The Chrysler Bail-Out Bust

[Sub Atomic]

July 13, 1983

Chrysler Corporation auto sales are roaring into high gear. And so is the myth of the Great Chrysler Comeback. The resurgence of the once dying automaker has become the favorite example cited by proponents of national industrial policy who call for massive and costly federal efforts to revive what they describe as a desperately ailing American economy. The way they tell the story, Chrysler in 1979 seemed destined for bankruptcy, and now it's showing a profit. What saved Chrysler, we are told, are the $1.2 billion in loan guarantees provided by the federal government—so successful was the timely injection of cash that the company could announce today that it will pay off the remaining $800 million by September. And it didn't cost the taxpayer a penny, did it, they ask gloatingly. Chrysler chairman Lee Iacocca, who came to Washington four years ago with begging bowl in hand, is now in the vanguard of the push for more government intervention in American industry. Federal loan guarantees, import quotas, and a well-defined industrial policy, he promises, will be the key to American corporate success in the years ahead

If it all seems too good to be true, it is because it isn't true. The popular version of the Chrysler bail-out is simply a fairy tale. The bail-out is a bust. Closer scrutiny of it reveals that the "great success" rests on a bedrock of myths and half truths. These myths cloud and distort important issues involved in the larger question of industrial policy and a closer business-government relationship. Confronting the Chrysler myths with Chrysler facts reveals Chrysler's true financial condition and the real impact of those federal guarantees. It shows that if the bailout is indeed the model for an American industrial policy the consequences could be disastrous

Myth No. 1: Government loan guarantees prevented the Chrysler Corporation from going bankrupt.

The truth is that the Chrysler Corporation has gone bankrupt by every normal definition of the word. In the past three years, Chrysler has renegotiated its debts and restructured its organization in a way that greatly resembles a company going through Chapter 11 bankruptcy. Its creditors, like those of bankrupt firms, were forced to swallow sizeable losses.



Much more at the link. http://www.heritage.org/research/regulation/bg276.cfm

[mrreowwr_kittty]

1. The Heritage Foundation is a RW think tank so I'd take anything they say with a giant grain of salt

But I'm sure you already knew that.

[Sub Atomic]

3. Yeah, it's the Heritage Foundation. It's also from 25 years ago and is spot-on correct.

[endarkenment]

7. Well no it isn't.

"In 1983, Chrysler paid off the loans that had been guaranteed by US taxpayers. The Treasury was also $350 million richer." - heritage forgot to mention that small detail.
http://uspolitics.about.com/od/economy/a/chryslerBailout.htm

Oh, and over the last 25 years Chrysler has employed something like 45,000 people every year with good jobs paying good wages and benefits.

[sandnsea]

2. Yeah I always care what Heritage has to say

:crazy:

Come on. Could people try to be at least a little selective in their research.

[marmar]

4. Next up, a report from Focus on the Family on the failure of same-sex marriage in Massachusetts....

n/t

[Sub Atomic]

5. I remember when HF was a CONSERVATIVE think tank, not a RIGHTWING think tank.

True conservative values have become a thing of the past.

[mrreowwr_kittty]

6. You might be confusing it with the CATO Institute. Heritage has always been RW ideologues.

It was founded by Paul Weyrich.

[Romulox]

8. When the hell did this site merge with Free Repuplic??? nt

[On the Road]

9. These Arguments are a Real Stretch

The more I read them, the more idiotic the whole article sounds. Point by point:

--------------------

Myth No. 1: Government loan guarantees prevented the Chrysler Corporation from going bankrupt.

Whether Chrysler filed or did not file for Chapter 11 is not the issue. The loan guarantees kept Chrysler in business. Bankruptcy filing is the legal means to force financial restructuring.

Myth No. 2: Federal 1oan guarantees were justified because Chrysler's financial problems were brought on by the federal government..

I am sure the Heritage Foundation can cite someone somewhere who made this argument, but who cares? The loan guarantees were made to keep Chrysler from going out of business, and they did.

Myth No. 3: The loan. guarantees cost nothing since Chrysler has not gone bankrupt.

Nothing in the article shows how the loan guarantees cost the federal government anything. They harp on the risk premium. This is not a dirty little secret of some kind -- the whole political debate was over whether the federal government should assume risk on behalf of Chrysler. The government assumed the risk and it paid off.

NOT providing the loan guarantees would in fact have cost billions of lost tax revenue and government expenses such as unemployment payments.

Myth No. 4: Chrysler's top management has taken deep salary cuts until Chrysler's financial problems are resolved.

In this case, the author has a good point. I did not know that 2/3 of the executive salary reductions were given back a year or two later. It was common knowledge, however, that while Iacocca accepted a salary of $1/year, he profited from stock options. This was considered a good thing at the time, since it directly tied Iacocca's compensation to the fate of the company.

Myth No. 5: Chrysler's new-found profitability shows that it is on the road to financial recovery.

It is hardly a new and alarming discovery that Chrysler made cuts in R&D and captial investment or got concessions from the UAW. And of course they benefitted from tax loss carryforwards after becoming profitable again -- that is how the tax system works and what all companies do.

Myth No. 6: Chrysler's survival has improved America's position in the international automobile market.

The author argues that Chrysler took market share from Ford and GM but not foreign car makers. This might be a good point, but since imports were steadily increasing anyway, it's not clear what the numbers would have been without a bailout loan guarantees.

CONCLUSION: ...Unrepresented and unheard was a huge "invisible" constituency. They included:

Current and future laid-off Ford and General Motors workers, who never understood that their tax dollars were being used to destroy their own jobs in order to save jobs at Chrysler.

How was saving Chrysler destroying jobs? (Unless you assume that Ford and GM workers had the right to build cars for Chrysler customers since Chrysler was on the verge of bankruptcy.)

Small businessmen and private individuals, who never understood that the Chrysler bail-out would squeeze $1.2 billion out of the credit market, making it difficult and more costly for them to raise business capital or finance a mortgage on a new house, all of which would have created new jobs.

Very weak. An extra $1.2 billion in the credit markets is negligible.

Over 60,000 now laid-off Chrysler workers, who expected the bailout to save their jobs

The loan guarantees were never intended to save all jobs, just the ones necessary for the company to stay in business.

American car buyers, who never understood that Ford and General Motors would have taken over much of a bankrupt Chrysler's market and produced cars more efficiently, reducing the cost of domestic automobiles.

Perhaps it would have played out this way, but the author provides no evidence. In any case, I always thought GM was the least efficient of the Big 3.

--------------------

Not every business failure deserves intervention, but relying on the free market is no guarantee of success, much less an optimal result.

[mrreowwr_kittty]

10. Good response!

:applause: