Banks including JPMorgan Chase & Co., Goldman Sachs, Citigroup Inc. and Morgan Stanley loaned Chrysler $6.8 billion in 2007 when Cerberus Capital Management LP acquired an 80.1 percent stake in the automaker.......Because the banks hold debt secured by collateral, they have the right to take Chrysler plants and assets if the company files for bankruptcy protection. That means they may be better off with what's left of Chrysler in liquidation than what they'd get if they agree to restructure the debt....Chrysler also owes money to Cerberus and Daimler AG, but they already have agreed to exchange all that debt for Chrysler equity. Other lenders also appear willing to make concessions, but JPMorgan is leading the negotiations with Treasury,

Neither Chrysler Financial nor GMAC would be subject to the bankruptcy plan Washington is crafting for their affiliated auto manufacturers.

Meanwhile, investors are also worried the administration won't honor their contracts on billions of dollars of bonds backed by floorplan loans that Chrysler Financial and GMAC write to finance the inventories of dealers...Under standard securitization terms, bonds backed by floorplan loans must begin amortizing ahead of schedule if the issuer files for bankruptcy. But investors are skeptical about the likelihood of such an orderly unwinding of the bonds, especially in light of the recent congressional attack on the bonus contracts that insurer AIG made with its employees before it came under the control of the federal government. Such concerns took a toll this week on the values of bonds backed by Chrysler Financial and GMAC loans to car dealers, with values of those securities slipping below 70 cents on the dollar. This week, Bank of America and J.P. Morgan were working to make markets in GMAC's floorplan-loan bonds, offering to buy for as little as 68 cents on the dollar and sell for as much as 76 cents.

One plan under discussion for GM would be to form a new company of the automaker's best assets, while its laggard brands and money-losing assets would remain under bankruptcy protection, a person familiar with the strategy said. Bondholders, a key constituency in the GM restructuring, said they were braced for a reduced offer of "pennies on the dollar" for about $28 billion in GM debt.

GM last week had offered bondholders about $6.5 billion in cash and new debt -- equal to a combined 24 cents on the dollar -- in addition to a 90-per cent stake in the new company, a person with knowledge of the terms sheet said. The $13.4 billion emergency loan for GM approved by the Bush administration in late December had offered bondholders a payout of 33 cents on the dollar in equity, terms they rejected. GM's 8.375-per cent bonds due 2033 were trading on Tuesday at 12.75 cents on the dollar, according to MarketAxess.