Historical look on the Chrysler bailout from 30 years ago

Posted on March 30, 2009


With the current actions taken by Obama administration to bail out General Motors and Chrysler (Ford turned down the money offered by the US government), it’s interesting to take a look back at the Chrysler turnaround led by Lee Iacocca and financed by the US government 30 years ago during the Carter Administration.   The parallels are startling, and history shows that Chrysler never realized a true turnaround, but a temporary gasp of air.  And now, 25 years later, Chrysler is back in Washington D.C. in need of additional capital to prove it.

Remember that in 1998, Daimler “merged” with Chrysler in a $38 billion deal, and then sold Chrysler to Cerberrus Capital in 2007 for an estimated $7.4 billion.

In an 1983 article written by James Hickel at the Hertitage Foundation that outlines the key points of the 1979 bailout illustrating its true ineffectiveness.  Quick points:

  • In 1979, the US government provided $1.2 billion in loan guarantees to Chrysler vs. a combined $17.4 billion program aimed at GM and Chrysler today. (Think about the fact that the current bailout program is $17.4 billion when the market price for Chrysler set by Ceberrus Capital in 2007 was under $8 billion.)
  • Four years after the program initiated in 1979, additional measures were set in action to assist Chrysler, including import quotas, additional loan guarantees, and industrial policy initiatives designed to bolster the automobile and related industries.
  • There was a public understanding that the loan guarantees made to Chrysler essentially cost the taxpayer nothing, since the money allocated was in the form of a loan and Chrysler successfully paid back those loans.  Truth is that the loans made to Chrysler carried an interest rate of 10.35% versus the going market rate of 14.5%, so the reduced interest rate certainly represents an opportunity cost to the American taxpayer.

Glad to see that the US government is acting rationally once again in 2009 at at ten times the cost of the 1979 bailout.  At this rate, Congress will be implementing a $174 billion bailout program for the automakers?

Here’s a link to Hinkel’s complete article on the Heritage Foundation website.