This is an excerpt from early draft of Bailout Nation: How Easy Money Corrupted Wall Street and Shook the World Economy. I was hoping to post this prior to the second round of automaker testimony (but was thwarted due to LIRR collision yesterday).

~~~

The current no strings attached bailout demands of the Big 3 stands in stark contrast to the 1980 Chrysler deal. Regardless, the subsequent decades post-bailout reveals the deal wasn’t particularly good for either the industry or the firm’s employees.

In the 1950s, Barron’s described the Detroit automakers as the big two and a half – with Chrysler, the perennial sales laggard, as the half. When the embargo hit, Chrysler suffered the most of the Big Three.

By the mid-seventies, the company was hemorrhaging cash. Chrysler lost $52 million in 1974, and a record $259.5 million in 1975. As smaller, less expensive and more fuel-efficient from Japan and Europe gained increasing market share in 1970s, Chrysler found itself in an ever-deepening hole. It looked like they might have to declare bankruptcy.

As soon as the energy crisis ended, it was back to business as usual. 1976 a hugely profitable year: the company’s net income was $422.6 million. 1977 was profitable, but less so: $163.2 million net income. By late 1978, they were running in the red again, losing $204.6 million. The fall of the Shah of Iran and a new US Oil embargo sent prices higher once again. By 1979, Chrysler was looking at its first billion dollar annual loss.

Management decided to was time to visit their Uncle Sam.

The Chrysler bailout was everything Lockheed was – its predecessor in the bailout timeline by 9 years – and more. It was bigger and more expensive. Lockheed had loan guarantees worth $250 million dollars; Chrysler’s were for six times that amount,. The rationale for the rescue of Lockheed, the country’s biggest defense firm, was national defense. With Chrysler, it was the economy, and saving 200,000 jobs in the U.S.

But the big difference between the two was that the Chrysler recue package was much more complex. The terms of the Chrysler loan guarantees required an additional $2 billion in commitments or concessions from: “its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments. ”

The Chrysler bailout of 1980 was not quite a pre-packaged bankruptcy reorganization. It left the company with the same management team, the same union contracts, the same pension obligations, and the same health care coverage; all the bailout did was buy the company a few more years. Indeed, the pre-bailout industry looked almost identical to the post-bailout industry. None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.

Chrysler survived, but a slow necrosis gradually handed over the dominance of the US automobile market to the Japanese, Koreans, and Germans. In 1980, Detroit had a ~75% market share of autos sold in the US.  For the first time ever in May 2008, that number slipper under 50%, and its now down to ~48%.

You read that right, the majority of automobiles sold in the USA are no longer vehicles made by US companies.

The UAW’s membership suffered even more than Detroit’s market share. It peaked in 1979, a year before the bailout, when the Union had over 1.5 million dues paying members. 25 years, UAW membership had fallen by two thirds — down a million to to 538,448 (2006).

And, year-over-year totals are still falling. From 2006 to 2007 (the most recent full year of data ) the union saw its membership decrease yet another 14% –down another 73,538.

~~~

Had Chrysler been allowed to fall into bankruptcy, it’s not too difficult to imagine a vulture investor obtaining all of the aforementioned assets, and putting them to good use. Just picture a refurbished Chrysler Corporation – newly recapitalized, minus the onerous labor contracts, pension obligations, and healthcare overhead. Its new owner would have been free to pursue new manufacturing methods, new automobile designs, even new markets – with all the advantages Chrysler itself had, but without the defunct company’s baggage.

A post bankruptcy Chrysler would have been as leaner, meaner and more cost-efficient, and maybe even more fuel-efficient machine than the rest of Detroit. Surely, they would have been willing to take chances on some new designs that broke free of the stodgy boring cars put out by Detroit in the 1970s and 1980s.

Not only would Chrysler have been much more competitive in the US and world markets, their mere existence would have forced GM and Ford to streamline their own processes improve their vehicles in terms of attractiveness, mechanical reliability, and fuel efficiency.

