Bailout Nation (8 page)

In the end, Congress provided $125 million in loan guarantees to Penn Central's creditors and spent $7 billion in direct federal operating subsidies for Conrail, which Congress created in 1976 from the carcass of Penn Central and five other struggling East Coast rail lines.

If Lockheed was the government's first sip of bailout elixir, Penn Central was a big gulp that opened the floodgates for the bailout binge that was about to come.

In 1971, corporate welfare was just a baby. By 1980, it was a baby no more.

T
hroughout the 1970s, American automakers were being challenged as never before. The luxo-barges they were building had become stale and tired looking; they did not lend themselves easily to higher fuel efficiency changes or attractive redesigns. Creating a manufacturing system that produced mechanically reliable vehicles seemed to be beyond their ken. The companies themselves had become bloated bureaucracies with far too many layers of management to be able make significant changes.

Besides, change was not their forte.

Then came the oil embargo of 1973. Skyrocketing energy inflation was the new reality. As gasoline prices soared, the devastation was most acutely felt in Detroit, where America's biggest and least fuel-efficient cars and trucks were manufactured.

In the 1950s,
Barron's
described the Detroit automakers as the big two and a half—with Chrysler Corporation, the perennial sales laggard, as the half. When the embargo hit, Chrysler suffered the most of the Big Three.

By the mid-1970s, the company was hemorrhaging cash. Chrysler lost $52 million in 1974, and a record $259.5 million in 1975. As smaller, less expensive and more fuel-efficient cars from Japan and Europe gained increasing market share in 1970s, Chrysler found itself in an ever-deepening hole. It looked like it might have to declare bankruptcy.

But the United States is a big country, filled with big-assed people who love their big, comfy cars. As soon as the energy crisis ended, it was back to business as usual. The return of Motor City muscle made 1976 a hugely profitable year: The company's net income was $422.6 million.

Make small, efficient vehicles? The idea was laughable. The oil embargo was looked at as an aberration, and once prices had stabilized, it was back to manufacturing big iron. Despite the drop in fuel prices, though, Honda and Toyota continued to make steady gains in market share that decade—and beyond.

Although Chrysler had renegotiated terms with its top lenders, this merely bought the automaker a few years, allowing it to survive from one crisis to the next. The year 1977 was profitable, but less so: Net income was $163.2 million. Chrysler's models were getting long in the tooth, and retooling factories was an expensive process. By late 1978, the company was again running in the red, losing $204.6 million, as the fall of the Shah of Iran and a new oil embargo sent fuel prices to record high levels. By 1979, Chrysler was looking at its first billion-dollar annual loss.

As the decade came to a close, it was apparent to management that they were running out of money and would be unable to resolve their financial situation on their own.

Management decided it was time to visit Uncle Sam.

The Chrysler bailout was everything Lockheed—its predecessor in the bailout time line by nine years—was, and more. It was bigger and more expensive. Lockheed had loan guarantees worth $250 million; Chrysler's were for six times that amount. The rationale for the rescue of Lockheed, the country's biggest defense firm, was national defense. With Chrysler, it was the U.S. economy, and saving 200,000 jobs.

But the big difference between the two was that the Chrysler rescue package was much more complex. The terms of the Chrysler loan guarantees required an additional $2 billion in commitments or concessions from “its own owners, stockholders, administrators, employees, dealers, suppliers, foreign and domestic financial institutions, and by State and local governments.”
⁷

The Chrysler bailout of 1980 was not quite a prepackaged 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 prebailout industry looked almost identical to the postbailout industry. None of the Detroit automakers, Chrysler included, received any long-term benefits from the bailout.

What Congress did was postpone the inevitable.

I
n the television series
Star Trek
, Captain Kirk is accidentally transported to another starship
Enterprise
in an alternative universe (“Mirror Mirror”). Kirk quickly figures he is in a changed parallel universe, as the entire social fabric is radically different. Not only that, but his science officer, Mr. Spock, wears a beard. What was the cause of these changes? It turned out that because of a single change in the earlier history of that universe, everything else was radically different.

If only we had access to the universe with the bearded Spock.

This is the investigative challenge of any philosophical inquiry into bailouts—there is no control group. We don't get to examine the counterfactual outcomes had the government not intervened into the private markets. Hence, we have only the net result of taxpayer largesse as our frame of reference in the real world. We can, however, imagine the possible what-might-have-beens had a few votes been changed.

Without seeing the alternative, it is easy for Chrysler's congressional supporters to point to this as a successful bailout: After all, the government-guaranteed loans were repaid, employees' jobs were saved, and eventually Chrysler itself was purchased by Mercedes-Benz. The German company even managed to find a greater fool, Cerberus, to take the Detroit dog off its hands.

But was Chrysler really a successful bailout after all? Judged on the shortest-term basis of mere survival, we can begrudgingly say yes. Lacking access to our alternative universe—one where bailouts were voted down in Congress, and companies such as Lockheed and Chrysler had to fend for themselves in the private sector—we can only imagine how things might have turned out.

Let's use the Chrysler bailout as a hypothetical model of what might have happened in the event the government did not succumb to political pressure to bail out Chrysler.

We do not know precisely what that world would have looked like if Chrysler were forced to fend for itself in the marketplace, like all other competitive companies in the United States. But we can easily imagine it. Chrysler executives said had they not received government assistance, they would have had to file not Chapter 11 reorganization, but Chapter 7 bankruptcy.

Let's consider this alternative universe—where Spock wears a beard, and where Chrysler was allowed to suffer its own timely demise. A Chrysler in bankruptcy may very likely have caused several distinct business shifts, with far-reaching repercussions for the American automobile industry and the broader economy at large.

T
he sight of Chrysler in flames may very well have sent paroxysms of fear into the senior management of General Motors and Ford. All three companies had been engaged in long, slow declines, but the baby boomer generation's growth and consumption habits had masked the decline somewhat. Sure, the Big Three were selling more and more vehicles each year, but they were losing market share; their slice of the expanding pie was shrinking.

It is easy to see why. Their cars were no longer attractive, and the vehicles' reputation for mechanical reliability had deservedly slid in the face of superior German and Japanese machinery. Gas mileage was consistently mediocre. Rather than working to engineer improved mileage, corporate management chose to wage a political fight against Corporate Average Fuel Economy (CAFE) standards instead. It is one of many post-Chrysler actions that in hindsight have proven to be disastrous.

Had senior management been forced to confront one of the Big Three actually going under, it would have served as a wake-up call to the (all too many layers of) management of the remaining two companies.

What happened instead was a failure of imagination at Ford and GM. Instead of causing introspection and contemplation, there was snickering and gloating. Neither company recognized that they were both suffering from the same disease that afflicted Chrysler—costly union contracts, expensive pension funding obligations, and ruinous future health care costs. The perennial third-place Chrysler was simply weaker, and so it showed the effects of its poor capital structure sooner than the other two.

A Chrysler bankruptcy could have been the impetus for major changes in Dearborn and Detroit. Instead, both firms generated more of the same ungainly, oversized, ugly cars. Quality wouldn't dramatically improve for two decades, and the cars lagged in mechanical reliability for years. Fuel efficiency also lagged, especially against Japanese vehicles.

Chrysler survived, but a slow necrosis gradually handed over the dominance of the U.S. automobile market to the Japanese, Koreans, and Germans. For the first time ever in May 2008, the majority of automobiles sold in the United States were not made by U.S. companies. In 1980, the U.S. manufacturers' market share had been 75 percent.

If that's your idea of a successful bailout, I'd hate to see what your idea of a losing one is like.