Chapter Three—
Chrysler Corporation:
Bailing Out the Banks

Really, as much as bailing out Chrysler . . . we [the federal government] are helping those financial institutions [that] assumed a certain amount of risk. When we come in, we are picking up the risk and we are bailing them out, as well as we are, for example, the other social concerns [labor, state and local governments, and so on], which we all feel deeply about.
—Congressman Bruce F. Vento

Even when a corporation's cash flow shortage becomes problematic, the banking community may choose not to define the situation as a crisis. Instead, banks threaten to impose that definition unless the federal government infuses cash or guarantees further loans by the banks. Indeed, the federal government has helped bail out over four hundred corporations with cash flow difficulties. In so doing, the federal government is often constrained to bail out banks' investments in large, economically critical firms (see Iacocca 1984, 199–200).

Chrysler Corporation's battle for a bailout provides insight into the definitional process of the social construction of corporate reality. Like W. T. Grant Company, Chrysler had a long history of short-sighted managerial decision making that produced a serious cash flow shortage. And like Grant, Chrysler had long-standing lending relations with the banking community. But Chrysler did

not go bankrupt. Instead, it was bailed out by a federal loan guarantee that the financial institutions insisted was absolutely essential before they could make any further commitments. How did the banking community elicit a federal bailout of Chrysler? What was the source of relative power in this case, and how did collective control of capital flows contribute to this power?

Setting the Stage:
Managerial Decision Making, the Economy, and the Banks

Until the mid-1970s Chrysler did relatively well. It enjoyed a healthy share of the domestic market as one of the three firms dominating the U.S. auto industry. Its sales increased from $3.01 billion in 1960 to a peak of $16.71 billion in 1977. Its profits grew from $32.1 million in 1960 to $209.7 million in 1968, peaking at $423 million in 1976 (U.S. Congress, House 1979a, 487, 488). By 1978 Chrysler was the tenth largest firm in the United States, employing 250,000 workers (New York Times , 12 Aug. 1979, F15). Its market share in the automobile industry for 1976–1978 averaged 12 percent (U.S. Congress, House 1979a, 25). Yet in 1978 the corporation reported a loss of $205 million and began pleading for aid from the federal government.

By 1979 Chrysler laid off 23,800 blue-collar and 5,000 white-collar workers (New York Times , 12 Aug. 1979, F15). At the close of that year, the firm reported an annual loss of $1.1 billion, with $4.75 billion owed to more than four hundred banks and insurance firms (Iacocca 1984, 240). The first quarter of 1980 looked similarly bleak, with a loss of $449 million (New York Times , 29 June 1980, F2). Chrysler's share of the market declined as well, dropping from 16.3 percent in 1968 to 13.6 percent in 1974 and skidding in 1979 to 9.3 percent (U.S. Congress, House 1979a, 476). The firm blamed federal regulations for its financial difficulties. Chrysler's chairman, John J. Riccardo, cited "federal standards for fuel economy, clean air and safety in the 1980's" as the source of Chrysler's "serious problems in raising $8.5 billion to redesign its vehicles to meet" these standards (New York Times , 14 Aug. 1979, D3; see Dramatis Personae 2). Chrysler asked the fed-

eral government for a two-year reprieve from compliance with the standards.

In 1978 Chrysler realized that it was going to suffer an annual loss of $200 million. Riccardo made another trip to the White House to plead his firm's case and to ask for $1 billion in tax credits. He proposed that Chrysler defer its 1980 taxes, which it would pay at a future date from the profits the firm's management assumed they would have in 1981 and 1982. Elinor Bachrach, Senator William Proxmire's aide, called the proposal "an appeal for a thinly veiled grant" (Moritz and Seaman 1981, 272). The Treasury Department's Domestic Finance Capital Markets division was assigned to "keep track" of Chrysler's situation, but the federal government took no concrete action at the time (New York Times , 14 Aug. 1979, D3).

Chrysler continued to argue that federal regulations and standards had "imposed a disproportionate burden on the smallest of autodom's Big Three." The firm claimed that compliance with such regulations cost it $620 per car, compared, for example, with $340 for General Motors, because the top two manufacturers could "spread the cost" of these regulations "over the larger number of cars sold" (Newsweek , 13 Aug. 1979, 53; see also Iacocca 1984, 197). Furthermore, Chrysler claimed that compliance with federal regulations would cost $1 billion more in 1979 and 1980 (Business Week , 20 Aug. 1979, 103; Iacocca 1984, 197). "Because the government has helped bring Chrysler to its knees," the company argued, "the government now has an obligation to bail it out" (Newsweek , 13 Aug. 1979, 53).