~~~

Down Below 50% “Detroit 3”U.S. Market Share 1986 –June 2008
(Sales of Detroit 3 N. American “owned”production)

Source: Center for Automotive Research

Category: Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “Looking at the 1980 Chrysler Bailout”

  1. Archiphage says:

    And of course, since the 1980 bailout results were less than ideal… let’s do it again, with even more money, and for GM and F too! Then in 2036, we can gear up to do it yet again.

  2. gunthestops says:

    Question, what is the lastest on the “Uptick” rule is it going to come back?

    On the Auto industry, if Congress does not act soon I think you could see a series of quick bankruptcies to save cash and reorganize as fast as possible –not sure but it may be the best thing for everyone.

  3. greenie says:

    GM and C need to declare chapter 11. Then they can re-org (merger, whatever) and ask the government for some limited help on their pension problems. As well the government can invest in a massive retraining/expanded unemployment to actually retool displaced workers. This type of solution along with much leaner auto industry (read lower loans) will be easier to “sell” to the taxpayers.

    May not be hope for Ford…

  4. Greg0658 says:

    Reading thru this – I wondered if the MIC (military industrial complex) is snatching the best talent from the AIC (auto)?

    If America is going to be foreign owned? Then we blue collar workers of the USA should be pushing for a paycheck tax withdrawl system that does not make us workers the financial backers of the MIC.

    The push for reducing capital gains and reducing corporate taxes – puts more and more on the labor force of America. We need a system to invoice world nations for the world police force (WPF); both the admin and field.

    Called into local talk radio yesterday, had the radio in 1 ear and House auto rescue in the other ear. The talk thread went from economy in general to warhawk talk to me. A week ago I went on record to offer help to the Detroit autos. I just had to call in and replay the Rep Brad Sherman question on Mexico and Canada factories being built. It was a good point.

    I am left wondering what is the spreadsheet lines in the sand when it comes to all these bailout / rescues of USA chartered organizations? Hard working, confined, inquiring minds what to know.
    Signed,
    not a jet setter here

  5. leftback says:

    This is all so so reminiscent of British Leyland in the UK in the 1970s. That didn’t work of course… but it was very expensive. Looks like the strategy here is to let them all go BK, then nationalize and blame the Bush administration. No wonder everyone started selling the debt, all investors would be wiped out.

    Did you guys see the action in the corporate credit markets yesterday? It’s almsost as though something unthinkable was going to happen to some monster that had been thought to be unsinkable. (No, not GM or F, I am talking about GE). NO wonder the banks were selling off, I presume banks and insurance cos were big holders of corporate debt. To borrow from Mish, “what can’t happen, is about to”.. (and a lot of it already has).

    The next corporation whose credit will come into question is… Uncle Sam. The bubble in Treasuries is now of historic proportions. Holding GDX, PAAS and COP if I am lucky today. I am short corporate bonds and the 10-year.

  6. leftback says:

    50% Fibonacci retracement level right here.

    If enough people believe it… might nibble but selectively.

  7. JustOne says:

    The logic of the arguments to “let them fail” leave me a little puzzled. By the same logic, if a football player blows out his knee, it is OK the first time to allow the doctors to do surgery and provide crutches and rehab during the healing process. But if it happens again, doctors should not be allowed to help.

    Instead we insist that they just leave him lying on the field until he succumbs to dehydration and starvation then haul his carcass to the dump or let the vultures do it for us. We should just look the other way, after all there are other football players. Some of them will likely be better than the injured player after his second surgery. Just let him die.

    The recent housing bubble bursting was a blow to our economic underpinnings causing us to shift our weight to other segments of the economy to continue GDP support. Oil prices increasing by a factor of almost 3 slammed into the side of that support, further stressing the support and rending the integrity of the joints and ligaments. Finally the confidence of the banking system was slammed so that interest rates soared and liquidity/operating capital was withdrawn from the auto industry … one of the segments of the economy that most depends on floor plan loans and operating capital availability and consumer credit. Now not only are the joints of our economic support system compromised but the bones are broken too.

    I don’t know if you have ever felt the pain of a knee or ankle being blown out along with a compound fracture, but that is not something to endure without the help of a few friends, your family, your doctors and durable medical equipment. Temporary support for the victim is not a “bad idea.”

