![\"Mr. Iacocca boasted that the TC was the prettiest Italian to reach the United States since his mother. But potential buyers recognized it as a $30,000 LeBaron look-alike with a removable hardtop that leaked around its goofy porthole window. The interior was particularly jarring, juxtaposing pleated Italian leather against cheap, ill-fitting plastic.\" (courtesy nytimes.com)](https://www.thetruthaboutcars.com/wp-content/uploads/2008/09/600-chrysler-tc.jpg "\\"Mr. Iacocca boasted that the TC was the prettiest Italian to reach the United States since his mother. But potential buyers recognized it as a $30,000 LeBaron look-alike with a removable hardtop that leaked around its goofy porthole window. The interior was particularly jarring, juxtaposing pleated Italian leather against cheap, ill-fitting plastic.\\" (courtesy nytimes.com)")
Discuss Detroit's bailout plans with one of its well-informed backers, and they will inevitably bring up the Chrysler bailout of 1979. Chrysler's near immediate return to profitability after receiving low-interest government loans is considered proof that U.S. government intervention in the American auto industry can work. After all, Chrysler paid back all its federal loans seven years early. But this comparison doesn't hold water. If anything, the bailout of '79 points out the many reasons for opposing the next big Detroit giveaway.
Bailout backers claim that low-interest federal loans helped Chrysler turn its business around. But there are loans and there are loans. Detroit's lobbyists [correctly] call this year's Department of Energy funding “an incentive to help the country meet its energy goals.” Back in 1979, Uncle Sam's money was universally and unashamedly acknowledged as a bailout.
Bottom line: the forthcoming $50b in low-interest government loans will arrive with far fewer and less powerful strings attached than the $1.5b lent to ChryCo back in the day.
When Chrysler came begging to congress in '79, it was in the midst of massive restructuring. The automaker had already sold or shuttered huge portions of its business, laid off workers and extracted then-historic concessions from the UAW. Even so, Congress was in no mood to give without asking. Our legislators placed significant conditions on the eventual bailout package.
To qualify for loans, Chrysler was forced to raise another $1.5b in private capital, present a convincing plan to return to profitability, and accept Treasury oversight of its implementation. This included the ability for the treasury to shuffle Chrysler's leadership in order to provide "a sound managerial base."
Needless to say, the “un-bailout” of 2008 is unlikely to include any such conditions.
The first $25b which has been authorized– but not yet appropriated– will be used to retool plants to build more fuel-efficient cars. But Detroit is transitioning to increased fuel-efficiency anyway, thanks to both market demand and beefed-up fuel economy regulations. And though final rules for the loan program have not yet been drafted, Washington doesn't appear to be asking for any more than business as usual from Detroit.
Considering the risk to taxpayers, Detroit needs to prove there is at least a chance it will be able to pay these loans back.
The key to Chrysler's post-bailout success was a well-grounded turnaround plan rooted in solid products. The K-Car and minivans were the right products at the right time. The government could invest in Chrysler with some confidence that it would return to profitability. Especially with Treasury officials closely monitoring the turnaround. Not to mention the salutary effects of a little job insecurity among Chrysler's execs.
Today, the federal government has no such grounds for optimism in Detroit's short-term future. Chrysler's new-product pipeline is a wasteland as far as the eye can see, with only the Hornet compact standing out from the Nissan re-badges and mild re-skins.
GM is banking on the Volt EREV to turn its fortunes around, but without inexpensive, fuel-efficient options in the meantime, the General won't survive to see the [initially] low-volume Volt turn a profit. Nothing minivan-like looms on GM's horizon to justify a huge, public money investment.
Ford alone shows signs of the kind of across-the-board revamping demanded by the dire times, bringing proven, paid-for and popular European models stateside over the next several years.
But congress won't be in a position to bail out specific automakers based on their turnaround plans; The Big 2.8 are approaching congress as a single block. What's more, they're framing the bailout in terms of environmentalism and nationalism (i.e. an entire industry in decline). This plan seems specifically designed to shield individual automakers from scrutiny and accountability whilst manufacturing a atmosphere of crisis.
Though rationales for the bailout are expressed in terms of decreasing America's dependence on foreign oil, this is a red herring. As Farago points out, consumer tax breaks make far more sense as a means of approaching this problem. And contrary to the all-for-one talking points, the American auto manufacturing segment is not in ruins. Transplant factories still build high-quality, profitable products across the land.
This bailout then is a political decision, motivated by political goals and wreathed in nationalist rhetoric. It seeks to collectively rescue several failing firms in a rapidly-changing industrial landscape.