Despite Riccardo's insistence on government responsibility, it appears that managerial decisions within Chrysler helped produce

the company's financial difficulties. For example, in 1976 Chrysler decided not to invest in the costly construction of a four-cylinder engine plant for its Omni and Horizon models. Instead, the company decided to make a contract with Volkswagen to purchase 300,000 engines a year (Newsweek , 13 Aug. 1979, 55). But the small cars became extremely popular, and Chrysler found that 300,000 cars could not satisfy the demand. The soonest Chrysler could receive more four-cylinder engines was early 1981—a delay that severely restricted the number of small cars the company could produce, left it unable to meet the surging demand for small fuel-efficient cars, and caused it to lose a great share of the market to its competitors. Had Chrysler made the correct decision, it would have improved its market position and had more research-and-development money for the future. In his opening statement for the House Subcommittee on Economic Stabilization hearings for a Chrysler bailout, Congressman Stewart B. McKinney named poor management rather than the burden of regulation as the cause of the firm's financial difficulties:

We could probably ease all of the regulations that Chrysler objects to and the company would still not be able to survive in today's market. Chrysler chose to make big cars, trucks and vans when the competition decided to concentrate on smaller and lighter cars. Chrysler continued to produce cars without orders while the competition produced to meet orders. Chrysler used outside suppliers for its components while the competition manufactured its own. (U.S. Congress, House 1979a, 5)

Congressman Richard Kelly concurred:

Chrysler is in trouble because through a long series of bad judgments it has rendered itself non-competitive. . . . In 1969, before any of the Federal regulations being blamed by the company were in place, a failure to downsize its automobiles caused Chrysler to suffer a drop in earnings of almost 70 percent, while its long-term debt soared almost 400 percent. . . . These factors are in no way attributable to government regulations. (U.S. Congress, House 1979a, 6)

Moreover, results of a National Highway and Traffic Safety Administration (NHTSA) study contradicted Chrysler's assertion that regulations placed a disproportionate burden on the smallest of the Big Three automakers. The study concluded that regulations actually imposed higher costs on the larger automobile firms: "Total

investment costs tend to be roughly proportionate to sales volume. This occurs because although compliance costs may be equal per model, or per engine or per transmission line, the larger firms have more of these than the smaller ones." The study also rejected the argument that compliance with regulations was more expensive per car for the smaller firms: "In fact, the exact opposite is the case. Historically, GM's capital investments per vehicle were about 15 percent higher than Ford's. Ford's were at least that much higher than Chrysler's, and Chrysler's were several times more than American Motors" (U.S. Congress, House 1979a, 451–452).

Finally, although Chrysler argued that fuel efficiency standards forced the firm to invest in expensive retooling, consumer demand for fuel-efficient cars (after the 1974 fuel disruptions) was forcing the firm to retool as a marketing strategy: "According to recent statements made by . . . GM and Ford, the market is now demanding more fuel economy than current regulations require, thus mitigating the investment effect of fuel economy standards" (U.S. Congress, House 1979a, 453). Even Iacocca admitted that the Big Three automakers ignored the public's demand for small cars, pursuing instead the higher profits derived from the sale of big cars and producing poor-quality small cars (such as the Ford Pinto): "We owe the public a little more than we've been giving them" (Business Week , 22 Sept. 1980, 84; see also Iacocca 1984, 151–166, 217). Thus federal regulatory standards were largely irrelevant. "Any regulatory relief would have failed to provide Chrysler with what it needed most: hard cash" (Moritz and Seaman 1981, 270).

Other managerial decisions dating back as far as 1949 contributed to Chrysler's financial difficulties. Before 1949 Chrysler had steadily cultivated a "reputation for sound engineering" and by 1946 enjoyed a 25.7 percent share of the national market (Newsweek , 13 Aug. 1979, 58; see also Iacocca 1984, 148–149). An NHTSA study pointed out that between 1949 and 1953 the firm "had no funded debt and maintained a rate of dividend payout which averaged about 65 percent of earnings (identical to GM)." Yet in 1950 Ford overtook Chrysler's position. The NHTSA study listed "poor market acceptance" of Chrysler's revamped 1953 models as a factor contributing to its loss of market share, which "dropped from 20 to 13 percent [by 1954]—a position never to be

recovered" (U.S. Congress, House 1979a, 505–506). Chrysler's management decided to focus on style rather than engineering to defend its share of the U.S. market, but its position continued to slip.

