Big Loss, Bigger Bailout

The White House proposes a $1.5 billion tide-me-over for Chrysler

The mood in the 54th-floor boardroom of Chrysler Corp.'s offices atop the Pan Am building in Manhattan was understandably subdued. Sales were still slumping, costs continued to soar, and back in Detroit the company had earlier in the week announced a third-quarter deficit of $461 million, by far the largest quarterly loss in its troubled financial history.

But Chairman Lee lacocca had some good news for his 16 fellow Chrysler directors. Before they gathered for their regular monthly meeting, he had received a call from Treasury Secretary G. William Miller, who told him that the suffering No. 3 automaker was going to get the Government aid that it had been seeking since August. Nor would the assistance be chintzy. The Carter Administration had decided to back a federal loan guarantee of $1.5 billion, which was twice what Miller had indicated he would support only last September and a full $500 million more than the company had asked for in the first place. As a result of a confluence of economic and political imperatives, the White House had decided to proceed with the biggest U.S. corporate bailout ever, one that would far exceed the $250 million in loan guarantees extended to Lockheed during the Nixon Administration in 1971.

The Carter pledge came after months of pleading from Chrysler executives that without a quick infusion of cash the company faced not just more losses and heavier layoffs but perhaps even a bankruptcy followed by a shutdown that would further weaken the nation's economy. That, plus the fear of having to campaign for renomination at a time when Chrysler plants might be closing for lack of operating capital, is what finally prompted the Administration to set aside any philosophical doubts about such a bailout and back a big loan guarantee.

The bailout plan comes with strict conditions attached, and it must also be approved by Congress, which will probably go along but may attach further limitations. Even so, the news cheered Chrysler's management, which is counting on a line of fuel-efficient, front-wheel-drive cars due to appear next year to spearhead a reversal of the company's decade-long slide and return it to solid profitability by 1981. Said lacocca after the Administration's announcement: "It's a vote of confidence we needed." Added Auto Workers Chief Douglas Fraser, who is joining Chrysler's board as part of a deal struck by his union to help the firm: "The Government is taking a very positive step, assuring the jobs of nearly half a million American workers."

The praise was by no means unanimous, and among the most vocal critics of the bailout plan was Wisconsin Democrat William Proxmire, chairman of the Senate Banking Committee, which must consider the actual legislation involved. He blasted the proposal as "a massive giveaway for the taxpayers, and a massive windfall for the banks, stockholders and others who have the main stake in a Chrysler bailout." He also pledged to make any aid terms "as tough as possible."

In fact, a loan guarantee is not a handout at all, but a promise by the Government to make good on the cash supplied by private banks to a company if the firm cannot repay the money. The borrower pays interest not only to the banks but also to the U.S. Treasury; in Chrysler's case the annual interest charged by Uncle Sam will be at least .5%.

Moreover, there are some important strings tied to the Chrysler aid package. The key one is a requirement that before Chrysler is allowed to make use of the $1.5 billion guarantee, it must first scrape up another $1.5 billion on its own to bring the company's total cash infusion to $3 billion. Explains one top Carter aide: "We reasoned that if we decided to help Chrysler we might as well do so with something that will actually work, instead of just putting up an amount that will only guarantee that the company will fail and the money would be lost."

Chrysler must also put together a convincing program for a return to profitability within two years, and it must accept close monitoring of its progress by the Treasury; indeed, Miller would be empowered to shuffle Chrysler's top executives if this was needed to give the company "a sound managerial base." Under the plan, no more guaranteed loans of any sort could be made after Dec. 31, 1983.

Political considerations clearly weighed heavily in the decision to help Chrysler. Indeed, Treasury officials concede that "a key role" in that decision was played by Douglas Fraser. Not only is his 1.5 million-member union the second largest in the nation, but Fraser himself is an admirer of Carter Rival Ted Kennedy, who has sponsored legislation to help Chrysler. Fraser himself has already declared that his union would be "neutral for Kennedy" in the 1980 campaign. With support for Carter weakening among urban blacks and blue-collar workers, who are strongly represented in the UAW ranks, the President's men have been at least keenly aware that many votes might be riding on the Chrysler decision. Said one top Carter aide last week: "It's not going to help us much with the UAW, but it might."

Despite all the dramatics in the past three months surrounding Chrysler's pleadings for federal help, there was never much doubt that Carter would agree to a bailout. The role of Miller, who rejected the company's initial aid proposal last August as too high, was to "play the heavy," as one Treasury aide says. Within the White House, the top operatives on the Chrysler case were Vice President Walter Mondale and Stuart Eizenstat, Carter's domestic affairs adviser. The momentum toward a bailout decision accelerated sharply after Oct. 11, when Mondale attended a Democratic fund-raising luncheon in Detroit and got an earful of company pleas and similar bailout advice from Motor City Mayor Coleman Young, who is also vice chairman of the Democratic National Committee. Back in Washington, Mondale argued that, given the political realities, the Treasury ought to be flexible on the Chrysler issue. Two weeks ago, Mondale and Eizenstat got Miller and Fraser together at a breakfast meeting. Next day, Treasury officials indicated that Miller would drop his insistence that any aid package for Chrysler be "substantially less" than $1 billion.

