The lessons of the 1979 Chrysler loan guarantee

[BigPontiac]

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AP

The lessons of the 1979 Chrysler loan guarantee

Sunday November 23, 11:34 am ET

By Ken Thomas, Associated Press Writer

Chrysler's 1979 loan guarantee offers lessons for troubled US automakers

WASHINGTON (AP) -- When Chrysler teetered on the brink of bankruptcy in 1979, the automaker spent months building support for a $1.5 billion loan guarantee that helped save the company and tens of thousands of jobs.

Nearly 30 years later, the U.S. auto industry is getting only weeks to make its case.

Still, the Chrysler chapter offers lessons to the executives of General Motors Corp., Ford Motor Co. and Chrysler LLC -- the private equity successor to the old Chrysler Corp. -- as well as the United Auto Workers union as they try to win support in Congress for a stalled $25 billion rescue plan.

Chrysler's predecessor secured the loan guarantees because labor, management and other stakeholders all made concessions, analysts and lawmakers said. The company also benefited from the salesmanship of its chairman, Lee Iacocca, as well as a broad coalition of supporters and a more dominant hold of the domestic auto market.

"The loan guarantee wasn't just handed to them on a silver platter," said Charles Hyde, author of "Riding the Roller Coaster: A History of the Chrysler Corporation."

Contrast that to the two days of high-profile hearings this past week when automakers stumbled and congressional leaders told them to come back after Thanksgiving with a better case.

Detroit's chief executives arrived aboard private jets, denied culpability for the jam their companies are in and blamed their problems on the economic downturn. The UAW said it had already taken wage and benefit concessions in 2007 and declined to endorse new givebacks.

"We're asking the taxpayers to throw money in. We're not asking management to do anything," said Sen. Charles Grassley, R-Iowa, who supported the Chrysler deal as a House member. "We're not asking unions to do anything and we aren't asking government to do anything except throw the money in. We aren't undoing a lot of the reasons why they're in trouble."

Chrysler's efforts in 1979 did not get off to a fast start, either. Struggling with its largest-ever quarterly loss, a fleet of inefficient cars and high gas prices, chairman John Riccardo appealed to the Carter administration that July for $1 billion to stabilize the company and protect its 250,000 workers.

Hyde, a Wayne State University history professor, said many people forget that Chrysler was forced to come up with $2 billion in concessions from unions, white-collar employees, dealers, suppliers and banks as part of the deal. State and local governments connected to plants provided tax concessions and Chrysler was required to adhere to tight government supervision after they received the loans.

Sen. Richard Lugar, R-Ind., who helped write the 1979 legislation with the late Sen. Paul Tsongas, D-Mass., remembered that UAW president Douglas Fraser told him that his union "never made concessions -- never" and Chrysler's leaders were "equally cavalier about it."

But Lugar said Congress approached the Chrysler loans "pragmatically -- that there would need to be substantial changes in the offerings by Chrysler, likewise substantial changes in the labor agreement with the UAW."

Riccardo announced his resignation in September and was replaced by Iacocca, a master salesman who introduced the wildly popular Ford Mustang in the 1960s.

Iacocca agreed to work for a $1 a year until Chrysler turned a profit. He traveled between Detroit and Washington on commercial airlines.

"You don't fly around on your private jet when you're asking the government for a big loan," said Reginald Stuart, who covered the 1979 rescue as The New York Times' Detroit bureau chief and wrote a book about it.

Iacocca teamed with then-Detroit Mayor Coleman Young to make the case for the loans. Together, they served as a "one-two punch," Stuart said in an interview, bringing in the Urban League and National Association for the Advancement of Colored People to their cause and organizing a grass-roots campaign by business and city leaders, dealerships, auto suppliers and others.

Four days before Christmas, Congress passed the bill, providing Chrysler a $1.5 billion loan guarantee -- 50 percent more than the company originally sought. Signed by President Jimmy Carter in January 1980, the legislation gave the government broad oversight of the company and an ownership stake. Chrysler avoided bankruptcy and went to develop its highly successful fuel-efficient K-cars.

Chrysler eventually drew down $1.2 billion in loans and repaid them within three years, seven years early. Chrysler turned a profit in 1982 and the government made $311 million in the sale of stock warrants and another $25 million in loan guarantee fees.

"We at Chrysler borrow money the old-fashioned way," Iacocca said later. "We pay it back."

Former Michigan Gov. James Blanchard, as a congressman, spent five months helping steer the Chrysler loan guarantees through the House. "They don't have this kind of time now, in my opinion," he said.

He said the car makers now need to present an operating plan that shows they can return to profitability in the next three to five years. "It's going to be very hard to help them if it appears that all it's going to do is let them limp along until we get an upturn in the economy."

U.S. automakers also face a different sales reality now. None of the Japanese companies had started building cars in the United States in 1979 and Detroit's automakers held more than three-fourths of the market. Cars carrying foreign nameplates represented 49 percent of U.S. sales last year and Toyota is on the NASCAR circuit.

Now, Hyde says, "The minute you leave Detroit, most of the rest of the county says, 'We're not against the auto industry, we're only against those backward Detroit companies.'"

[CARBIZ]

There is one huge difference between Chrysler in '79 and GM in '08: Chrysler was the last of the Big 3 to acknowledge small cars were coming and was largely caught flat-footed by the 2nd oil shock.

Whereas GM 'downsized' its best selling full-sized Chevrolets in '77 (and Ford followed suit in '78), Chrysler itself didn't downsize its full-sized vehicle until after that. In fact, the only mid-sized car under the Chrysler banner at the time was the Cordoba, which although a sales smash in '74, had largely died by '78/'79. Their 'best selling' Volare/Aspen twins were powered by the reliable, but gas sucking slant-6. The Chevette and later Escort were 4-cylinders. When Chrysler rushed the Omni/Horizon twins to market, they were powered by a licensed VW engine (although in truth Chrysler did sell the odd Cricket or two, licensed under Mitsu).

The hostage crisis put all of Detroit on shaky footing and then the U.S. economy went into the toilet.

GM has been 'right-sizing' its empire since Lutz came onboard in '01. All the re-jigged UAW contracts, E-flex, Volt, etc. are well on their way to 'turning around' GM. These were all hammered out 2,3 or even 4 years ago but won't bear fruit until '09/'10. All the favorite failings, as purported by self-apointed experts, whether the hoary 4 spd transmissions, push rod engines, lack of hybrids, etc. have all been addressed, but the mortgage meltdown has derailed everything.

Chrysler's 'turn around' was far less assured in '79 than GM's could be today, IMO. In fact, it could be argued, if it weren't for their lucky success with the MagicWagons in '84, Chrysler probably wouldn't be around today. Although the K-car was a sales success in '81, Chrysler wasn't making much money from them. However, it was the volume leading MagicWagons that gave Chrysler the profits to buy AMC (Jeep) and eventually build its new design center that begat the LH cars in the early '90s that continued Chrysler's design renaissance.