would be so soon.”
Chrysler’s bankruptcy filing is the latest step in a drastic reordering of the American auto industry, which has been crushed by higher fuel prices, the recession and customer tastes that are moving away from the gas-guzzling SUVs that were once big money makers.
Lee Iacocca, the retired chairman and CEO who led Chrysler through a government bailout in the late 1970s, said it was a sad day.
“It pains me to see my old company, which has meant so much to America, on the ropes,” he said in a written statement. “But Chrysler has been in trouble before, and we got through it, and I believe they can do it again.”
The government has sunk about $25 billion in aid into Chrysler and rival General Motors Corp.
GM faces its own day of reckoning on June 1, a date the administration has set for it to come up with its own restructuring plan. GM has announced thousands of job cuts, plans to idle factories for weeks this summer and has even offered the federal government a majority stake in the company as it races to meet the deadline.
Like at Chrysler, debt may be the stumbling block. GM has asked its unsecured bondholders to exchange $27 billion of debt for a 10 percent stake in the automaker. The creditors balked, saying that would leave them with just pennies on the dollar and they deserve a majority stake if they give up their claims.
When Chrysler emerges from bankruptcy, the United Auto Workers union will own 55 percent of the automaker and the U.S. government will own 8 percent. The Canadian and Ontario governments, which are also contributing financing, would share a 2 percent stake.
Under the deal, Chrysler would gain access to Fiat’s expertise in small, fuel-efficient vehicles. The U.S. automaker eventually wants to build cars that could get up to 40 mpg, far more economical than its current fleet focused on minivans, Jeep SUVs and the Dodge Ram pickup.
In exchange, Fiat would initially get 20 percent of the company, but its share could rise to 35 percent if certain benchmarks are met, and Fiat said Thursday it could get an additional 16 percent by 2016 if Chrysler’s U.S. government loans are fully repaid. Fiat would also get access to the North American market through Chrysler factories and dealerships.
Fiat CEO Sergio Marchionne said he planned to spend time meeting Chrysler employees and touring its plants over the next few weeks.
He said Fiat was preparing for Chrysler to “re-emerge quickly as a reliable and competitive automaker.” Fiat also plans to reintroduce brands like Alfa Romeo in North American markets.
First, though, bankruptcy court Judge Arthur Gonzalez will have to sort out the issue of Chrysler’s creditors, who hold $6.9 billion of the company’s debt. The company’s first hearing is set for Friday.
The Treasury Department’s auto task force had been racing for the past week to clear the hurdles that led the government to reject Chrysler’s initial survival plan one month ago. Along with the Fiat deal, Chrysler adopted a cost-cutting pact with the UAW on Wednesday.
Four of the largest banks holding 70 percent of Chrysler’s debt agreed this week to a deal that would give them $2 billion. But a collection of hedge funds refused to budge, saying the deal was unfair and would only return a small fraction of their holdings.
When the hedge funds refused a sweetened offer Wednesday, Chrysler and the government resorted to bankruptcy.
Obama chastised the funds for seeking an “unjustified taxpayer-funded bailout.”
One lender, OppenheimerFunds Inc., said it rejected the government offer because it “unfairly asked our fund shareholders to make financial sacrifices greater than the sacrifices being made by unsecured creditors.”
Later Thursday, one of the hedge funds that had been a holdout issued a statement agreeing to the offer.
“We believe that this is in the best interests of all Chrysler stakeholders, and our own investors and partners,” said the statement from Perella Weinberg Partners. The fund said it was working “to encourage broad participation in the settlement.”
The White House said Chrysler could comes out of “surgical” bankruptcy in 30 to 60 days. Under normal circumstances, it would be difficult to complete such a large bankruptcy so quickly.
But John Pottow, a University of Michigan professor who specializes in bankruptcy, said the government’s level of involvement is much greater than a typical corporate bankruptcy.
“If you have the president of the United States who wants something to happen, I think anything’s possible in bankruptcy protection,” he said.
The Fiat deal and bankruptcy cap a disastrous time for Chrysler.
The Auburn Hills, Mich.-based company lost $8 billion last year and its sales through March were down 46 percent compared with the same period last year, leading some auto industry analysts to question whether Chrysler can survive even in bankruptcy.
But company executives told reporters Thursday that Chrysler vehicles with Fiat’s fuel-efficient technology should reach showrooms in 18 months.
