Chrysler's Crisis Bailout

Questions about whether a quick federal fix is right--and will be enough The Carter Administration decided last week that now was the time to come to the aid of the nation's most beleaguered major company. After weeks of rising pressure for a federal fix for the multiplying problems of Chrysler Corp., Treasury Secretary G. William Miller produced--and Jimmy Carter approved --a Government bailout. It was designed to prevent the nation's No. 3 automaker (1978 sales: $13.6 billion) from sliding into a bankruptcy that could have put many thousands out of work and sent a shudder through U.S. financial markets.

Beamed Chrysler Chairman John Riccardo "We are extremely encouraged. This fits the bill."

In his first public act at the Treasury, Miller spelled out the ideological ground rules of federal aid and warned other troubled companies against expecting similar help. Such assistance, he said, "is neither desirable nor appropriate, being contrary to the principle of free enterprise." But Chrysler was an unusual exception, he added, in which the Administration "recognizes that there is a public interest in sustaining [its] jobs and maintaining a strong and competitive national automotive industry."

Despite Chrysler's immediate enthusiasm, the Treasury package falls far short of what the company sought. It does not give Chrysler the $1 billion cash aid that some analysts insist is the minimum it needs to keep going until late next year.

That is the earliest time Chrysler can expect to make money from the new generation of front-wheel-drive compact cars now being developed by President Lee lacocca, who will replace Riccardo as chief executive by this year's end.

The Government rejected Chrysler's plea that it receive aid in the form of either federal tax refunds or immediate relief from having to meet the costly safety, environment and mileage standards on new cars. Miller said the former idea would amount to an "interest-free, unsecured cash advance from taxpayers' funds." Instead, he recommended Government loan guarantees that will have to be approved by Congress and will "total considerably less than $1 billion."

Treasury aides were understood to be thinking of $500 million to $750 million over a limited period. With those guarantees, the company would be able to borrow from private bankers who would otherwise turn down Chrysler as an unacceptably high risk. In case of default, taxpayers would be left holding the bag, and the Government would probably have to take over Chrysler and hope to sell off its vital parts.

Wary of Congress's reluctance to bail out Lockheed in 1971 and New York City in 1975--the legislators finally voted for both programs by small margins--the Carter Administration laid down basic conditions that Chrysler will have to meet.

Its managers, said Miller, must draw up "an acceptable financial and operating plan" for dealing with the company's short-and long-term problems as well as spelling out its cash needs. This strategy will have to include sacrifices by everybody with an interest in saving the company: management, stockholders, employees, bankers and suppliers. Only such an effort can ease the Chrysler crisis. The long troubled company lost $204.6 million last year but topped that in this year's second quarter alone, when it ran $207.1 million in the red. Faced with the possibility of a shattering loss of more than $500 million for 1979, Chairman Riccardo held out the hand for $1 billion in federal aid.

Early last week evidence of the company's woes increased. Chrysler announced that another 4,600 workers had been laid off, bringing the total to 23,800, nearly a quarter of its normal blue-collar force. Chrysler also reported that, partly to save money, it was pulling out of a proposed joint venture with a Taiwan company to produce trucks. And lacocca disclosed that the company was considering dramatic cash rebates to customers of up to $500 a car; the aim would be to clear its staggering factory stockpile of nearly 80,000 unsold vehicles, valued at just under $700 million. Chrysler still has some 1978 models unsold, and, at current levels of demand, more than 200 days' supply of many of its 1979 cars.

The company specializes in making larger cars, vans and recreational vehicles. Since the gas crisis started, sales of these relics have, in lacocca's words, "been dropping like a rock." In this year's second quarter, unit sales were down 28% at Chrysler, compared with 27% at Ford and 15% at General Motors. GM and Ford, being bigger, are better able to withstand downturn. Also, they normally manufacture cars only after dealers order them; alone among the Big Three, Chrysler until recently produced autos essentially on speculation and then tried to market them to dealers. Because its dealers' lots are overflowing with slow-selling cars, Chrysler has been forced to add to its own sprawling stockpiles. Inflation raises the cost of financing this inventory and adds to the company's financial burden. The wholesale price index in July jumped at a 14% rate, the worst since February.

Since earlier this year, when the bond-rating agencies downgraded the company's credit and thus effectively prevented it from raising any further funds in the public markets, Chrysler has had to live off its own flesh and bone. Following earlier sales of some or all of its interests in France, Britain, Brazil, Argentina and South Africa, the company in the past few months has announced the closing of two U.S. plants.

Still, Chrysler's working capital --the difference between current assets and current liabilities, which is one measure of its ability to pay its bills from its own resources--has dropped from an acceptable $1.1 billion early this year to a weak $800 million in June. The figure now is still lower, and stock analysts predict that it could shortly fall below $600 million. That would violate the fine print of the company's 1977 revolving credit agreement with some 180 banks and could place it in technical default on $567 million in debt.