The NHTSA study revealed a number of strategies from this period that backfired on Chrysler:

In the mid-1950s, Chrysler's passenger car divisions had nearly the same number of total dealer franchises as GM, even though Chrysler had only one-fourth the sales of GM. This plan was originally intended to maximize Plymouth sales; however, it resulted in smaller dealer margins as well as poor dealer-manufacturer relations. (U.S. Congress, House 1979a, 506)

Despite these problems—and the disappointing profit performance of its expensive foreign subsidiary, Simca—Chrysler decided to maintain a high dividend payout rate and to raise investment capital through debt financing. By 1957 "Chrysler's capital structure included 34 cents of funded debt for each dollar of shareholder's equity," compared with 5 cents for GM and 9 cents for Ford (U.S. Congress, House 1979a, 506). This high debt-to-equity ratio laid the foundation for Chrysler's later cash flow shortage.

In an attempt to compete with Ford and GM, Chrysler's chairman, Lynn A. Townsend, decided in the 1950s to "match every Ford and GM product line with one of his own." But this emphasis on matching styles in short-term competitiveness for market share produced long-term hazards. "Chrysler neglected to update its core facilities," and this neglect eventually pushed Chrysler's production cost per car 10 percent higher than GM's (Newsweek , 13 Aug. 1979, 58). Moreover, the decision to produce models similar to the other auto manufacturers' placed Chrysler in "more direct competition with GM and Ford" (U.S. Congress, House 1979a, 507). Chrysler could not hope to prosper in this head-to-head confrontation in the market, since the other two manufacturers had already staked out substantial market shares.

Chrysler's production strategy also differed from GM and Ford's, a choice that was to haunt Chrysler later. GM and Ford built vehicles strictly by order from dealers. "By doing this, the companies are immediately paid as the cars roll off the assembly line" (U.S. Congress, House 1979a, 502). Chrysler produced cars for its inventory rather than as a response to orders, and this strategy resulted in enormous stockpiles of unsold cars.

Chrysler had been adhering to this practice since the 1960s as a means to store cars in slow periods and quickly take advantage of anticipated market surges. Although this procedure worked for awhile, it started to backfire during the early 1970s when sales growth was low. In the recession of 1975, Chrysler had a backlog of 60,000 cars in its "sales bank" . . . and 110,000 units in June 1979. (U.S. Congress, House 1979a, 502–503; see also Iacocca 1984, 162–164)

In another critical strategy that set Chrysler apart from GM and Ford, Chrysler's management purchased parts from outside suppliers rather than vertically integrating as GM and Ford had done. By 1964 Chrysler's outside purchases amounted to 64 percent of revenue, compared with 52 percent for GM and 62 percent for Ford (U.S. Congress, House 1979a, 508).

Between 1968 and 1970 Chrysler gambled by stepping up its investment program during an economically unstable period, "basing its decision on factors such as strong growth in population, rising incomes and improved highways. This decision, unfortunately, coincided with the 1969–70 recession" (U.S. Congress, House 1979a, 508). Meanwhile, Townsend decided to expand the firm's focus from the U.S. market to the world market, constructing factories in Europe, South America, South Africa, and Australia. This move further eroded the company's available resources to compete on the domestic market (Newsweek , 13 Aug. 1979, 58; see also Iacocca 1984, 154–155). Moreover, Chrysler's attempt to become a multinational came too late, long "after Ford and GM had acquired the best operations" (U.S. Congress, House 1979a, 912). Chrysler's rate of profit dropped dramatically from 5.8 percent in 1950 to –3.4 percent in 1958. The firm's global expansion marked an effort to raise its falling rate of profit and to compete effectively with GM and Ford. But the expansion seriously "drain[ed] the corporation of funds, depleting monies for domestic investment and creating for the company a huge and unmanageable debt burden" (Detroit Socialist Collective 1980, 8, 23).

Finally, in 1974 Riccardo replaced Townsend as chairman and proceeded to pare down Chrysler's staff to reduce costs. But by then the damage had been done, and Riccardo faced the additional problem of the recession of 1974–1975. Despite his efforts to reverse Chrysler's problems, the firm lost $260 million in 1975. Moreover, many observers argue that Riccardo's drastic paring down of staff caused Chrysler to get "a late start on redesign