    I know that the auto industry has a reputation that is somewhat tarnished by deceptive sales practices along with bait and switch marketing and dubious repair and maintenance operations. Consumers often feel like a “mark” when entering the dealer show room and that feeling is pervasive and hard to overcome. Some general negativity toward “over paid management,” “union feather bedding” and “big business” is not unwarranted.

    But the American auto industry is among the gems of the world economy and produces some of the best and most cost effective products anywhere. And it does so without a lot of the protectionism given to competitors in other parts of the world. Do they really need to die for their shortcomings?

    Pickups from Honda and Toyota are beginning to compete well but I still drive a Chevy. I don’t want the warranty and parts support for my truck slammed because of economic issues most of which GM did nothing to cause. And millions of others depend on the auto makers as well.

    Confidence placed in this industry should not be smashed like confidence in default swaps or mortgage backed securities. Be careful what you wish for. The unintended consequences are often far worse than anticipated.

    It is time now for reasonable levels of support and rehab to be applied to the broken system … auto makers and home builders are suffering the worst externally induced injuries that I have ever witnessed in my 60 odd years. It is not time to be lashing out and kicking the injured that are “down” on the field of play. I don’t like it when we shoot injured horses … much less football players.

  8. jason says:

    Chapter 11 is like rehab surgery not leaving them on the field to die.

  9. greenie says:

    Right on Jason!

  10. leftback says:

    I agree with Just One in some ways, but we should save the people and not the companies. Look, the builders had their day in the sun, and we don’t need any more houses. We have enough. Eventually we will need more cars, but there are a bunch of them at the docks at Long Beach. The problem here is one of overproduction in an era where we are recovering from overconsumption. I am all for saving the jobs but we need to retrain at least some of these people to do something that we need, instead of building more houses or cars that nobody needs or wants.

    Looking at the action this week I think Bernanke is going to need a bigger helicopter. This is dire and there is only one way out. Print, Ben, print.

  11. Archiphage says:

    When the football player refuses to wear protective gear, and the doctor is not paid for by the injured reckless player himself, but with money stolen at gunpoint from prudent players? Furthermore, when the doctor has never had a patient live without significant debilitation due to his inept ministrations? I think I just have to call it… Fallacy of Extended Analogy and save us a lot of time and effort.

  12. jason says:

    Archipage – spot on

  13. R. Timm says:

    We can’t say the Chrysler bailout was a total failure.

    1- The US government got paid back
    2- The taxpayer avoided supporting a couple of hundred thousand auto workers through unemployment insurance, PBGC, and other social safety nets
    3- Chrysler went on to make some groundbreaking vehicles like the first Minivan in the 1980s (Dodge Caravan), and the popularization of the SUV in the early nineties (Jeep Grand Cherokee).

  14. leftback says:

    This lame duck period of government is an absolute disaster for the markets and a great deal of damage will be done unless someone steps up and takes charge here. Bush and Cheney are in the back room wearing masks and filling a big bag up with silverware.

  15. Greg0658 says:

    This whole mess has me wondering the big picture plan for me, or advice to the kids since its nearly to late for me.

    I worked 23 years in union hvac, put money in an annuity and a defined pension (that my mom is still collecting – I’m 2nd gen). (all along I had a 2nd line of work, a high school passion, graphics, financed with cc) Work got slow, I withdrew (smaller bench / bigger take for bros). Withdrawing – after 12 months allowed annutity cash out to pay off cc bills, put on a roof. Hindsite totally good move. At the time taxes not a biggie, 10% hit sucked.

    Point of the background story. The pension is still owed to me. I’m to young to collect. Seems we live in a popular view that “promises can be broken”. For the sake of who? Imo Paper Pushers. That is our #1 problem. HEAVY in the Admin … LITE in the Field.

    Heard in one of the Capital auto rescue hearings “we have got to get back in the business of making things people want to buy”. RIGHT ON all you paper pushers. Get to work, and when you get the plan down on paper, LAYOFF 2/3rds of your numbers. GET a REAL JOB. F^@& “slow down / job security” our Nation is at stake.

