Wednesday, January 7, 2009
Auto Bailout: 29 Years Ago Today...
President Jimmy Carter authorizes legislation giving $1.5 billion in loans to bail out the Chrysler Corporation. The more things change, the more they stay the same.
In 1979 and 1980, the economy was in recession and the price of oil had unexpectedly increased dramatically. However, at that time there was no financial liquidity crisis, as is the case today. Most of the arguments for and against the proposed Chrysler loan guarantee program are relevant to current proposals for credit assistance to the Big Three. For example, in the 1979 debate, proponents argued that the Chrysler loan guarantee would save many jobs. But opponents contended that the financial capital obtained for Chrysler by the proposed loan guarantee would have been used by other firms to expand their productive facilities, output, and employment. Thus, any Chrysler job losses could be offset by gains at other firms. Provisions in the Chrysler Loan Guarantee Act of 1979 included the establishment of a Chrysler Loan Guarantee Board, extensive federal oversight of Chrysler operations, detailed reporting requirements by Chrysler's management, shared sacrifice of parties benefiting from the loan guarantee, and protection of the federal government's interest.
Chrysler used federal loan guarantees to borrow $1.2 billion of the $1.5 billion available and redeemed its guaranteed loans in 1982. Some critics argued that Chrysler was only able to return to profitability because of the imposition by the U.S. government of voluntary import quotas on Japanese vehicles. In 1980, the Chrysler loan guarantee was treated as a contingent liability with no initial cost at the time the guarantee was provided. Because Chrysler repaid all of its guaranteed loans, the U.S. government incurred no budgetary cost. Furthermore, the U.S. government received warrants to buy Chrysler stock, which it subsequently sold at auction to Chrysler for $311 million. Thus, it can be argued that the U.S. government made a profit from the loan guarantee program.
at 8:47 AM