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For Chrysler, it's a tale of 2 bailouts

November 11, 2008

For Chrysler, it's a tale of 2 bailouts

At a time when the Federal Reserve is shoveling money into financial institutions like boilermakers once fed coal into steam engines, the Chrysler bailout 28 years ago has become a quaint episode in American finance.

Word arrived early Monday that American International Group, which fast is becoming the public face of the financial meltdown, has reworked its bailout for the fourth time to the tune of $150 billion.

The terms of a government bailout certainly have changed.

"Bailing out this many companies with this much money would have been unthinkable a year ago," said Charles Trzcinka, chairman of the Kelley School of Business finance department at Indiana University. "We're handing out money like drunken sailors on a very long shore leave."

Since Congress approved the $700 billion bailout, the Treasury Department has lent $2 trillion to banks and other companies. The national debt, which now stands about $9.5 trillion, may reach $11 trillion by the time Barack Obama takes office.

Back in 1980, Chrysler had to approach Washington, D.C., on bended knee as bankruptcy approached. After winning a $1.5 billion loan guarantee from Congress, Chrysler execs led by Lee Iacocca spent months assembling a 400-lender syndicate to lend it the money -- at double-digit interest rates.

Indiana put up $32 million. Then, as now, thousands of Hoosiers worked for Chrysler and stood to lose their jobs. Thousands more worked for suppliers.

The package had plenty of opposition. Another stalwart, the heavy truck maker that became Navistar, was facing its own financial crisis. It had 10,000 employees in Fort Wayne, and many grumbled that if Chrysler got a bailout, it should too.

It didn't happen, and it wasn't long before the massive Fort Wayne plant closed for good.

So what has changed? "Americans are scared," Trzcinka said. "In the past month, we have decided that a market-based economy needs a huge amount of government support."

Hard to believe just seven weeks ago the government decided not to bail out Lehman Brothers. But days after the venerable investment bank went bankrupt, Barclays picked up a majority of its business. Most of Lehman's bankers and traders are still on the job.

Such are the Darwinian ways of the free markets.

"We cannot make everything succeed," Trzcinka said. "There needs to be some failure of companies where people took huge risk and it didn't work out."

The Chrysler bailout was easy to understand. The company needed money until new models -- including the revolutionary minivan -- hit the market.

But many people who traded the complex securities at the core of the current financial meltdown don't know what they're worth. "I have a sense that people in Congress don't really understand what is going on," Trzcinka said. "They can't articulate it, and they're afraid of the possibility of failure."

The fear of failure was present when Chrysler faced bankruptcy nearly 30 years ago. But government officials didn't lose their bearings. They extracted a high price for relatively modest help.

Here's how much things have changed. Chrysler, again facing bankruptcy, is in line to get far more money with fewer strings attached as part of a $25 billion bailout of domestic automakers.

John Ketzenberger: For Chrysler, it's a tale of 2 bailouts | IndyStar.com | The Indianapolis Star

Rick

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