of new products" after the recession, "and it was that late start that really hurt them the most" (Newsweek , 13 Aug. 1979, 58). Chrysler's vulnerability at that time was clearly a result of poor management decisions. The company had decided not to produce a subcompact car "to compete with GM's Vega and Ford's Pinto, both introduced in the 1971 model year." Townsend decided instead to "redesign Chrysler's big cars," which were marketed in the fall of 1973, "just months before the Arab oil embargo destroyed the market for gas guzzlers" (Business Week , 20 Aug. 1979, 105). Whereas GM responded to the gas crisis with a major shift in product emphasis, Chrysler responded by laying off "hundreds of engineers, which obviously set the company back further in terms of planning future projects." According to Howard J. Symons, staff attorney for Public Citizen's Congress Watch, by 1974 Chrysler had "laid off 80% of its engineering staff" (U.S. Congress, House 1979a, 171, 913). When gas prices doubled once more in 1979, Chrysler was pummeled again for its emphasis on large cars, recreational vehicles, vans, and motor homes as sales on these gas guzzlers plummeted. Van sales, for example, fell by 50 percent (Iacocca 1984, 183). Thus Chrysler was hardly the innocent victim of circumstances; poor management decisions made it especially vulnerable to economic recession and fuel disruptions.

By the time Chrysler reentered the compact car market with its Volare and Aspen models in 1976, sales of intermediate-size cars had already begun to slow down. In addition, these models were poorly made in the rush to get them to market. "More than three and a half million cars were brought back to the dealers for free repairs—free to the customer, that is. Chrysler had to foot the bill" (Iacocca 1984, 160). Over this long series of decisions management was clearly out of touch with the market and with consumers.

Chrysler wanted government assistance because it could not get assistance from normal business sources—mainly the banks. The firm therefore contrived a set of arguments to justify a federal bailout. The rationales Chrysler offered for the various strategies it adopted or attempted reflect the inherent constraints on nonfinancial corporations that need to access capital flows. Chrysler first pursued government assistance by claiming that the government was responsible for the automaker's deepening financial difficulties.

When this claim was refuted, Chrysler appealed instead for loan guarantees from mostly hostile congressional banking committees. Chrysler was in for a long struggle.

The Loan Agreement

In 1979 G. William Miller replaced Michael Blumenthal as Treasury secretary, and Chrysler found itself struggling anew for some relief. Miller based his strategy for handling the Chrysler situation on the hope of wringing "major concessions from the company, its suppliers, its bankers, and its union" (Business Week , 27 Aug. 1979, 36).

After frustratingly slow progress, the federal government finally conceded. In November 1979 the Carter administration endorsed a maximum federal loan guarantee to Chrysler of $750 million (New York Times , 29 June 1980, F1). But the threat of a coming recession forced the government to double this figure to $1.5 billion. The plan called for Chrysler to raise $1.5 billion from sales of its assets and from concessions made by its workers, suppliers, dealers, and bankers. It is not clear why the federal government determined to rescue Chrysler; what is clear is that it ultimately succumbed to the enormous lobbying efforts on the firm's behalf.^[1]

Carter's endorsement did not secure $1.5 billion for Chrysler. The loan guarantee still needed congressional approval. After lengthy hearings, Congress offered a proposal for a federal loan guarantee on the condition that the United Auto Workers (UAW) concede $1.2 billion—"the equivalent of a three year wage freeze for union and non-union employees." The proposal also required a total of $1.43 billion in concessions from Chrysler's dealers,

suppliers, and banks, and from state and local governments (Moritz and Seaman 1981, 285). The stage was now set for a great struggle between Chrysler, its workers, the banks, and the federal and state governments.

Conditions of the Loan Agreement:
The Struggle

The Banks

John F. McGillicuddy, chairman of Chrysler's lead bank, Manufacturers Hanover Trust, expressed the sentiments of the banking community when he said that further loans to Chrysler were "not feasible" without federal loan guarantees and policy changes in the firm (New York Times , 31 Oct. 1979, A1). Several bankers told Congress that such loan guarantees were necessary for the private creditors to lend more money to Chrysler. McGillicuddy told Congress that U.S. and foreign banks had provided Chrysler with $4.8 billion in credit lines and loans. Furthermore, Manufacturers Hanover had acted as agent for 102 banks in providing a $567 million line of credit, of which $408 million was currently outstanding. Another 36 domestic banks had provided $64 million to the firm, all of which was outstanding (U.S. Congress, House 1979a, 824, 333). If Chrysler went bankrupt, the federal government would be required to pay all outstanding debt owed to the banks (New York Times , 2 Nov. 1979, D4). Meanwhile, to garner congressional approval the loan guarantee would have to stipulate more favorable terms for Chrysler—a stipulation that did not please the banking community at all (New York Times , 29 June 1980, F19).

