The Administrations bankruptcy plan for Chrysler is a poor plan in a lot of respects. It will give the UAW, specifically the UAWs retirees health care fund, a sweet heart deal in a 55 % equity interest in the surviving Chrysler. This UAW arrangement as it stands now doesnt pass the smell test. The Administration is giving short shrift to a key issue in this case that will have long lasting reverberations throughout the nations economy and is a matter that Americas business leaders consider very serious. The Administration is poised with this Chrysler bankruptcy case to undermine a long standing principle of bankruptcy which is secured claims have priority in being paid in bankruptcy over unsecured claims. If the reliability of this principle is put in jeopardy, America very well may see lenders at times be hesitant to make loans to businesses even when businesses put up their assets as full collateral or the loans made will not have good terms for businesses thus weakening the U.S. economy. In the Chrysler case, the Administration is planning to put a non-secured claimant, the UAW retirees health-care fund, ahead of secured claimants, the lenders that hold $ 6.9 billion of loans backed with Chryslers assets as collateral. The UAW retirees healthcare fund is owed $ 10.6 billion, the Administration is proposing the surviving Chrysler give this UAW fund a promissory note for $ 4.6 billion payable over thirteen years with interest and as mentioned a 55 % interest in the surviving Chrysler (which essentially means the UAW is paying $ 6 billion for this 55 % equity interest). The Administration is proposing to give the 46 secured creditors $ 2.25 billion cash for their $ 6.9 billion claim essentially asking them to forgive $ 4.65 billion. The course the Administration should be taking with this bankruptcy case is make it clear in word and deed that the Administration is going to do right by the secured claimants in the Chrysler bankruptcy, more specifically, the Administration is going to see these secured claimants get their rightful due, that is, these secured claimants will get the amount of money they would get if the Chrysler bankruptcy was handled as a liquidation, all Chrysler assets with a security interest against them were sold and bankruptcy costs were deducted and the remaining balance given to the secured creditors.. This way there is no hurting the priority of secured creditors in bankruptcy issue. The Administration can make these secured creditors whole and do it in a way where they likely wont have to pay any more money than they were planning to pay with this Chrysler bankruptcy and do it in a fair manner by doing the following. As stated the UAW is getting a 55 % equity interest for a $ 6 billion claim. It doesnt matter how many stocks are issued in the entirety to all the owners of the surviving Chrysler because whatever this number ends up being the UAW gets 55 % of this number. The plan is to give the secured creditors $ 2.25 billion cash for their claim, to give these secured creditors their full legal due they would have to be given this liquidation amount (described earlier) minus this $2.25 billion. How does the administration get them this money? Give these secured creditors a call option on 15 % of all the surviving Chrysler stock specifially the stock being given to the UAW; the call price for this stock is 27 % [15 ÷ 55] of ($ 6 billion plus a 3 % yearly interest rate starting from when the bankruptcy Judge approves the bankruptcy plan) divided by 15 % of the total number of all Chrysler stocks at the time the bankruptcy plan is approved essentially the call price makes the UAW whole on a respective portion of its original $6 billion claim against Chrysler. These call options last for ten years from when the bankruptcy plan is approved. The UAW is obviously restricted in selling this 15 % of Chrysler stock for this ten year period. In all probability in ten years time the stock price of Chrysler stock will rise higher than the call price and high enough to satisfy this liquidation balance owed the secured creditors plus a 3 %/year interest rate on that liquidation balance. If over the course of this ten years the Chrysler stock price does rise above this ideal price for three months straight this secured creditor matter is over from a Chrysler or U.S. government standpoint because the secured creditor would be expected to execute its option and sell the Chrysler stock and thus be made essentially whole on its bankruptcy claim. If the Chrysler stock price doesnt rise to this ideal price by nine years from the date the bankruptcy plan is approved come this nine year date the account will be reconciled with the secured creditors. That is at this nine year date, if the Chrysler stock price has risen above the call price the options will be executed and the stocks sold and the profit from that sale will be given to the secured creditors any further liquidation monies owed to the secured will be paid over five years time with payments divided evenly in five installments, the surviving Chrysler company will have the first obligation to pay this installment with any of its yearly net income in excess of $2 billion if there is still a balance the U.S. government will pay this balance. The likelihood the U.S. government will have to pay out here is remote and with this financial crisis the U.S. has been experiencing over the past nine months the U.S. government and/or Federal Reserve Board has made indemnification arrangements like this during this nine month time period for AIG and its swap problem and Citibank and its swap problem so it really shouldnt be a big deal doing this