The US Treasury Department is leading the talks with Chrysler's creditors to persuade them to take up equity stakes as the ailing American carmaker battles to achieve the list of demands set down by President Obama within the 30 days deadline set for the deal with Fiat to be realised. Current shareholders Cerberus Capital Management and Daimler are both believed to be ready to write off their loans and stakes.

Chrysler's executives made virtually no progress in negotiations to persuade its secured lenders to swap debts of around US$6.9 billion into equity by itself, and after the Presidential Auto Task Force reported on March 30th, the US Treasury Department gave it 30 days of survival before the supporting funds would be cut off. The Treasury Department has since taken the lead in the negotiations with creditors leaving Chrysler in the back seat. “Chrysler is committed to working closely with all constituents, the administration, US treasury and the task force, over the next 30 days to reach a successful conclusion,” said a Chrysler spokesman.

The Treasury Department is meeting with Chrysler's main creditors that comprise of major financial institutions, hedge funds and other investors. Around 50 creditors make up a syndicate led by JP Morgan Chase. Other key players in the consortium include Citigroup, Goldman Sachs and Morgan Stanley. The Auto Task Force has indicated that “the vast majority of Chrysler’s outstanding secured debt and all of its unsecured debt and equity” must be negotiated into equity within 30 days.

However as secured creditors these banks could lay claim to Chrysler's infrastructure and operations if it tips into bankruptcy next month. This scenario playing out has attracted the ire of some legislators on Capitol Hill. "Some of these debt holders are financial institutions that exist today only because of government support," said Democrat Congressman Gary Peters who represents Michigan's 9th district in reference to the involvement of Goldman Sachs, JP Morgan Chase and Citigroup. "Yet they now stand hypocritically unwilling to cooperate with the government to help maintain an American auto industry."

Chrysler also has a US$500 million loan from 80.1 percent shareholder Cerberus and a US$1.5 billion loan from minority shareholder and former owner, Daimler. Both these loans rank behind the secured creditors and both parties have indicated that they are prepared to write down these debts as well as their shareholdings, although Cerberus is expected to retain a major slice in Chrysler's captive financing division, Chrysler Financial. Cerberus made a spectacular misjudgement when they bought the 80.1 pct stake from Daimler and have indicated that they won't pump anymore funds into Chrysler which is currently surviving on a Treasury Department loan to the tune of US$4 billion loan.

Chrysler, which has seen consumer demand for its range of vehicles slump by almost a half this year, then has to renegotiate its labour costs with the powerful United Auto Workers (UAW) union and turn healthcare liabilities into equity. The Auto Task Force indicated that it wasn't impressed with the proposals that Chrysler has so far negotiated with the UAW.

The initial proposal for an alliance between Fiat and Chrysler announced by the two carmakers in January called for an initial 35 percent stake to be given to Fiat in exchange for access to its efficient technology, recently valued by Chrysler CEO Bob Nardelli as worth between US$8 and US$10 billion. However the Auto Task Force has demanded a much lower initial stake for Fiat of 20 percent as it seeks to sell the deal to a sceptical American public. Fiat's stake will rise in increments of 5 percent as targets are met to reach a ceiling of 49 percent before all the governments loans are repaid. These loans currently stand at US$4 billion with another US$6 billion to be made available if the deal goes ahead at the end of the month.