Why the 1979 Chrysler bailout worked -- temporarily
Posted Nov 15th 2008 7:17PM
About 29 years ago -- in August 1979 -- Chrysler was at death's door. It made gas guzzlers that nobody wanted to buy and it asked for $1 billion to keep itself going until a fleet of more fuel efficient cars could take up the sales slack. If it failed, a Congressional Budget Office study said that 360,000 jobs would be lost.
The U.S. turned down Chrysler's request and offered loan guarantees to encourage banks to make Chrysler the loans it needed to cover its $100 million a month operating expenses until the new car line could hit the dealer floors. That story had a happy ending -- and offers some lessons for the current situation.
Except for the much smaller numbers this story sounds much like the plight of General Motors (NYSE: GM) . As I posted, GM is trying to convince the Congress that it will fail without a $25 billion bailout and that such a failure would cost 2.5 million jobs and $125 billion in lost economic activity. It remains to be seen whether the U.S. will come through with the money that GM wants.
But the lessons from Chrysler's successful turnaround are worth considering. As it turns out, Chrysler was able to borrow $1.5 billion from banks -- co-signed by the U.S. -- which it paid back in 1983 with $350 million in interest-- never costing the government anything. Here are five reasons why Chrysler came back:
* Lee Iaccoca. Chrysler had available a replacement CEO, Iaccoca, whose reputation for success convinced everyone that he could fix the company;
* Shared sacrifice. All of Chrysler stakeholders -- including unions, shareholders, banks, and dealers -- were willing to sacrifice for the survival of the company;
* New car that met market needs. Chrysler was ready to launch a new front-wheel drive fuel-efficient car that consumers would be wiling to buy;
* Realistic plan. Chrysler had a well thought-out operating plan to survive the crisis; and
* Bank loans. Banks agreed to provide financing to Chrysler if the government would guarantee the loans.
While these five conditions for success, are instructive -- the GM bailout fails them all. To be fair, its Volt electric car might appeal to some buyers but it is unlikely that a car that requires hours of electric recharging each night in a garage will attract a big enough customer base to take up the slack for all those lost SUV and truck sales. Unfortunately, it does not look like any of the other four conditions are close to being satisfied -- although they could be with the right leadership.
Jimmy Carter -- who cut the deal that ended up saving Chrysler -- is looking better all the time. And even though Chrysler is back at death's door in 2008, the lessons to be learned from its 29 year extended life -- thanks to the government loan guarantees -- are worth considering today.
Link: Why the 1979 Chrysler bailout worked -- temporarily - BloggingStocks