The banking community also struggled with Congress on the issue of governmental control of Chrysler. The banking community pressed for a greatly scaled-down firm rather than the full-line producer Lee Iacocca envisioned. But Senator Proxmire's intent to restrict the firm to the production of only small cars was apparently too scaled down for the banking community. Furthermore, both Chrysler and the banking community recognized the need to retool and automate if the firm was to continue to compete (al-

though the banks did not want to fund such efforts).^[2] One of Chrysler's key bankers threatened: "If we wind up with a real Christmas tree of a bill that gives the company no operating room, then a rescue would be impossible. . . . None of the third parties would want to put additional money into the company." Another banker claimed, "Somebody is going to have to back down . . . and it may be the government" (Business Week, 3 Dec. 1979, 42). Because of the standoff between the government and the banking community, many feared that if the loan guarantee package was not passed before Congress recessed for Christmas "there [might] be nothing left to save" when Congress reconvened in January. By then "Chrysler would have gone past the point where aid would be successful" (U.S. Congress, House 1979a, 1190). The threat implicit in the power of the banking community was clear: "If the bailout legislation stumbles badly in Congress, the lenders may run out of hope or patience, and any one of a multitude of creditors could force Chrysler into involuntary bankruptcy" (Business Week, 10 Dec. 1979, 36, 37).

The stalemate helped the banking community scare Congress into passing the bill: although "the banks could easily withstand the financial consequences of a Chrysler bankruptcy," the federal government did not think the U.S. economy could (Business Week, 10 Dec. 1979, 37). In testimony before the House subcommittee, McGillicuddy held the federal government responsible for action:

When you are talking about a company that is part of an industry, that is part of the mainspring and fiber of the United States, that has tremendous implications in terms of employment, both within their own company as well as the suppliers—I think that you are at a point where the implications are such that you who are sitting here today in hearings . . . have to make a judgment. That is a task that is yours and not mine. (U.S. Congress, House 1979a, 836–837)

McGillicuddy argued that the loan guarantee was needed "promptly" for the banking community to act, emphasizing that "a sign from the Federal government in terms of whether they will

or will not act really can't come too soon in terms of the general group [of creditors]." Chrysler's executive vice president and senior financial officer, Gerald Greenwald, testified: "It is clear that the banking community today would not increase its loans to Chrysler in the absence of a firmer program involving Federal aid." And Tom Killefer, chairman of the board of U.S. Trust Co. of New York, stated: "I believe the banking community will continue to show . . . support of . . . [Chrysler] in the future, but quick action by the government is essential in order to assure this" (U.S. Congress, House 1979a, 839–840, 290, 822).

The banking community enjoyed the power to define and create a corporate crisis out of Chrysler's cash flow difficulties and to force the state to make concessions to the banks: "Chrysler's future depends on the willingness of some private lenders to come up with that money. Its major institutional creditors—banks and insurance companies—have been taking a hard line, in hopes that the government would provide interim assistance" (Business Week, 31 Dec. 1979, 32). Consequently the stalemate between the banking community and the state was finally resolved in favor of the banks. The Treasury Department proposed a bill with "less stringent terms than it would have liked" because time was running out: "The company was sinking fast, and a House Banking subcommittee was ready to push out a bill with or without the [Carter] Administration's concurrence. As a result, much of the government's leverage over the existing creditors evaporated. And because no single bank [was] owed more than $30 million by Chrysler, the banks had little to lose by forcing a bankruptcy" (Business Week, 19 Nov. 1979, 47).

Congress finally approved the loan guarantees for $1.5 billion in late December 1979. But passage of the bill produced a great deal of anger and resentment over the force and pressure the banking community exerted. Congressman Bruce F. Vento complained that the federal government had absorbed the financial institutions' risk in extending credit to Chrysler:

Really, as much as bailing out Chrysler . . . we are helping those financial institutions because they had no basis when they went forward and they are getting 12 or 15 percent interest. They assumed a certain amount of risk. When we come in, we are picking up the risk and we are bailing

them out, as well as we are, for example, the other social concerns, which we all feel deeply about. (U.S. Congress, House 1979a, 314)

Congressman Norman D. Shumway pointed out the incongruity that the banking community (traditionally in the business of taking risks) refused to take any further risk with Chrysler while insisting that the federal government take that risk:

Chrysler proponents claim that once Federal assistance has been granted the corporation will soon return to the ranks of the profitable. If this is so, I can't understand why private lenders are not jumping at this opportunity to extend credit—a nice rate of return—to a firm that is surely going to be profitable. If this is not the case, if private lenders do not believe such loans could necessarily be recovered, I just have to wonder how much more confident we in the Federal government should be. (U.S. Congress, House 1979a, 819)

Congressmen Norman E. D'Amours and Ron Paul were more bitter. D'Amours argued, "So in point of fact we are asking the taxpayers to take a risk that the banking community which is in the business and has the expertise to make loans . . . is unwilling to take." Congressman Paul noted that the existing loans the banks had extended to Chrysler would be secured by a federal loan guarantee: "I can't see how this can be construed as anything but an aid to the banks" (U.S. Congress, House 1979a, 838, 847).