As such, its closest comparison is to the British Leyland debacle of the 1970s. Then, an emotional attachment to failing British car brands cost UK taxpayers billions before the whole mess fell apart in a pile of rust and faulty electrics.
Without principled political resolve from Washington, Detroit faces a similar fate. Even with appropriate terms and conditions, Chrysler's return to the brink of bankruptcy– via a series of bone-headed product decisions and executive greed– demonstrates conclusively that, ultimately, no amount of money can save an automaker from its own incompetence.
Edward,
Thank you for your thoughtful, well-written and non-polemical editorial.
I plan on sending this to my state’s Congressional delegation with a covering note saying not one thin dime to incompetent and corrupt American companies.
Inept 123
“Considering the risk to taxpayers, Detroit needs to prove there is at least a chance it will be able to pay these loans back.”
I’m not so sure. Didn’t the feds give Detroit some dosh for the “new generation” of vehicles? Well, the cars were developed, but never sold. I strongly doubt that the loans were paid off, so what was the point of the exercise? Feds are out of pocket, Detroit have made some cars they don’t want to sell and the tax payers are fuming.
So who was the winner, here?
Detroit will get the bailout. There’s a lot of lobbying and a lot of people receptive to the idea. Unless there’s a freeze on bonuses & payrises and an overhaul of management, it’ll solve nothing. All it will do is provide more material for TTAC and the B&B to write about.
Hey, maybe there ARE some winners in this bailout….?
“To qualify for loans, Chrysler was forced to raise another $1.5b in private capital, present a convincing plan to return to profitability, and accept Treasury oversight of its implementation.”
True dat. One of Lee’s pet peeves in his auto-biography was that the government made Chrysler get rid of it’s private jets. Lee and the boys had to fly commercial. Could you imagine Rick, Alan, and Bob doing that?
Lee also had to testify before congress and answer a lot of pointed questions. Why should we back these loans? Why didn’t you forsee the changing marketplace? How do you know you will have a viable product and business in the future?
Again, could you imagine Rick, Alan, and Bob doing that?
Also history is repeating itself. Lee felt that his turnaround plan would work and they wouldn’t need the guaranteed loans. Then the Shah of Iran fled the country and the embassy was stormed by Islamic “revolutionaries”. When the oil prices spiked, cars sales fell in the toilet, pushing Chrysler to the brink. Looks familiar, doesn’t it?
I remember reading in Iacocca’s autobiography that he felt the government got a stellar deal given the terms of the loan, and that it was actually quite profitable for the government.
Oh, isn’t that a Maserati in the picture?
The management has lead the D2.8 to this juncture – not the market, not the environment, not the competition or all the “unfair” practices D2.8 used as excuses to hide their incompetent management and rubber stamp board of misdirectors. The one thing that is always a wrong idea in business is throwing money at something failing on its own accord (pun intended).
Matthew Danda: I remember reading in Iacocca’s autobiography that he felt the government got a stellar deal given the terms of the loan, and that it was actually quite profitable for the government.
It was a profitable venture for the government. If I recall correctly, the government held some of Chrysler’s stock as collateral, and when the company bounced back in the early 1980s, the value of those shares soared. The government DID make some money on the Chrysler loan guarantees.
Edward Niedermeyer: The key to Chrysler’s post-bailout success was a well-grounded turnaround plan rooted in solid products.
Excellent article, but a critical key to Chrysler receiving the loan guarantees in the first place was Lee Iacocca. Probably no one else could have orchestrated the public relations campaign that sold the UAW on concessions (without which Congressional Republicans would never have agreed to the bailout) and Congress, President Carter and ultimately the public on the whole idea of the loan guarantees.
Some of his actions in the late 1980s and early 1990s – along with his refusal to retire from Chrysler – tarnished his reputation, but in 1979, the fact that Iacocca was leading Chrysler made the idea of loan guarantees palatable to a skeptical public and federal government.
Again, I say, for an entire industry to admit failure is a fantastic statement of itself. We privatize profits and socialize losses. How,can Republicans the brass knuckle survial of the fittest, buy into this? I think I know, it’s called votes. When the last crisis hit in 1979 there was little other domestic car capacity other than the big three. Now, with all of the transplants, why should it matter who builds the cars here in America? Is chrysler more worthy now that they are not German owned? Is the Ford family a special case since their grandfather invented the assembly line for cars? Is GM, the former heavy weight builder of the World, given special status as the old icon of American might? If any of this is true, than we should socialize the rest of the Country’s industries and regulate them from Washington. If not, then one or two of these old icons has to exit stage left and make room for newer and more efficient players. Unless I am wrong, don’t these other car builders with the funny sounding names build here with American labor and investment? Is it government’s role to pick the winners and losers in all of this? Finally, how can anyone say this is the wisest use of our tax dollars in times of financial peril as we are in now?