Vice Chairman Jim Press said Chrysler has cut expenses to operate profitably at a lower sales volume, and he said it would be able to take advantage of Fiat’s distribution network to sell more vehicles globally.
Also, the company has new products coming out such as the new Jeep Grand Cherokee, which debuts in early 2011.
Press said the company predicts that small-car sales will rise dramatically around the time the Fiat products hit the U.S. market.
“The real volume pickup opportunity for smaller cars is going to start to ramp up about two years from now,” he said.
Despite the turmoil with Chrysler and GM’s looming deadline, Obama urged consumers to keep buying cars.
“If you are considering buying a car, I hope it will be an American car,” he said.
Passing police officer caught Jesse James after robbing the First Fidelity Bank on this morning.
A man with the same name as the famous outlaw, Jesse James, was caught robbing the bank this morning. James was backing out the bank with $20 thousand dollars as a police man happened to be passing by. The same bank was robbed one hundred years earlier by the famous James brothers and they were also caught.
“Jesse James was my great-uncle. I was just trying to finish the job he started,” Said the suspect.
By JOHN PORRETTO AP Energy Writer
Exxon Mobil Corp. said Thursday first-quarter earnings fell 58 percent from a year ago, its lowest profit in more than five years.
The quarterly profit also fell short of Wall Street expectations and company shares fell 3 percent.
Exxon Mobil, based in Irving, Texas, said earnings for the first three months of the year came to $4.6 billion, or 92 cents a share, down from $10.9 billion, or $2.02 a share, a year ago. On average, analysts polled by Thomson Reuters were looking for net income of 95 cents a share.
The last time Exxon had lower earnings was the third quarter of 2003, when its net income was $3.65 billion.
Revenue tumbled 45 percent to $64 billion from $116.9 billion a year ago. Analysts, on average, had forecast revenue of about $54 billion.
Yet even as many producers postpone or even cancel some oil and gas projects, Exxon increased capital spending in the first quarter by 5 percent from a year ago, evidence of its strong balance sheet. Exxon has said its capital spending this year is expected to reach $29 billion, up from $26.1 billion in 2008.
“In spite of the dramatic changes to the global economic environment, Exxon Mobil is maintaining its long-term focus and disciplined approach to capital investment,” Rex Tillerson, the company’s chairman and chief executive, said in a statement.
Exxon also spent $7.9 billion buying back its own shares during the quarter.
The profit falloff was no surprise given the steep drop in oil and natural gas prices from a year ago. This time last year crude was in the triple digits, in the midst of a historic ride to almost $150 a barrel. But prices spent the rest of the year retreating and have hovered around $50 a barrel since March.
Still, anytime Exxon Mobil reports such a big profit decline, it’s likely to prompt a double-take. Just three months ago, it posted a $45.2 billion profit for all of 2008, breaking its own earnings record for a U.S. company.
The oil giant, which replaced Wal-Mart atop the 2009 Fortune 500 list of largest U.S. companies, has made a habit of setting quarterly and annual profit marks in the past few years amid rising commodity prices.
It’s a different story these days.
Exxon, which pumps 3 percent of the world’s oil, said earnings at its exploration and production, or upstream, business fell 60 percent to $3.5 billion. The company said lower crude prices reduced earnings by about $4.4 billion, while falling natural gas prices lowered results by about $500 million.
Overall production was roughly flat from a year ago.
On the refining and marketing side, earnings were down about 8 percent from a year ago to $1.1 billion. The company said it was hurt in part by lower volumes and higher operating expenses, although margins improved.
Exxon wasn’t alone reporting sharply lower year-over-year profits among major oil companies. The numbers were even uglier for ConocoPhillips (down 80 percent) and Europe’s BP PLC and Royal Dutch Shell PLC (both down 62 percent.) Chevron Corp., the No. 2 U.S. oil company behind Exxon, is scheduled to report earnings Friday.
Also Thursday, Marathon Oil Corp., the fourth-largest U.S. integrated oil company, said its profits for the first three months of 2009 fell 61 percent.
Exxon shares fell $2.17 to $66.27 on Thursday.
Consumer dips, unemployment up
By JEANNINE AVERSA AP Economics Writer
Americans spent less than expected in March, pulling back after a burst of buying in the first two months of the year. The reversal was tied to a larger-than-anticipated decline in income and is a stark reminder of a fragile economy trying to rise out of a deep recession.