Laments about the relative helplessness of the state to resist the power of the banking community in its bid for a bailout echoed in congressional hearings to increase the U.S. quota in the International Monetary Fund (IMF) to bail out the debt burdens of developing countries. Bank representatives and some federal officials insisted that such an increase amounted to a "jobs bill" for American workers, since the IMF would bail out countries that were major importers of American goods. But many members of congress continually expressed anger and frustration in their analyses that bailing out a country's debt is in fact bailing out poor or unmanageable bank investments (U.S. Congress, House 1982, 1983b, 1983c; Senate 1983a, 1983b). This sentiment is precisely the one articulated in Chrysler's case.

The banking community wanted the federal government to assume the risk of granting the future loan guarantees to Chrysler,

thus bailing out the banks' investments and protecting them from further risk. Because banks make a substantial proportion of their money from commercial lending, their profitability was threatened by the prospect of a Chrysler bankruptcy (although the threat was less problematic for each individual bank than for the federal government, which was struggling to achieve a healthy economy in an election year). The federal loan guarantee capped that risk, thereby guaranteeing bank profits.

A second objective of the banking community was to force Chrysler to become a pared-down, limited-line automaker. This objective appears to have been instrumental in accomplishing the banks' first objective of maximum risk-free recovery of investment. If Chrysler had to sell off some of its operations, the proceeds from the sales could reduce Chrysler's debt burden to the banks. Although this may have been sound advice for the automaker in the short run, it would have long-term deleterious effects on Chrysler's competitive position. The banking community does not typically involve itself in day-to-day corporate decision making and thus could do little to demand a reduced product line directly. Instead the banks forced the state, which has the legitimate power to enforce conditional legislation such as a loan guarantee, to impose and implement operational modifications and restrictions on the automaker. Requiring a limited product line as a condition of a bailout restricted Chrysler's managerial discretion to make fundamental decisions on production. At the same time, it assured the banking community's first objective: a risk-free recovery of investment.

Now that Chrysler had been granted a federal loan guarantee, the firm "had to raise $1.5 billion in private capital and meet a series of tough conditions that would give the government tremendous control over the company" (New York Times, 29 June 1980, F19). For example, the loan guarantee required Chrysler "to submit each purchase contract of more than $10 million to the Chrysler Loan Guarantee Board, created by Congress. That means that many of the contracts to purchase supplies and parts for auto production must be reviewed by Federal authorities" (New York Times, 17 May 1980, D1). This requirement placed the federal government in a position to control the day-to-day management decisions of the firm, including "the most fundamental of market-

ing decisions" (New York Times, 27 May 1980, D1). According to a Treasury official, although the federal government did not dictate "for instance, what options to make standard on its [Chrysler's] new cars, . . . 'If we don't agree with their plans, they have to modify it'" (Business Week, 7 July 1980, 22).

This potential governmental role in Chrysler was a concession the banking community had to make to get the federal loan guarantees it wanted. Although the federal government now apparently had operational control of Chrysler, the banks still maintained allocative control over the investment capital the firm needed to survive. And whereas the federal government did not enforce its operational power over Chrysler, the banks persistently exercised their allocative power to constrain the firm's day-to-day decision making. This pattern of the active exercise of bank discretion as a constraining influence on the operational power of a nonfinancial firm resembles the pattern identified in the W. T. Grant bankruptcy case.

With the loan guarantees in place, and with Chrysler required to raise a similar amount in unsecured private funds, the banking community took a more aggressively steadfast position. The banks had wrung concessions and contributions from the workers, the suppliers, and several state governments. But "resistance from the bankers [remained] a huge stumbling block in Chrysler's efforts to assemble the $2 billion package enabling it to qualify for $1.5 billion in Federal loan guarantees. Chrysler's major domestic lenders . . . steadfastly refused to provide the company with any new money, on the ground that dealers, suppliers, and others should ante up first" (Business Week, 7 apr. 1980, 30). Congressman McKinney repeatedly admonished the banks for their "deafening silence" when asked to join labor, states, the federal government, suppliers, and dealers in making concessions and offering aid to Chrysler (U.S. Congress, House 1979a, 289, 818).

