Friday, May 01, 2009

The first Chrysler bailout

As the Obama Administration enmeshes itself in the travails of the auto industry it is useful to recall the last time the federal government bailed out the company back in 1979:
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."
At first glance the 79' bailout would seem to be an arrow in the quiver of advocates for greater government involvement in industry. After all, the company survived for another 20+ years and large numbers of layoffs were likely avoided or at least slowed. The bailout can therefore be seen as a success.

Economic thinking, however, demands that we examine not only what occurred, but what likely would have occurred if the government had done nothing. Barry Ritholz, who is hardly a right-wing partisan, says the following:
The Chrysler bailout of 1980 was not quite a pre-packaged bankruptcy reorganization. It left the company with the same management team, the same union contracts, the same pension obligations, and the same health care coverage; all the bailout did was buy the company a few more years. Indeed, the pre-bailout industry looked almost identical to the post-bailout industry. None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.

Chrysler survived, but a slow necrosis gradually handed over the dominance of the US automobile market to the Japanese, Koreans, and Germans. In 1980, Detroit had a ~75% market share of autos sold in the US. For the first time ever in May 2008, that number slipper under 50%, and its now down to ~48%.

...Had Chrysler been allowed to fall into bankruptcy, it’s not too difficult to imagine a vulture investor obtaining all of the aforementioned assets, and putting them to good use. Just picture a refurbished Chrysler Corporation – newly recapitalized, minus the onerous labor contracts, pension obligations, and healthcare overhead. Its new owner would have been free to pursue new manufacturing methods, new automobile designs, even new markets – with all the advantages Chrysler itself had, but without the defunct company’s baggage.

A post bankruptcy Chrysler would have been as leaner, meaner and more cost-efficient, and maybe even more fuel-efficient machine than the rest of Detroit. Surely, they would have been willing to take chances on some new designs that broke free of the stodgy boring cars put out by Detroit in the 1970s and 1980s.

Not only would Chrysler have been much more competitive in the US and world markets, their mere existence would have forced GM and Ford to streamline their own processes improve their vehicles in terms of attractiveness, mechanical reliability, and fuel efficiency.

Words to ponder as the government again injects itself into the workings of the auto sector.

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