The Commerce Department data released Thursday highlighted one of the big wild cards for the economy: consumers’ appetite to spend in the months ahead.
The outcome will be determined in part by how much the tax rebates in President Barack Obama’s economic stimulus package and historically low mortgage rates mitigate the financial pain caused by rising unemployment and falling home values.
Consumer spending fell 0.2 percent in March, ending an otherwise strong quarter for spending on a sour note. Americans’ incomes — the fuel for future spending — tumbled 0.3 percent for the month, reflecting wage cuts and layoffs as employers cut costs. Both the income and spending figures were weaker than economists had expected.
“Consumption fell in March, but let’s not panic a whole lot,” said Joel Naroff, president of Naroff Economic Advisors. “The modest drop off in spending does not change the fact that individuals are starting to buy more things and are attempting to live their lives a little more normally.”
Consumer spending grew at an annualized rate of 2.2 percent in the first quarter, the government said Wednesday in reporting on the nation’s gross domestic product. (Thursday’s spending figure was included in the GDP estimate.)
The first-quarter rebound came after consumers had gone into a deep hibernation at the end of 2008, slashing spending by the most in 28 years. Many analysts say the worst of the recession is over in terms of lost economic growth, but caution pain in the labor market and elsewhere will persist well into next year or longer.
The revival in consumer spending in the first quarter was overwhelmed by big cutbacks by businesses, causing the economy to contract by a sharp 6.1 percent.
On Wall Street, the Dow Jones industrial average gave up earlier gains after Obama confirmed that Chrysler LLC was filing for bankruptcy protection. The Dow, which had been up more than 110 points earlier in the day, lost nearly 18 points to close at 8,168.12.
Christina Romer, chair of Obama’s Council of Economic Advisers, predicted another economic contraction in the second quarter albeit at a slower pace and delivered a downbeat assessment about unemployment. “The recovery will almost surely take a long time,” she said.
Analysts are hopeful the recession is easing its firm hold in the April-June quarter.
They predict the economy won’t contract nearly as much — anywhere from a 1 to 3 percent pace. They expect the improvement will come from less severe cutbacks by businesses and a rebound in government spending.
“Business spending will be down but not as fast and furious as it has been,” said Stuart Hoffman, chief economist at PNC Financial Services Group.
Consumers, meanwhile, are likely to show far less energy than they did in the first quarter. Some analysts expect a small gain in spending, while others think it will be flat.
What is not expected: the “horrors again” of the type of deep consumer spending cuts seen in the final quarter of last year, said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
As consumers cut back in March, the personal savings rate rose to 4.2 percent, from 4 percent in February. It stood at 4.4 percent in January, the first time in more than a decade the rate has been above 4 percent for three straight months.
Procter & Gamble Co., the world’s largest consumer products maker, on Thursday reported a dip in its quarterly profit and trimmed its full-year outlook, expecting slow sales through June. P&G has been promoting Tide detergent, Pampers diapers and its other products by emphasizing their value to consumers and cutting costs, but sales fell across its broad portfolio.
In one encouraging sign, the number of newly laid off workers filing for jobless benefits dropped last week.
The Labor Department reported that new applications for unemployment insurance fell to a seasonally adjusted 631,000, from 645,000. Economists had expected a small increase.
The four-week moving average of initial jobless claims, which smooths out volatility, dropped last week to 637,250. That was the lowest level since late February and a decrease of about 20,000 from the high in early April. Goldman Sachs economists have said a decline of 30,000 to 40,000 in the four-week average is needed to signal a peak.
Still, the number of people continuing to draw unemployment benefits jumped to more than 6.27 million, the highest on records dating back to 1967. That was steeper than economists expected and a 13th straight record-high. It suggested that many laid-off workers are having trouble finding new jobs.
As a proportion of the work force, the total jobless benefit rolls are the highest since late December 1982. The continuing claims data lag initial claims data by a week.
Besides the continued claims, the report said there were 2.4 million people receiving benefits, as of April 11, under an extended unemployment compensation program enacted by Congress last year. That provides an additional 20 to 33 weeks on top of the 26 weeks typically provided by states.
Another report showed that the recession is making employers more frugal when it comes to workers’ compensation packages. U.S. workers’ wages and benefits inched up just 0.3 percent in the first quarter of this year, the smallest gain on records dating back to 1982.