    Back to me … since computer generated graphics is an abounding paper pushing industry (own smalltype IBM Selectric and StripPrinter bigtype) … my next step may be – fall on my sword (or steal).

  16. Peter_Schiff_Sucks says:

    Why can’t GM just “borrow” money from the FED via GMAC.

    http://www.nytimes.com/2008/11/21/business/21gmac.html?ref=business

  17. Greg0658 says:

    missed point to story:

    Advice to kids on saving for retirement / picking a career.
    There is NO safe stash place
    Trucking & warehousing if your lower IQ
    Medicine if your of higher IQ (but thats not so guarenteed / tight money)
    Not sure how long gaming will be in vogue (be ready for a rug pullout)

  18. wunsacon says:

    Bail out people. Not institutions!

    Thoughts:
    - Institutions don’t feel pain, don’t die of thirst, and don’t starve in the literal sense. People do.
    - Extend unemployment benefits (which are too paltry for anyone to think “hey, this is the good life”). (Ahem, Dubya is a dick!) But, let these automakers go bankrupt. Bad decisions should have consequences.
    - People will go work for another company.
    - I listened to Wilbur Ross’s commentary. It’s *frightening* how much damage will be “realized” by not bailing out the automakers. But, this damage has just been “off balance sheet”. Time to recognize the losses. (Yes, I’m very sorry about this.)

  19. Archiphage says:

    Greg0658:
    I just sum it up to “Act as if all promises can be broken… because they can.” There is no such thing as safe. All you can do is try and manage your risks without giving up too much of the joy of life. No one gets out alive anyway, no matter how careful they are.

  20. Greg0658 says:

    “Bloggers with an occupation of Royal pain”
    I’m in favor of way more transparency in this all connected world.
    This inquiring mind wants to know if I’m talking to a felon, a scholar, a joe6pack and every kind of mix.

    I as of yet don’t know how to publish my link in this new blog. So shameless plug for transparency.
    http://www.graphicsplus.info

  21. wunsacon says:

    Apologies to Dubya for my remark. I read yesterday he was against extending unemployment. But, he says he’ll sign it. Either I misread or he changed his mind.

  22. daveNYC says:

    To continue the dubious sports metaphor, a bailout would be more like shooting the knee full of painkillers, putting a brace on it, and then sending the QB right back into the same situation he was in when he got broken.

  23. Archiphage says:

    ‘This inquiring mind wants to know if I’m talking to a felon, a scholar, a joe6pack and every kind of mix.’

    Well, depending on who you ask, you might get any one of those answers! My real identity is no secret at all… just about every stupid thing I’ve ever written is but a Google search away.

  24. If the Big Three go bankrupt, what new jobs will all those autoworkers take? For most of Bush’s time in office, the rate of new jobs wasn’t keeping pace with what is needed due to population increase. Everyone remembers the U-6 is above 10%, right? What does that tell you? It says that while a lot of people are working, they are not fully utilizing their skills(meaning someone who used to have an $80,000/yr job is not making anywhere near that presently). Krugman has esitmated that three million people will end up out of work if the Big Three go under. How many of those will get jobs anywhere near of what they used to have(And those asshats on CNBC(I am looking at you Gasparino .. you nitwit!!) need to stop with the Union busting nonsense, because it is just that)? How many people will lose their pensions, which they counted on for a secure retirement?

  25. wunsacon:
    He changed his mind. How someone convinced him to do that is the interesting question.

  26. wunsacon says:

    Thanks, Calvin. Yes, that is a very interesting question. Maybe his own party told him how bad it would look to spend [Dr.Evil air quotes/] “trillions” on institutions and nothing more on people. It would be adding “insult to injury” on a horrible, horrible legacy.

  27. wunsacon:
    Not to mention it could help speed the decline of the Republican party. Bush has already helped put them there. I don’t think they want to make it worse(especially this close to Christmas).

