U.S. Government Bails Out Chrysler Corporation Summary

  • Last updated on November 10, 2022

The government’s $1.5 billion loan guarantee to Chrysler Corporation prevented a sudden business collapse. The trauma of the firm’s near collapse and the tension and novelty of the rescue strained old networks and compelled groups to cooperate in new and unaccustomed ways.

Summary of Event

Chrysler Corporation’s fall from grace was not sudden, nor were its financial difficulties in the late 1970’s unexpected. In 1976, Chrysler lost $282 million. It had a brief resurgence of profitability but in 1978 lost $205 million. Unable to sell the line of big cars it produced during the 1973 gas crunch and caught with insufficient medium-sized and large models when customers turned to them later in the decade, and also plagued by recalls and poor quality control, Chrysler had replaced the American Motors Corporation as the industry’s nominee for the automobile manufacturer most likely to go out of business. Chrysler Corporation Loan Guarantee Act (1979) Chrysler Automobiles;manufacture [kw]U.S. Government Bails Out Chrysler Corporation (Jan. 7, 1980) [kw]Government Bails Out Chrysler Corporation, U.S. (Jan. 7, 1980) [kw]Chrysler Corporation, U.S. Government Bails Out (Jan. 7, 1980) Chrysler Corporation Loan Guarantee Act (1979) Chrysler Automobiles;manufacture [g]North America;Jan. 7, 1980: U.S. Government Bails Out Chrysler Corporation[04020] [g]United States;Jan. 7, 1980: U.S. Government Bails Out Chrysler Corporation[04020] [c]Banking and finance;Jan. 7, 1980: U.S. Government Bails Out Chrysler Corporation[04020] [c]Laws, acts, and legal history;Jan. 7, 1980: U.S. Government Bails Out Chrysler Corporation[04020] [c]Manufacturing and industry;Jan. 7, 1980: U.S. Government Bails Out Chrysler Corporation[04020] Carter, Jimmy [p]Carter, Jimmy;Chrysler Corporation bailout Iacocca, Lee Miller, G. William McGillicuddy, John F. Fraser, Douglas A. Miller, Robert S.

As losses mounted early in 1979, there was talk of a merger with Ford. Unless some action were taken, Chrysler anticipated laying off as many as 100,000 autoworkers, with further effects on suppliers. Chrysler’s chairman, John Riccardo, Riccardo, John and president, Gene Cafiero, Cafiero, Gene had lost the confidence of Wall Street; they were unable to raise funds to keep the corporation afloat and had failed in their early attempts to obtain government help.

Meanwhile, Lee Iacocca had been fired as president of Ford Motor Company Ford Motor Company and was seeking employment elsewhere in the industry. He entered into negotiations with Chrysler and late in 1978 agreed to come on as president with the understanding that he would be promoted to chairman and chief executive officer within a year. Iacocca’s initial contributions were in the areas of sales and publicity, but the salvaging of Chrysler required an unusual mix of government, labor, and management cooperation, together with some bending of rules by financial institutions and suppliers. The result was the most dramatic bailout in American business history.

Iacocca’s agreement with Chrysler was that he would be in full charge of all operations, and Riccardo would concentrate on obtaining loan guarantees and reassuring suppliers so that they would continue shipments. Negotiations with labor were crucial to Chrysler’s future. The government probably would not have cooperated with Chrysler without pressures from organized labor, and vendors likely would have refused to make concessions if it were not for concrete results from the factory and sales floor. From the beginning, Iacocca and United Auto Workers United Auto Workers (UAW) president Douglas Fraser were the keys to the corporation’s survival.

After weeks of rising pressure for federal aid in solving the multiplying problems of Chrysler Corporation, Treasury Secretary G. William Miller produced, and President Jimmy Carter approved, a government bailout plan. Carter signed the Chrysler Corporation Loan Guarantee Act on January 7, 1980. It allowed Chrysler to qualify for up to $1.5 billion in federal loan guarantees, meaning that the government promised to pay any new debt up to that amount if Chrysler defaulted. The act also required that the company arrange for $1.5 billion in new financial assistance. The government received warrants to purchase 14.4 million shares of Chrysler common stock at $13 a share as partial compensation for the high risk of the deal. Few seriously expected that these warrants would ever be exercised. For the warrants to be worth exercising, the company would have to recover sufficiently that its stock price rose above $13 a share.