Bankers' resistance to the loan agreement's requirement of more favorable credit terms for Chrysler was the subject of a meeting held between Chrysler's major banks and three legislators to gently but firmly force the banks to accept the terms (New York Times, 28 June 1980, F19). The bases of the banks' power were (1) their strategically unified position in the Chrysler bailout plan, thanks to their common presence in a huge lending consortium; (2) their threat not to extend further credit to the firm, despite the antici-

pated severe consequences to the U.S. economy of a Chrysler bankruptcy; and (3) congressional and federal government willingness to accept the banks' definition of Chrysler's situation. The legislators' strong suit was power to pass bank reform legislation, which the banking community wanted. One of Chrysler's bankers attending the meeting felt that "the implicit message of the meeting was clear . . . 'If we wanted the bank reform legislation being considered by Congress, we had better be flexible on Chrysler'" (New York Times, 29 June 1980, F19). Congressional arm-twisting was apparently effective. By 24 April 1980 several of Chrysler's banks had finally "been persuaded to purchase shares of stock in the company as one way of providing new cash." The banks had been asked to buy $200 million in preferred stock (New York Times, 25 Apr. 1980, D1).

Chrysler's condition continued to worsen. The fear that Chrysler would run out of money by early May prompted a meeting with Chrysler's 325 banks to produce a huge financial reorganization plan. This plan, which enabled Chrysler to begin using the $1.5 billion in federally guaranteed loans, was termed a "bitter pill" for the lenders: "$660 million in interest deferrals and reductions plus a 4-year extension of some $4 billion in debt to Chrysler and its credit subsidiary, Chrysler Financial Corp." The banks reluctantly agreed to the compromise, but only after major concessions had been wrung from the UAW, the suppliers, the dealers, and state and federal governments. It was the lesser of two evils for the banks, which would otherwise have faced "the prospect of getting only 30 cents on the dollar in a protracted liquidation" (Business Week, 28 Apr. 1980, 27). The measures provided by the restructuring plan were termed "soft funding."

The bankers found their pill less bitter than it seemed at first. Since the funds raised by the restructuring plan were essentially "soft" (rather than the hard cash provided by new loans), "virtually all of the 'new' money available to Chrysler for refurbishing its product lines and plants [would] come from government backing by Washington, several states, and Canada" (Business Week, 26 May 1980, 555). The banks did not provide any new money to Chrysler in the form of new loans. They merely agreed to defer the firm's interest payments. Thus any new money the company

needed would come from loans made to Chrysler by the federal and state governments (see the section on state and local governments, below) and by Canada, which agreed to lend $200 million to $250 million in government aid to Chrysler's Canadian division (New York Times, 3 May 1980, D1). Moreover, the banks took twelve million Chrysler stock warrants, "good until 1990, which could be exercised if the Chrysler stock ever reached $13 a share" (Iacocca 1984, 244). Since the stock was then selling at $3.50 a share, the banks stood to receive a substantial profit later (which indeed they did). Chrysler's banks thus made far fewer concessions than originally appeared, and they succeeded in forcing the state and labor to bear the greatest burden in bailing out Chrysler: whereas the state provided loans and labor made major concessions, the banks advanced no new money at all.

Despite the banking community's stunning tenacity in refusing to add new money to the Chrysler financial package, the banks suffered a major setback (at least initially): they exchanged loans for equity. Therefore they were at enormous risk to lose a large portion of their investment. But they had already indicated that they were ready to take this risk when they agreed to accept a return of 60 to 80 cents on the dollar. In other words, the struggle with the government did not alter the banks' posture at all, because the government had little leverage over them. The banks and the government both believed that a Chrysler bankruptcy would be a greater blow to the state than to the banks. So even though the banks did not get everything they wanted, they were clearly in the more powerful position.

By June 1980 most of the banks had agreed to the terms of the loan. But in a reprise of a similar drama in W. T. Grant's bankruptcy, the larger banks always insisted that "everyone sink or swim with the company" (Business Week, 8 Oct. 1979, 33). The lenders' restructuring plan hinged on an agreement by Chrysler's major banks that "they would participate only if all 400 voted unanimously to join them. . . . Unless all fall into line, the Chrysler Loan Guarantee Board . . . is likely to remain unwilling to authorize the loan guarantees" (New York Times, 17 June 1980, D8). Both the large and the small banks depended on the loan guarantees to recover their loans to Chrysler. But the struc-

ture of the lending consortium gave the large financial institutions the power to pressure the small banks into accepting an arrangement the small ones did not want.

One of the more compelling reasons why the small banks acquiesced is that the largest, most lucrative loans to corporations require the structure of a lending consortium, because banks are legally barred from lending more than 10 percent of their capital to any one borrower. Since such consortia are standard structures in the commercial loan industry, the small banks rely on inclusion in those structures to gain access to large corporate business. Clearly small banks run the risk of being excluded from future lending consortia if they develop a reputation for deserting the group in a crisis.

