A few weeks ago, the Chrysler Corporation announced that it would repay, well ahead of schedule, the remaining $800 million of the loans guaranteed in 1979 by the federal government.
Coupled with the news of strong earnings in the first quarter of 1983, this announcement led many people to the conclusion that the 1979 federal bailout was a rousing success which saved Chrysler from bankruptcy, kept the auto industry competitive, and saved thousands of jobs.
Before the federal government repeats this example in the case of other troubled companies, however, some second thoughts are in order. By looking at the facts of the Chrysler bailout, we find: (1) the company went through a procedure that looked like bankruptcy, but wasn't called bankruptcy; (2) large costs were incurred by private and public parties to keep Chrysler afloat, and these costs will in some cases never be reimbursed; and (3) tens of thousands of jobs were lost, and the company still may not be on a solid footing.
On the surface level, it is easy to think that Chrysler's rescue was a no-cost effort, since loans were made and repaid. The loans were about four percentage points below market rates, however, and the difference was paid by Uncle Sam.
Those who were Chrysler's creditors before the bailout are in a less enviable position. The company retired over $600 million in debts by paying creditors 30 cents on the dollar. Other debts were converted into unre-deemable preferred stock paying no dividends, then into common stock at less than the face value of the original debts. This is bankruptcy in everything but name.
While the highly touted Salary Reduction Program made inroads on executive pay, far greater costs befell the average Chrysler worker. Over 60,000 people, more than two-thirds of whom were blue-collar workers, lost their jobs.
There are other costs, to the whole company, which are difficult to measure. By guaranteeing Chrysler's loans, the federal government transformed this losing company from a very bad credit risk to no credit risk at all. In effect, Chrysler was placed ahead of all the creditworthy ventures that were seeking to borrow money to start, retool, or expand their businesses. Since there is a finite amount of capital available, some potential borrowers were certainly denied the credit that Chrysler received, and their job-producing plans were deferred or canceled.
What benefits have been realized to offset all these costs?
One benefit was supposed to be a new company on a sound financial footing. Even though Chrysler earned $170 million in the first quarter of 1983, half of this was from deferred tax deductions that the company was able to take due to massive losses in recent years. In two areas crucial to future development, there are troubling signs: Chrysler is now spending 17 percent less in real terms on research and development than it did in 1972, and its 1982 budget for capital spending was $500 million, compared with $8 billion for General Motors. Wage demands are increasing, and the agreement with the auto workers to defer more than $200 million in pension contributions will not be permanent.
Has Chrysler been helped in its competition against imports? If so, it is difficult to measure. Since 1980, Chrysler's share of the US market has increased slightly, but so has the Japanese share, while that of other domestic producers has declined slightly.
On balance, the Chrysler rescue effort has been a costly undertaking for shareholders, creditors, and the taxpayer. Simply because of its size, Chrysler was extended federal credit that would never be given to a small business that was failing due to bad management and tough competition. In my view, it is not at all clear that we have seen a decent return on our investment. The Chrysler lesson should be remembered by Congress the next time a large corporation comes to the Capitol, hat in hand.