  28. Marcus says:

    In your piece “Looking at the 1980 Chrysler Bailout’ the “bailout” was touted as a failure because it left an inept Chrysler intact. “None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.” Mr. Ritholtz, your quick fix suggests controlling costs, hiring new managers and allowing bankruptcy, as lessons learned from Chrysler’s problems in the 1970s.

    The Chrysler “bailout” was an example of a roaring success. It worked. This was Chrysler from 1978-1992, the Lee Iacocca years. In September 1979, Chrysler petitioned and was granted a $1.5b loan guarantee from Congress, with an additional $2b in concessions from interested parties. This “bailout” was paid back in full with interest. In March 1982 Chrysler sold its defense business to General Dynamics for $336m to pay down debt and focus on new products. And focus it did; the mini-van (Ford’s cast off idea), K cars, the profitable Jeep line, a strong truck line (including a current electric truck manufactured with Tata motors in India), and profitable international sales. As your chart shows, Chrysler has maintained about 12% U.S. market share for over 30 years, through the onslaught of Japanese and European car imports, competition with GM/Ford, several down turns, and even their purchase by Daimler-Benz.

    Your piece was myopic and became a scatter blast, mainly against Ford and GM. Chrysler is the model of how to conduct an auto company bailout. Your article should suggest using the $25b largesse from Congress in a plan modeled after 1979. Congress should set up a Governing Board to oversee application of loan monies, a Board led by Lee Iacocca and two of his appointees, the Board having broad powers like management and employee wage/benefit guidelines, innovation support, sales and marketing review, regulatory interface, and feedback to Congress.

    Your article missed the mark by about 180 degrees. The Chrysler Bailout of 1982 is an example of how to handle a market sector in crisis. That piece of history is a bright light on a dark night, a model we can use.

    Ford stock dropped to $1.01 a share today. A better plan would be to give Lee Iacocca $500m to buy a controlling interest in Ford, and turn him loose.

    You blog is great, another bright light in difficult times. I strongly disagree with your position and analysis in this article.

  29. DL says:

    If the auto companies are in as dire straits as they claim, they can just take the $25B that Bush and the Republicans are offering – - they are offering to let the auto companies use the $25 billion loan program already voted on (for development of more fuel-efficient vehicles) for whatever they want. But the D’s are standing in the way of that. So, there’s no way that GM goes for bankruptcy given that the money is there for the taking.

    And of course once Obama gets in, he’ll give the autos whatever they want.

  30. DL says:

    Marcus @ 11:53

    Yes, one could argue that the Chrysler bailout was a success. But it doesn’t mean that history will repeat in this case. GM and the others have to take a chain saw to their cost structure, and there’s no chance that they’ll do it, even with a significant amount of coercion.

    As a practical matter, only a bankruptcy court will be effective in breaking all of the contracts that would have to be broken in order to get the necessary cost savings.

    However, I think this is all a moot point, because the auto companies will end up getting the money that they need to survive until February, and then Obama will let them do what they want after that.

  31. frodo1314 says:

    Somehwat of a non-sequitur here folks but I was wondering…

    I am not an economist nor a hegde fund manager nor anything like that (I am an aerospace manager and dabble in the market on the side) but has anyone done the math on the $70B and what can be done with that?

    What if instead of bailing out the banks or the auto industry the government just took that money and gave it to all the adults in the U.S.? There are roughly 200,000,000 people over 18 in the U.S. according to 2000 census. This comes out to $350,000 per adult.

    Wouldn’t that boost the economy and preculde the need for much of the credit market anyway? Wouldn’t that be a better way to deal with this? Houses would be bought, autos would be bought, and if firms failed, let them fail and let new ones take their place.

    In Barry’s words “what say ye”? Am I completley nuts? Why wouldn’t this work? Yes, I ‘ll stick to my day job.

  32. Archiphage says:

    I think you need to check where your decimal point landed. I come up with $350 per adult, or $3,500 if we’re talking about the $700B.

  33. DL says:

    frodo1314 @ 12:59

    Are you completely nuts?

    It depends on whether or not you believe that the Federal debt and deficit matter.

  34. frodo1314 says:

    Oops. Well, that would explain it, huh? In the immortal words of SNL’s Emily Latella “Never mind.” Thanks.