So am I the last person to realize that GM’s advertising campaign of nonexisting products isn’t to impress customers but, instead, to impress congressmen? “Lend us a few bucks just to tide us over…” And when congressmen sniff the winds back home, the millions of disgruntled customers, having seen the same ads, can see that GM is on the verge a turnaround, and won’t punish their congressmen that voted for the bailout? (At least for the time being)
The only hope here is that the bailout vote can be delayed until after the election. Tell ’em what they want to hear in the meantime. Won’t get fooled again…
So what happens to the Big 2.8 after the $50bn has been spent? Like a new college student who gets their first (emergency)credit card from Dad and maxes it out pizza and kegs, the 2.8 will come begging for more. And someone will be willing to give it to them. Perhaps the government should pull an Airbus and become a partial owner in one of the manufacturers. GM seems to be run like the Post Office anyway. Would we really notice any difference?
A few minor quibbles to a great article. It wasn’t the K-platform and the minivan that helped ‘sell’ Chrysler. It was Iacocca’s decision to use one platform for a large variety of powertrains, a strategy then used by a few of Chrysler’s Japanese competitors, that helped sell the bailout. The K-Platform was really nothing special from an engineering standpoint. It’s the economies of scale, and the ability of Congressman to understand how this reduces cost, that made it work.
Here’s the paradox folks. If one of the big three go bankrupt… their name and sales will go straight to the toilet. Period. This isn’t a, “Well… what if…” scenario. The minute they decide to file Chapter 11 they will lose the majority of their remaining sales base.
Another thing to consider is that a Ford or GM Chapter 11 will effectively make their American competitors that much less marketable. It will for all intended purposes become a complete capitulation of the American-owned auto industry when it comes to car buying. Most anyone who then shops for an ‘American’ car will have to consider the possibility that the maintenance and depreciation of the car will be terrible. Even if that model is truly among the best in that segment it won’t matter.
Chrysler may have a limited impact due to it’s far smaller size and popularity. But a Ford or GM bankruptcy will be a big white flag in the eyes of the public.
Matthew Danda:
“Oh, isn’t that a Maserati in the picture?”
Actually it’s a hybrid (no pun intended). The coach work and interior are Maserati, the drivetrain is Chrysler with the addition, on the top end models of a double overhead cam Maserati sourced 16v head (by Cosworth). In later years it was a true world car: Body by Maserati, electronics, tranny, and running gear by Chrysler, and engine by Mitusbishi.
The car was delayed for several years because, don’t laugh, Maserati could not produce a coach with quality targets that Chrysler was asking for. When it was finally introduced after numerous delays the interest in it had waned. And the LeBaron had been introduced making the TC look like a copy of the LeBaron instead of the other way around.
A good history is here:
http://www.allpar.com/model/tc.html
As for the NYT’s description of the interior, I’ll let you be the judge:
http://www.murrayco.com/Car_Collection/chrysler_TC_maserati_91.html
(Scroll down to the bottom)
I like this article very much. It’s great when the facts are laid out plain and clear, with few polemics and little snark.
What I do not understand about America is how it is even possible for the government to support dying companies that still think they can afford exorbitant saleries for their top executives.
Paying Rabid Rick millions while he asks for billions: that’s like as if Brownie were still doing a hell of a job in New Orleans, and being paid like a king, to boot.
We can’t really know if the gov made money on the former Chrysler guarantee until we factor in the cost of that guarantee.
Let’s assume the company could find no commercial insurer for their loans. We are talking Guido vigorish territory. Were they charged that kind of interest? If not, the taxpayers subsidized the loan, and that reduces any returns by a like amount.
The answer to the question of what happens after 50 billion is the same answer the investment banks get, and Fannie Mae gets, and commercial banks get… no problem, we’ll keep giving you more.
Next year the car companies will be back again to ask for another 50billion. And why not?
Finally, that $50 bill, if it goes anywhere, should go to car-buying taxpayers. It’s their money, and if they buy a car- no matter from whom- then the company will have earned that money. Free enterprise is the American way, not turning the automakers into welfare queens.