To raise the new funds required, Chrysler combined a variety of money sources. The UAW agreed to change its contract, for a savings to Chrysler of $600 million over a three-year period. This amounted to $5,000 per hourly worker, making Chrysler the lowest-cost North American auto manufacturer. Further cuts and a wage freeze followed, with Chrysler inviting Fraser to take a seat on Chrysler’s board of directors. This was unprecedented. In addition, several states in which Chrysler plants were located committed funds. Later, the Canadian government added $100 million to the total in the hope of saving jobs in Canada.

The hardest part of the agreement for Chrysler to satisfy was a requirement that it raise $650 million of new financial assistance from its lenders. Doubts about the banks’ desire to chip in any new funds were heightened when John F. McGillicuddy, chairman of Manufacturers Hanover Trust Company, Chrysler’s lead bank, indicated an unwillingness to commit his bank to any additional unguaranteed loans because of the high risk of default. Long hours of negotiations finally produced an agreement on June 6, 1980. Robert S. Miller, Chrysler’s executive vice president of finance, successfully gained a commitment by the more than twenty banks that held more than $4 billion of Chrysler’s debt to a loan restructuring. Suppliers granted close to $4 million in concessions.

The granting of the loan guarantee was not the end of Chrysler’s financial troubles. Within six months, interest rates had escalated, and the automobile market was in trouble. That meant another round of negotiations, loans, and concessions. The company went through a painful internal trimming necessary to turn the company around. It cut costs (measured in inflation-adjusted dollars) from $4.5 billion in 1979 to $3.1 billion in 1982. A billion dollars was trimmed out of inventories and half the employees on the payroll were cut, yet more products were introduced at a higher quality level. The company cut its break-even point in half, meaning that it began earning profits at a production level half of that required previously. Chrysler also positioned itself to be ready for any upturn in the market. As a result of these efforts, Chrysler turned a profit and was able to pay off its government debt. The Loan Guarantee Board staff disbanded early in 1984.

Significance

The Chrysler bailout took place in an atmosphere approaching panic. Unemployment was rising throughout the automobile industry. This, combined with federal anti-inflation policies, turned what might have been a mild economic decline into the worst post-World War II recession to that date. Iacocca argued that the disruptive transition from “smokestack” to “high-tech” capitalism should be aided by government. On the other side, many conservatives rejected such proposals in the name of fairness and free competition. They insisted that freedom to fail was as integral to a market economy as the right to succeed.

Free market advocates argued that the market generally reallocated resources efficiently and that bailouts should be considered only in situations in which failure would hurt many people and the economy as a whole and assistance would be needed only temporarily. Help, when it is given, should be designed to ease the abruptness of an economic contraction rather than prevent the contraction. The federal assistance programs of the 1970’s—among them federal loan or bond guarantees for Lockheed, Conrail, New York City, and Chrysler—had several things in common. Each was spawned by a financial crisis that, without federal intervention, would probably have led to sudden, concentrated unemployment. Each triggered prolonged public debate, and each generated a coalition of interest groups large enough to win a congressional majority. To varying degrees, each forced the beneficiaries to make sacrifices in exchange for aid. Each one cushioned economic contraction.

Chrysler in 1979 was in the midst of a huge capital expenditure program to bring into production its new generation of fuel-efficient K cars, which at the time were viewed as a national asset that would help ease the energy crisis. A Chrysler bankruptcy would have idled anywhere from 110,000 to 600,000 workers, including effects on suppliers and other companies dealing with Chrysler. Clearly, the death of a large enterprise, especially one concentrated locally or regionally, has a greater social impact than the death of a small or geographically dispersed enterprise.

Chrysler’s case was improved by a unique set of political circumstances. President Carter faced a strong presidential primary challenge and badly needed the support of both the United Auto Workers and Mayor Coleman Young Young, Coleman of Detroit.

Congress is not made up of individuals with superb business expertise, but it is uniquely equipped to extract concessions from interest groups that want to see a failing firm survive. The Chrysler case provides a perfect example. Where private institutions had failed, Congress was able to get everyone to agree to terms they normally would not have been willing to accept. Republican senator Richard Lugar Lugar, Richard and Democratic senator Paul E. Tsongas Tsongas, Paul E. combined to convince the United Auto Workers to take a bigger pay cut than the union had been willing to accept. The Loan Guarantee Board finally got banks to make sacrifices. Even Iacocca was pressured to make sacrifices. When Chrysler was slow to sell off its corporate jets, as the Loan Guarantee Board required, a Treasury staff member leaked to the press that Iacocca was still using his plane for personal use. This story helped stiffen the board’s position on the planes, and soon the company had a plan to sell them.

