Creditors say Treasury plan is DOA

Chrysler debt holders, including JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc. and Morgan Stanley, will reject the government’s proposal to exchange the $9.6 billion in secured debt they currently own for a senior, secured loan of about $1 billion.

Citing obligations to investors, pension funds and others who put up the money they invested in Cerberus Capital Management’s acquisition of the carmaker, the creditors will offer a counter-proposal which could include a large equity stake or government guarantees of the loans.

The major banks have been trying to unload the Chrysler debt almost since the purchase took place in August of 2007. Even with fairly steep discounts, they have been unable to sell the loans. They now must balance their losses under two scenarios: the first writing down Chrysler’s obligations with the assumption the balance will be repaid; the second the amount they could potentially recover if Chrysler was to go into liquidation. As holders of senior debt, the banks and other investors would generally be among the first to be paid from the proceeds of an asset sale.

Chrysler is under a May 1 deadline to drastically reduce its debt, wring more concessions from the United Auto Workers and complete an alliance with Fiat SpA.