Workers and companies have been hard hit by the recession, which began in December 2007. It has snatched 5.1 million jobs and pushed the unemployment rate to a quarter-century high of 8.5 percent. It is expected to top 10 percent by early next year before it starts to slowly drift downward.
Associated Press writers Martin Crutsinger and Jim Kuhnhenn contributed to this report.
Texas taxpayers may have to pay $6 billion for power-lines to connect wind-turbines to the state power grid.
By R.A. DYER
Star-Telegram Staff Writer
AUSTIN — Texas ratepayers could be on the hook for $3 billion to $6.4 billion to build new transmission lines so wind-power turbines can connect to the state power grid, according to preliminary estimates released Wednesday.
The eye-popping cost projections by operators of the Texas power grid could equate to as much as $320 for every man, woman and child getting power from the grid, although the impact on individual bills remains unclear.
The money would be used to build lines that theoretically would encourage more wind-power development in the Panhandle and West Texas.
Wind-power advocates say the potential expense could be a bargain, saying that besides leading to cleaner air, the expensive new transmission lines will pay for themselves because of the zero fuel costs associated with wind power.
“There is no question that adding more wind energy to the grid will reduce the overall cost of energy to ratepayers, particularly as fossil-fuel prices increase,” said Ned Ross, director of regulatory affairs for FPL Energy, the state’s largest wind-energy provider.
But skeptics say consumers should watch their pocketbooks. They say that the giant price tag will get coupled with additional hidden costs and that much of the benefit from lower fuel costs will go to energy companies and not ratepayers.
“Anytime you’re spending several billion dollars, that should be cause for concern for consumers,” said Thomas Brocato, an attorney representing Fort Worth and other North Texas municipalities in utility matters.
Landowners could also lose thousands of miles of property through eminent-domain proceedings.
The projected expenditures are largely associated with the legal and regulatory cost of acquiring such right of way, along with the price of the big latticework transmission towers and wires needed to move power from the far reaches of the state.
The new cost estimates were released Wednesday as part of an extensive study on wind power by the Electric Reliability Council of Texas, the quasi-governmental organization that operates the state’s power grid. ERCOT conducted the study as part of its implementation of Senate Bill 20, a 2005 law calling for special zones where the construction of transmission lines would potentially encourage wind-power development.
The ERCOT study describes five different scenarios and outlines the cost of construction within each scenario.
It also examines the potential location of new lines and spells out other engineering and technical details.
The study now goes to the Public Utility Commission, which will select a scenario within months and then sign off on a transmission construction plan within about a year, a spokesman said.
The price tags for the five scenarios are $2.95 billion, $3.78 billion, $4.83 billion, $5.46 billion and $6.38 billion.
The costs would be divided up among all ratepayers in ERCOT through a fee attached to bills and paid off over several years.
The least-expensive scenario could lead to 5,150 megawatts of additional wind power and would require about 1,600 miles of new transmission lines.
A single megawatt provides enough power for 500 to 700 households under typical operating conditions.
The most-expensive plan could be sufficient for 17,956 additional megawatts and require more than 3,000 miles of new transmission lines.
Public Utility Commission spokesman Terry Hadley said the agency’s three commissioners will try to ensure that ratepayers get a good deal. He said the transmission construction could be complete within about five years.
“The commission will most likely begin reviewing this at their open meeting next week, and the cost is a large concern,” Hadley said.
Wind-power advocates say the new transmission lines could pay for themselves because the cheaper wind power will replace more expensive power generated by fossil fuels. Ross of FPL Energy also said that the new transmission lines will serve other electric generators besides wind and that the state needs to invest in new lines to serve its growing population.
But critics have raised war- ning flags, noting that no state agency has undertaken an overall review of the relative merits and costs of pursuing alternative clean-air strategies.
Jeff Pollock, an expert testifying on behalf of a group of Texas industrial customers, told the PUC earlier that “what is known is higher transmission and [other] charges associated with new wind generation will increase the electricity costs paid by all consumers.”
With almost 5,000 megawatts of existing generation, Texas leads the nation in wind power. ERCOT said wind generation would leap to 12,000 to 24,000 megawatts, depending upon which scenario the PUC selects.
However, because of the intermittent nature of wind, ERCOT depends on only about 8.7 percent of capacity when determining available power during summer peak hours.