The Chrysler crisis shook up the United States. The trauma of the firm’s near collapse and the tension and novelty of the rescue strained old networks and compelled groups to cooperate in new and unaccustomed ways. After the Chrysler deal, creditors entered negotiations with other companies willing to compromise more. There were fewer attempts by single lenders to hold out for separate, more favorable deals. Negotiation and compromise became the norm.

Labor also learned from the Chrysler episode. Workers at Chrysler found themselves acting more like stakeholders in the company and less like holders of claims against it. The UAW broke from industrywide pattern bargaining, in which similar contracts were struck with each company. New deals struck during the crisis blurred the status of blue-collar workers. The workers shared risk and reward in the form of profit sharing. Labor even gained representation on Chrysler’s board of directors.

American management viewed Chrysler’s trauma as a lesson in trimming down. Executives in many large corporations took radical steps to lower their break-even points. Managers were slow to rehire workers as recovery progressed, resorting instead to overtime. The trauma of Chrysler, in sum, contributed to a reshaping of the American auto industry—and less directly other basic industries—in which it could profit at lower production levels and thus weather a recession.

The central discovery for federal officials was the payoff from putting conditions on public assistance to companies. Public involvement actually increased private commitment to the rescue. Public money was strictly contingent on private sacrifice. Once the deal had been struck, the company’s performance was monitored by the government, and strict conditions had to be met as long as Chrysler retained any claim to public resources.

The guaranteed loans were only a bargaining chip. What ultimately saved Chrysler were sacrifices from labor, creditors, suppliers, and other constituents, and the ability of the leaner company to convince Americans to buy their cars. Government presence at the bargaining table illustrated the power of public intervention. It spurred greater sacrifice from these groups than they otherwise would have rendered. The lesson Chrysler brought to all Americans was captured on bumper stickers during the company’s darkest days. They simply said, “We can do it!” Chrysler Corporation Loan Guarantee Act (1979) Chrysler Automobiles;manufacture

Further Reading
  • citation-type="booksimple"

    xlink:type="simple">“The Bountiful Bailout Planned for Chrysler.” BusinessWeek, November 19, 1979, 46-48. Gives a detailed description of the proposed Chrysler Corporation Loan Guarantee Act. Discusses the role the government would play and the requirements for new outside financing that Chrysler would have to meet. The risks involved with the bailout are mentioned, as well as the provisions that were included in the proposed legislation. These were designed to help compensate the government and others involved with the bailout for the risk to which they were exposed.
  • citation-type="booksimple"

    xlink:type="simple">Cameron, Juan. “Chrysler’s Quest for Federal Welfare.” Fortune, August 27, 1979, 30-31. A summary of the efforts taken to obtain federal assistance. Describes the impact of cabinet changes on the negotiations, the process that led to the final request for loan guarantees, and the discussions that took place to determine whether the help was warranted.
  • citation-type="booksimple"

    xlink:type="simple">“Chrysler’s Crisis Bailout.” Time, August 20, 1979, 39-41. Specifically discusses the many questions and problems that were raised as the bailout legislation was discussed in Congress. Provides insight into the arguments offered against the bailout effort as well as reasons that the bailout was believed to be essential.
  • citation-type="booksimple"

    xlink:type="simple">“A Delay in Congress May Doom Chrysler.” BusinessWeek, December 10, 1979, 36-37. Discusses in detail the problems that would face Chrysler if the loan guarantee were not passed before the end of the year. Describes the tough bargaining position of the United Auto Workers and the hard-line position the banks took as major stumbling blocks to the success of the rescue attempt.
  • citation-type="booksimple"

    xlink:type="simple">Reich, Robert B., and John D. Donahue. New Deals: The Chrysler Revival and the American System. New York: Times Books, 1985. One of the best resources available on the Chrysler bailout. Addresses the conditions that led to the need for a rescue and gives a detailed account of the legislation negotiations. Discusses the lessons learned from the bailout.

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