By David Cho and Peter Whoriskey
Washington Post Staff Writers
Tuesday, April 28, 2009 4:00 PM

The Treasury Department reached an agreement with Chrysler's main creditors late last night, but the automaker is still expected to be restructured in a bankruptcy, sources familiar with the matter said today.

The carmaker had owed a fractious group of 46 banks, hedge funds and other firms about $6.9 billion. The creditors will instead receive $2 billion in cash under the deal. They will not have an equity stake in the newly formed Chrysler, one of the sources said.

The deal was reached with four major banks, which hold more than 70 percent of the debt, allowing the Treasury to move forward with its plans to restructure Chrysler in a bankruptcy. The other creditors, mainly hedge funds, have not signed off on the agreement, but the sources said their reluctance will not stand in the way of Treasury's plans.

Chrysler and federal officials have been working for weeks to overhaul the company, but sources said today that it was unlikely that could be done without a bankruptcy. A source familiar with the negotiations said, "Bankruptcy is not our goal. It's not an ideal place no matter how surgical or quick you make it."

The two sides had been far apart in the negotiations, leaving Treasury officials little choice but to prepare a bankruptcy filing. Indeed, one government official said last week that it would take a "miracle" for a deal to be worked out. But the lenders realized that they would have received far less in a bankruptcy and ceded to government demands.

Chrysler also reached a deal over the weekend with the United Auto Workers, in which the union would own a majority stake in the automaker.

A source familiar with the matter said if the restructuring of the storied American automaker is completed according to the tentative deal, the union would have a 55 percent stake in the company, the Italian automaker Fiat would eventually hold a 35 percent stake, and the government likely would have a 10 percent stake in the company. The source spoke on condition of anonymity because he was not authorized to comment publicly on the talks.

The agreement with the UAW, which must be ratified by union members, and the deal with the automaker's lenders are milestones in the effort to keep Chrysler and its 54,000 employees out of bankruptcy.

They come as the Obama administration seeks to make the automaker viable once again by stripping it of its overwhelming debt load and partially merging it with Fiat.

The agreement with the union essentially relieves Chrysler of a portion of the $10 billion it owes to the union's retiree health fund. In exchange for giving up its claims to some of that $10 billion, the union is getting the significant equity stake in the company.

Gary Chaison, professor of industrial relations at Clark University in Worcester, Mass., said that if the union winds up with a majority stake in its employer, that "puts the UAW in a strange position."

"If it takes company stock as a part owner in the company, it would be bargaining against itself," he said. "It can never act as adversarial in that relationship. Also it's in a position that to make the company more stable, it has to reduce health-care benefits of its own retirees."

Also yesterday, the German automaker Daimler said it has reached a deal to shed its remaining 19.9 percent stake in Chrysler. Daimler had previously written down the value of its Chrysler stake to zero.

Under the deal, Daimler will pay $600 million into Chrysler's pension plan over the next three years. Daimler will also surrender its claims to the loans it extended to Chrysler when it sold most of the company to Cerberus in 2007.