A new proposal submitted by Chrysler LLC's first-lien lenders yesterday to reduce their secured debts by 35 percent in exchange for up to 40 percent equity in the struggling American carmaker has draw sharp criticism from the Obama Administration and elected representatives.

Around 50 creditor banks and hedge funds make up a syndicate that is led by JP Morgan Chase. Other key players in the consortium include Citigroup, Goldman Sachs and Morgan Stanley, and yesterday they submitted a proposal to the U.S. Treasury Department. The terms are secret but sources familiar with the bank's negotiations have been widely quoted on the newswires over the last 24 hours. "The goal is something close to 40 percent of the equity" said a source, adding that "taking equity is a risky proposition."

Last night an official in the Obama Administration, responding to the lender's offer, was quoted anonymously as saying: "It is neither in the interest of Chrysler's senior lenders nor the country for them to advance a proposal that would yield them an unjustified return as Chrysler, its employees and other stakeholders are working tirelessly to help this company restructure." The unnamed official then added that "our hope and expectation is that these lenders take a more constructive position in the coming days that reflects the actual situation that they and the company face."

The lender banks were responding to a U.S. Treasury Department demand to the banks that they reduce the their secured debts, which amount to US$6.9 billion, down to around US$1 billion. The banks own response yesterday, to reduce debt by US$2.5 billion, also demanded that they receive a seat on the Chrysler LLC board and that Fiat - the carmaker's proposed alliance partner - inject US$1 billion of cash into the restructured company. The U.S. Treasury Department, Chrysler LLC and Fiat are all rushing to realise the alliance with just 8 days remaining before a deadline to complete the deal set by the Obama Administration a month ago is reached on the 30th April.

As well as the banks' offer drawing the ire of the administration, Democrat Gary Peters, whose seat includes Chrysler's Auburn Hills headquarters said last night: “This offer is an affront to taxpayers and the many thousands of Chrysler employees and retirees whose livelihoods hang in the balance of the outcome of these negotiations. These debtholders were offered fair market value for their debt and the banks have responded by asking for a windfall. It is extremely disappointing that while other stakeholders have agreed to work with President Obama to advance Chrysler's restructuring, financial institutions that have already taken billions of dollars in taxpayer support are refusing to do the same."