Miller's announcement last week was deliberately timed to follow Chrysler's latest loss report, the better to make the Administration's motives seem purely economic. The Secretary explained that the higher aid package was necessary in part because the company now needed "greater resources than were apparently required in August." Actually, the Administration had known that Chrysler's third-quarter deficit would be huge, and in fact last September the company had forecast an even larger loss.

Chrysler also played politics in its pursuit of aid. The company not only recruited Michigan's congressional delegation, led by Senator Don Riegle and Congressman Jim Blanchard, to press its case on Capitol Hill but also dispatched a team of high-powered lobbyists to work up House and Senate support. Much of the pressuring was concentrated on Wisconsin's Proxmire, who had let it be known that he would be in no great hurry to have his committee report out an aid bill before Christmas. Though Proxmire's opposition to the bailout is genuine enough, by last week he had agreed to a Riegle request that his hearings on the bill be moved forward from Nov. 19 to next week, so that they could be finished before the Thanksgiving recess.

Government help of some sort is plainly needed if banks are to be persuaded to continue to finance Chrysler. Despite five profitable years, the company has run up a net loss in the 1970s of $100 million, and more than half the red ink has come this year alone. So far the 1979 deficit totals $722 million, and the full-year loss could easily top $1 billion, an all-time record for U.S. industry.

Some of Chrysler's deficits result from the high cost of meeting clean air standards and fuel efficiency requirements. But it was the gas shortages of last spring that triggered Chrysler's ruinous 1979 sales slump (indeed, recently Ford and General Motors have also been losing money on their U.S. operations). Yet the fundamental problem has been poor management; Chrysler has consistently failed to come up with enough models that sell well, and its share of the U.S. auto market has slumped from 14% three years ago to 11% now. The firm's total indebtedness, including that of its financial affiliate, now stands at more than $5 billion, spread among some 250 different banks and other institutions, and lenders are wary of taking on any more Chrysler debt.

Yet Chrysler does stand a good chance of raising the $1.5 billion that it needs to get its loan guarantee in other ways. Three likely sources of funds:

> United Auto Workers: $203 million, representing money that the UAW has agreed to forgo in its new three-year contract. Included is a delay in phasing in certain wage and benefit increases that G.M. and Ford workers are already receiving.

> State aid: about $250 million, representing various financial schemes now cooking between Chrysler and the seven states where it has major operations. For example, the state of Michigan plans to mortgage Chrysler's Highland Park headquarters for $150 million.

> Preferred stock: up to $200 million, representing a kind of financial prestidigitation whereby dealers and suppliers can lend the company money in return for the stock; also, banks that have already reached their lending limit to Chrysler might be persuaded to swap loan notes in return for preferred stock so they can take on more of the company's debt.

Should the Administration have resisted the temptations to extend a hand to Chrysler? Many businessmen and economists say yes, partly because they believe that the rescue effort will fail. Says Alan Greenspan, President Ford's chief economic adviser: "I forecast that the aid package will be insufficient to solve the problems of Chrysler. I further forecast that the company will be back for more."

Carter aides concede that they are not sure that Chrysler can be restored to health. But they argue that the rescue effort had to be made. Any economic downturn would surely become steeper if the nation's tenth largest industrial enterprise (1978 sales: $13.6 billion) had to close its doors. Chrysler employs 137,000 workers directly and supports another 400,000 people on the payrolls of suppliers and dealers. By the White House's reckoning, perhaps 50,000 jobs would be lost immediately if Chrysler went bankrupt. Within twelve months, according to the Data Resources research firm, the unemployment rate, now 6%, might rise by .5%. In financially beset Detroit, where Chrysler is the largest private employer, joblessness might double from today's 8% level. The cost to taxpayers could be large in terms of unemployment compensation and increased welfare and food stamp payments --and a Government takeover of Chrysler's $1 billion pension obligations.

But the permanent impact of a Chrysler collapse on the economy could hardly be described as calamitous; even if the firm were to go bankrupt, many of its profitable components would certainly be taken over by other companies. Furthermore, expanded production not just by Ford and G.M. but by American Motors and even the U.S. operations of Volkswagen might quickly offset some of the jobs impact of a Chrysler shutdown.

The real question in the bailout is whether it chips away dangerously at free enterprise itself, a system that cannot survive without the discipline of competition brought on by the threat of failure. Speaking specifically about Chrysler, General Electric Chairman Reginald Jones has said: "One of the aspects of the free enterprise system is that you should be allowed to succeed, and you should also be allowed to fail."

It is true, as the White House argues, that the U.S. auto industry would be more competitive with three healthy giants than two, but that is not an entirely persuasive argument for trying to keep afloat a company that may not be able to survive on its own. Secretary Miller insists that the Chrysler crisis is a "unique situation," in that it will cost much less to help the firm than to let it fail. Nonetheless, there is a hazard that a bailout could be read by other big companies as a signal that if collapse looms, they too can count on a rescue.

The fear is that this could foster an attitude among managers that they need not work very hard at holding down costs, increasing sales and developing new products, since Washington will be reluctant to let failing companies fail. That is an attitude that has been pervasive in Britain, where governments have been all too ready to nationalize or shore up shaky enterprises. In fact, Chrysler got a $270 million handout in Britain in 1976 after it threatened to abandon its money-losing manufacturing operations there. Two years later, the company pulled out of Britain anyway. Indeed, that episode may have an important moral: loan guarantees or no, only Chrysler can save Chrysler.

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