  35. The Policy Boy says:

    If the cost/benefit work on letting GM (and maybe Ford) fail is at all correct, this is a no brainier. Give them the money. And why doesn’t anyone ever place any blame on the U.S. government for keep gasoline taxes so low, thus encouraging people to buy SUVs (and therefore the Big Three to make them)?
    http://thepolicyboy.blogspot.com/2008/11/three-reasons-why-we-should-and-should.html

  36. DL says:

    I actually think that GM stock may be worth buying below $3.00. It’s merely a bet on Obama bailouts.

  37. JustOne says:

    Jason,
    Chapter 11 is not rehab for the stock holders that trusted the US economic system to be stable and functioning and that saved their money in conservative investments as the system encouraged. It is death for the millions that hold auto stocks in pension funds, 401ks, mutual funds, insurance reserves, etc.

    Neither the auto makers nor their stock holders bid the price of oil to $140 per barrel, they did not issue credit default swaps and CDOs by the billion without adequate reserves, they did not decide to pump billions into banks that don’t want to lend, they did not default on their promises to build a good product at a reasonable price under the economic conditions of the day and pay their workers a reasonable wage/benefit package so they could buy cars like all the government’s employees and farmers and teachers and firemen etc.

    They may not have been perfect but their faults are highly overstated to justify leaving them on the field to die. Before we put all thumbs down in the coliseum of life, do you really think that is what they deserve? Give me a break … are/were you so much more a contributor to our system?

  38. DL says:

    JustOne @ 2:38:

    “They may not have been perfect but their faults are highly overstated to justify leaving them on the field to die”

    Should we use taxpayer dollars to resurrect all of the failed “dot-coms”…?

  39. tedstevens says:

    @Greg0658 Says:

    “Point of the background story. The pension is still owed to me. I’m to young to collect. Seems we live in a popular view that “promises can be broken”. For the sake of who? Imo Paper Pushers. That is our #1 problem. HEAVY in the Admin … LITE in the Field.”

    do I owe you for your pension? I don’t remember agreeing to pay your pension. Quit letting your emotions get the best of you. Take your hit like a man and get back up. Life does not end with the loss of your net worth.

    @BR – good info on the 80s bailout, ty.

  40. JustOne says:

    Actually I think the best use of tax payer dollars is to provide market incentives. Lowering interest rates and taxes would make both cars and houses more affordable since both require loans for most consumers. Prices are already down in both markets but buyers and lenders are still unable or reluctant to make a loan commitment when the economic future is uncertain and loans are expensive.

    Like a lawn mower who’s engine has stopped when pushed too fast into tall grass, the economy is completely bogging down. Putting more gas in the tank (cash to banks), changing the oil (allowing overextended banks to fail) or replacing the spark plug (electing a new president) does not get the engine going and keep it going to cut the grass. While gas, oil and spark are necessary for operation, if you want to cut the grass it is time to pull the mower out of the tall stuff (lower interest rates), yank the rope (cut payroll taxes) and wait for the mower to rev up. Then push more gently forward into the grass (while slowly increasing the taxes and interest) to make sure the motor does not stop again. After the tall grass is cut, one can start to speed up the pace and as long as the engine is kept fueled and maintained.

    This is the Laffer idea in a slightly different form, lower taxes to get the economy revved up. We will not see the end of trouble for all sectors of the economy until the engine is spinning a full speed.

    If the dot com companies had real profits and a viable business model, they would still be here. GM and the other Dow components are mostly still here but they have been whacked by other’s greed and stupidity. They did not force rating agencies to fabricate AAA ratings, they did not force the SEC to wave leverage limits for the big five investment banks and they did not force Fannie and Freddie into unsustainable lending practices in over heated real estate markets.

    If we don’t save the core of the economy, we will only have a burned out hulk of the system left. JMUO. If you burn up the motor or run it until the piston flies through the cylinder wall, no grass will get cut until a new mower is bought. The US economic mower was not built in a day. Do you really want to let that happen. Talk about too big to fail. Look out below.