Chrysler was forced into bankruptcy protection Thursday but President Barack Obama insisted the troubled automaker could emerge as a stronger company through a partnership with Fiat.
The aim is for Chrysler to emerge from bankruptcy protection within 30 to 60 days by selling the automaker’s principal assets to a new company.
Chrysler said most of its plants will be "temporarily" idled until the transaction is complete but workers would continue to be paid, dealerships would remain open and warranties would be honored.
Obama said the new alliance and bankruptcy reorganization were among the "necessary steps" taken "to give one of America’s most storied automakers, Chrysler, a new lease on life."
"I have every confidence that Chrysler will emerge from this process stronger and more competitive," Obama said at a press conference.
Senior US officials said the company, founded in 1919 by Walter Chrysler, was forced to file for bankruptcy protection after major creditors balked at a deal to reduce 6.9 billion dollars in debt.
Bob Nardelli will step down as chairman and CEO of Chrysler once the alliance with Fiat is complete and Chrysler emerges from bankruptcy protection.
"From many great parts, we begin to build a vibrant new company with less debt, a stronger balance sheet, richer product portfolio, supported by a well-positioned finance company," Nardelli said.
Fiat will initially take a 20 percent stake which would then rise to 35 percent and could reach 51 percent as early as 2013 if Chrysler is able to repay its government loans.
Fiat would pay nothing, but would provide access for Chrysler to its technology, notably for smaller, more economical vehicles.
"This partnership transforms Chrysler into a vibrant new company with a wealth of strategic advantages," Nardelli said.
The CEO of Fiat Group, Sergio Marchionne, said that bringing together Fiat and Chrysler "will create a powerful new automotive company, while helping preserve jobs and a manufacturing industry that is critically important to the US and Canadian economies."
The ailing auto giant would get a total of 10.5 billion dollars in funding from the US and Canadian governments to support its operations throughout the process.
The US Treasury would hold 8.0 percent of the equity of the new Chrysler under the plan and have a right to select four independent directors, but "will not play a role in the governance or management of the company," according to a White House statement.
The Canadian and Ontario governments would receive a two percent stake in the new company.
The reorganization envisions no further job cut or plant closings, and could allow Chrysler to grow as it expands globally under the Fiat partnership and gains new technology for smaller, fuel-efficient cars.
The filing will place the struggling number-three US automaker in the hands of a bankruptcy judge and analysts have warned that a swift emergence could be blocked should some stakeholders mount objections.
But an administration official said that with the vast majority of stakeholders agreeing to a deal, "our judgment is that no judge is going to override that kind of support."
The news came after the United Auto Workers (UAW) union members approved an agreement to slash labor costs, restrict the right to strike and accept stock in place of cash obligations to the union’s retiree funds.
But the automaker’s other creditors failed to approve a tentative deal to restructure some 6.9 billion dollars in debt.
Obama noted that Fiat would have an incentive to repay the US loans because the Italian firm would not be able to boost its holding to a majority stake until the government is repaid.
The new plan also calls for an end to Chrysler Financial, which will be merged into GMAC — the former financial arm of General Motors, which is now majority controlled by Cerberus, the private equity owner of Chrysler.
Cerberus has agreed to waive its debt and forfeit its entire equity stake in Chrysler to the new Chrysler alliance.