The roots of this crisis are old and deep. In the 1960s, under Chairman Lynn Townsend, Chrysler glanced jealously at the worldwide power of both GM and Ford and tried to emulate them by expanding rapidly at home and abroad. The forced growth was ill-timed, haphazard and too fast. Chrysler entered the 1970s lacking the financial resources to weather three recessions, two oil crises and an enormous wave of environment, safety and fuel-economy regulations.

When Riccardo took over in 1975, the public was demanding smaller, more fuel-efficient cars, but Chrysler, unlike GM and Ford, lacked the money to retool and redesign quickly. With smaller sales than the other two automakers, Chrysler had to spend nearly twice as much per vehicle to meet Government rules. Pressed for cash, the company had to slash its budget for plant modernization.

Now Chrysler appears to have one hope: to stay solvent in any way possible until lacocca, who is to auto sales what Patton was to tank warfare, can bring forth the cars to save the company. He will need help--and not just from Washington. The United Auto Workers rejected his plea for a wage freeze, but delegates from its Chrysler council agreed to reconsider making concessions once the UAW agrees to a new three-year contract with GM and Ford. Said UAW President Douglas Fraser: "We'll take into consideration whatever is needed for the survival of Chrysler Corp." The union probably will accept smaller raises at Chrysler than at GM and Ford.

As for other sacrifices, common stockholders will have to wait a long time for dividend payments to resume. Top managers could well announce token salary cuts* and the sale of the company's three corporate jets. Bankers may have to accept deferred payment and lower interest. A committee representing Chrysler dealers has offered to lend the company $50 for every car they receive--a deal that ultimately could amount to an interest-free credit totaling $120 million. lacocca has already confirmed that certain suppliers have agreed to extend terms of payment. Chrysler has also asked some to cut prices by as much as 20%.

Chrysler may have to sell off some more operations. Its small marine products division, which makes outboard motors and boats, and its 15% investment in France's Peugeot could well go on the block. The company may also sell one or more of its U.S. engine or transmission plants to a major importer like Volkswagen or Japan's Honda and work out a deal for Chrysler to buy back some of the production. In sum, the company will have to accept a reduced role in the auto market.

The combination of squeeze and sacrifice is expected to meet the Treasury's conditions, but Congress will be harder to sell. The aid package will go before the banking committees of both the Senate and the House.

Their chairmen, Senator William Proxmire and Representative Henry Reuss, both Wisconsin Democrats, opposed aid to Lockheed. "A terrible precedent," said Proxmire of the proposed Chrysler deal. Reuss expressed distaste for guaranteeing loans for Chrysler to build "gas guzzlers that nobody will buy."

The congressional debate will resurrect all the arguments for and against giving federal aid to any company. There is a strong case that such help rewards failure and penalizes success, puts a dull edge on competition, is unfair to an ailing company's competitors and their shareholders, and inexorably leads the Government deeper into private business. Why should a huge company be bailed out, say critics, while thousands of smaller firms suffer bankruptcy every year? Where should the Government draw the line? GM Chairman Thomas A. Murphy has attacked federal help for Chrysler as "a basic challenge to the philosophy of America."

Hearing that, the UAW'S Fraser, with equal hyperbole, called Murphy a "horse's ass." In short, emotions are high, and there are no clear, simple answers.

Supporters of aid argue with passion that the U.S. cannot afford the failure of a company that is the nation's tenth largest manufacturer, its biggest builder of military tanks and one of only three major domestic competitors in its supremely important automotive industry. A Congressional Budget Office study concluded last week that a complete Chrysler shutdown would cost 360,000 workers their jobs immediately, and that ripple effects throughout the economy could throw an equal number out of work.

Yet all those arguments can be countered. Even if Chrysler were to fail, another company would take over its tank business; the domestic auto industry would remain competitive because Volkswagen is expanding production in the U.S.; other auto manufacturers would enlarge their production--and hire plenty of workers to meet it. Still, the threat of unemployment, even if temporary and spotty, was the decisive point for Administration policymakers in this preelection, recession year.

Congress can also consider that if Chrysler fails, the federal Pension Benefit Guaranty Corp. may have to assume responsibility for about $800 million in insured but unfunded pension obligations to the auto company's employees. "That would be catastrophic," warned one agency official. To pay the bill, the PBGC would have to get special congressional approval to raise the fees that it charges for insuring other companies' pension funds.

Since Chrysler, by its own reckoning, is now spending at a rate of about $100 million a month, guarantees for even $750 million in new debts (on which interest would have to be paid) will not go very far. Next year the company will have to repay or renegotiate $303 million in European loans and $284 million in U.S. borrowings. The prospects are good that the company, after a hard fight, will win congressional approval for aid in 1979. But the chances are also strong that hungry Chrysler, like Oliver Twist, will return for more some time next year.

* "Last year Riccardo earned $343,339. In 1979, his first full year at Chrysler, lacocca was supposed to earn $360,000, on top of a $1.5 million bonus, paid over 1979 and 1980, for joining the company.

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