indemnification The other valuable appeal of this plan is that it should cause the secured creditors to drop their opposition to the Administrations bankruptcy plan in bankruptcy court enabling Chrysler to exit bankruptcy quickly and thereby fix its critical reputation problem it is having in the mind of its customers. The Administration should rein in a little bit more of the sweet heart deal the UAW is getting here for the good of Chrysler. No one is really focusing on the new age of the Auto Industry, the electric car age, and preparing Chrysler to get there. All the U.S. automakers are presently urgently focusing on how they get in the black, that is profitable, quickly; to that end they are deciding which carbon based fuel run cars to build now. This is understandable, but five to seven year from now sixty to seventy five percent if not a greater number of all new passenger cars being sold in the U.S. will have to be electric cars because of the worlds fuel supply there isnt the supply of oil to satisfy world wide demand if the worlds countries have their passenger vehicle fleets still powered by carbon based fuel engines in this time frame unless the world is prepared to pay $150 to $200 for a barrel of oil which it isnt. The critical point here is that Chrysler is going to need ready access to $ 4 billion to $6 billion for redesigning its vehicles and retooling its plants to convert its passenger fleet to electric cars in that five to seven year time frame. This is how the Administration can go a long way to getting Chrysler that money. Chrysler officials in forecasting about the surviving Chrysler project earnings to be about $2 billion to $3 billion a year five to seven years from today. Applying a traditional rule of thumb amongst the investment community, the price of a stock should reflect a price to earning ratio of around 15. Applying this standard the total value of all Chrysler stock five to seven years from today would mean the value of all Chrysler stock at this time would be $30 billion to $45 billion. Now the original UAW claim that is being traded for equity is $ 6 billion if out of this 55 % of equity the UAW is being given in bankruptcy Chrysler decided to hold a call option for 20% out of that 55% even considering the prior call option for the secured claimants of 15% the UAW is still left with 20% of Chrysler stock to do with it what it will and considering in five to seven years this 20% of stock would likely be worth $ 6 billion to $ 9 billion the UAWs interests would still be well served. The call price on these options for 20 % portion of all Chrysler stock would be priced just like the secured creditors call options and these call options would last from eight years from when the bankruptcy plan is approved. For this 20% portion of Chrysler stock which is subject to this call option which the UAW owns, the UAW would be restricted in selling that stock unless it needed to sell this stock to pay UAW retirees health care bills (If the UAW does sell this 20% block of stock, the Chrysler company can just honor the options by issuing new stock as the options are redeemed in the amount needed by those redemptions). The key about these call options on this 20% block of Chrysler stock Chrysler will hold is that Chrysler can sell these options to raise money to retool plants and redesign cars to change their passenger vehicle fleet to electric car powered in the not to distant future when the imminent conversion occurs in the U.S. auto industry. The Administration course is wrong in one other major area. The Administrations plan is to join Chrysler with Fiat essentially allowing Chrysler to be absorbed into Fiat. This is a bad idea. Fiats focus will be on the Italian market and if it gets Opel the European market, there is a lot of labor challenges in building cars in those markets automakers cant lay off and shut down plants as easily as is done in the U.S. for instance. Fiats investment in U.S. plants and the creation of U.S. jobs will suffer because of these concerns; moreover, the U.S. car market is competitive the U.S. consumer demands auto manufacturers to be on top of their game. Merging Chrysler into Fiat is not a real good idea from the standpoint that the Fiat corporate office will not likely have the focus on the US car market as it is focused on its European concerns thus being a not so strong competitor in the U.S. auto market thus resulting in fewer Fiat jobs and plants in the U.S.. The best course for a surviving Chrysler is not try to merge it with another automaker, that was already done with Chrysler in the past in its merger with Daimler with disastrous consequences where Daimler decimated Chryslers engineering and design ranks supplanting Daimlers resources in this area resulting in hamstringing Chryslers competitiveness in the future. The best thing for Chrysler and for most companies for that matter is to be owned by a broad range of investors so that no investor plunders the company or sits on their duff as the company becomes uncompetitive. To be fair to Fiat, they should be given seven years to increase their stake in Chrysler and it should be mandated Fiat cant acquire these stakes by going heavily into debt; whatever percent ownership Fiat has at the seven year date that is the maximum Fiat is permitted to hold indefinitely and no other investor other than ones that at the time the bankruptcy plan is approved own more or an option to own more are permitted to acquire an ownership interest in Chrysler greater than eight percent of the Chrysler companys total equity, this way a good ownership scenario will be achieved for the Chrysler company for the long-term.