I think the bailout is more palatable to congress now since its miniscule compared to the trillions that the Iraq mess has cost and will continue to cost.
$50B these days isn’t that significant. Heck, tons of banks have been losing $5B a quarter thanks to the debt debacle and they’re still around.
Plus, all that has to happen is that Congress (again) buys stock in GM, F, and get a portion of Chrysler. Then, if it’s set up right and if the domestics are still around, congress’ll make back what they spent.
$50B / 250M people = $200 per person.
That’s less than most people spend on gas in a month.
Ecch, that interior really reminds me of the Cordoba my mom drove in the late 70’s.
Sweet Maserati!!
+1 for Katie
The only (il)logic a bailout follows is this:
To solve a problem, make it bigger.
Yet another example of how throwing money at a problem only makes said problem worse.
netrun Says:
September 2nd, 2008 at 12:51 pm
I think the bailout is more palatable to congress now since its miniscule compared to the trillions that the Iraq mess has cost and will continue to cost.
Cite please.
HondaLover, I think he means billions, not trillions.
Remember, in the 70’s the Gov only guaranteed the loans, basically cosigned, and were given Chryco paper for their troubles. In hindsight, a very smart and profitable deal.
Now, they’re going after the tax money directly. A much, much different proposition and not one that fills me, or anyone else it seems, with any sort of the warm and fuzzies. A bad deal that looks to to be throwing money away, and that bowl being presented again; “Please Sir, some more.”
Saw a Dodge Aries K-car recently for the first time in my life…….So thats what they spent the money on….Good Call!
windswords Says:
September 2nd, 2008 at 9:23 am
…. One of Lee’s pet peeves in his auto-biography was that the government made Chrysler get rid of it’s private jets. Lee and the boys had to fly commercial. Could you imagine Rick, Alan, and Bob doing that?
I wonder how many free rides have been provided to the political class on those GM private jets.
Saw a Dodge Aries K-car recently for the first time in my life…….So thats what they spent the money on….Good Call!…
Being that the K car you saw was at least nineteen years old, I will have to add “Good Call” indeed!!
Who actually needs these low interest loans?
Ford seems to be in decent shape, ok they are mortgaged to the hilt but they have more stuff to sell if things get really dire. GM in is the same boat and Chrysler is going to get sliced and diced anyway. These guys should be paring back harder before looking for govt assistance…
Without principled political resolve from Washington…
Ah, yes, those were the days, Mr. [your favorite politician here].
Personally, I nominate the 2000 version of Mr. McCain, you know, the pre Rove version…
There are actually two other distinctions, both of which the author has missed.
First, the Chrysler loans were private. They weren’t government loans. The government merely guaranteed the loans in the event that Chrysler defaulted. Chrysler could not have obtained the loans without government intervention and the government was on the hook, but it was actually not the government’s money being loaned.
Second, part of the rationale for bailing out Chrysler was that it was a defense contractor. I believe that it may have been developing the Abrams tank at the time. Letting it go under might have, it was argued, jeopardized the defense procurement end of national security. Whether that was accurate or not, it certainly doesn’t apply currently.
The devil will be in the details; calling all wordsmiths. Two republicans of little success outside politics are high on board at Cerberus; John Snow and Dan Quayle.
Assuming various statements out of Cerberus about how they’re in this for the long term and really really do intend to grow the company with compelling new products are bullshit, can we expect to see the great flipping soon after the bailout? Depending on the language in the bailout (guess who’s drafting that) might they be able to back their 18-wheelers up to the window and load up? And then, depending on the language in the legislation, maybe flip this loser while the value is maxed out? It’ll be interesting.
Help is on the way:
http://www.theonion.com/content/news_briefs/chrysler_names_83_lebaron?utm_source=slate_rss_1
Simply put, bad companies should be allowed to go out of business.
golden2husky :
I see 19 year old Japanese and German Cars on a daily basis. Sure the Japanese ones are usually 82% rust, but they run. Hell my Subaru is 23, and my BMW is 21.
Those 80’s-era domestics(with very few exceptions)were rolling automotive abortions that resembled medieval torture devices but without the quality, especially in the case of Chrysler. 1.5b Dollars and we get the Dodge Aries and 600!?!(The Lancer/Lebaron was not bad, however). ARE YOU KIDDING ME. Chrysler should have been left to die in 1979, it was never a good idea to bail them out, look what they created.
Up here, 80’s domestics have virtually disappeared, you won’t even find them in junkyards. The only American car that I see from that era with any regularity is the Pontiac 6000.