One of the more irksome factors for the small banks was that the major lenders alone formulated the restructuring plan with Chrysler. Excluded from developing the plan, the small banks were nonetheless expected "to comply with it," but "they maintained that they would not be dictated to by a third party on how to deal with a customer" (New York Times, 22 June 1980, F19). David W. Knapp, president of the American National Bank and Trust Company in Rockford (one of the recalcitrant small banks) complained that "the decision and control rests with the large banks" (New York Times, 17 June 1980, D8). Originally about twenty small banks balked at the agreement. Meanwhile some of Chrysler's major European lenders wanted to withdraw their participation and would not renew their lines of credit to the firm (Business Week, 8 Oct. 1979, 33). These banks were angered by the loan guarantee stipulation that the federal government would get first lien on Chrysler's assets, "including Chrysler's compensating deposits in their own banks," in the event of a default by the firm (Business Week, 23 June 1980, 30). They argued that the large banks had given Chrysler greater concessions than the small banks thought necessary. Furthermore, they felt that they were less likely than the large banks to recover their loans, "regardless of whether Chrysler eventually emerged solvent or bankrupt" (New York Times, 22 June 1980, F19).

The large banks and their supporters goaded the recalcitrant banks into agreement. Knapp told the New York Times: "We've had calls from Chrysler, from suppliers, asking that we be reason-

able. . . . We have calls from other banks and I just told them we're not interested in getting in the agreement. I'm sure I'll get more phone calls." Finally, on 17 June 1980, the deadlock began to break. One of the recalcitrant banks, York Bank and Trust Company of York, Pennsylvania, agreed to go along with the large banks. Rodney E. Rohrbaugh, executive vice president, said that his bank was under "a lot of pressure but our decision is honestly based on our own assessment" (New York Times, 18 June 1980, D1, D5). That assessment apparently revealed that the large banks were in a better position to survive a Chrysler bankruptcy than the small banks. Furthermore, Treasury Secretary G. William Miller began to make "a series of personal phone appeals" to the recalcitrant banks (New York Times, 22 June 1980, F19). These "appeals" reminded the small banks that the loan guarantees on which they depended would not materialize unless they acquiesced. By 24 June 1980 approximately thirty thousand investors agreed to lend Chrysler $500 million in ten-year notes at 10.35 percent interest (New York Times, 29 June 1980, F2; see also Iacocca 1984, 241–248).

The unification of the financial community is the main source of bank power. Individual banks' control of capital flows would not necessarily translate into discretionary power, whereas hegemonic or unified control does. To minimize or eliminate points of contention that might undermine the discretionary powers of the banking community, large banks may discipline small recalcitrant banks (as they did in both the Chrysler and W. T. Grant cases). This action solidifies the collective control of capital flows and consequently banks' relative discretionary powers.

The restructuring agreement did not express the banking community's confidence in Chrysler's financial future. Rather, it was a way for the banks to protect their investment: "Many skeptical lenders view the reorganization as no more than a stopgap to allow for an orderly sale of Chrysler Financial Corp. . . . which would insulate the bulk of their loans from what many fear will be the inevitable demise of Chrysler when the federal guarantees run out in 1983" (Business Week, 7 July 1980, 22). Indeed, the sagging U.S. automobile market in 1980–1981 caused more financial difficulties for the already beleaguered firm and forced it to turn once again to the federal government for the needed capital.

Chrysler had already used $800 million of its $1.5 billion in federally guaranteed loans and was now asking for $400 million more.

To convince the federal government of its need for more loans, Chrysler asked its lenders "to convert $572 million in loans to preferred stock. It . . . pleaded with suppliers to forgo December payments worth some $233 million. It [was] pressuring the United Auto Workers to generate an additional $250 million in concessions beyond the $446 million given so far by Chrysler's UAW workers" (Business Week, 29 Dec. 1980, 43). The firm's banks resisted the idea of converting their loans to preferred stock, "claiming that the company's most immediate problem [was] not net worth" but "cash" (Business Week, 19 Jan. 1981, 29). This was an ironic position for the banks to take, given that they had previously refused to provide any new hard funding to the firm and instead forced the other participants (including the UAW and the government) to provide greater concessions and cash. Ultimately the banks agreed to the conversion as a necessary trade-off for the bank deregulation they wanted.

The United Auto Workers

In August 1979 Iacocca asked the UAW for aid in the form of an exemption for the firm in the union's contract negotiations and "a two-year freeze on both wages and fringe benefits. [UAW president Douglas A.] Fraser promptly rejected the proposal." Chrysler's workers had already aided the company by buying $37.3 million of its common stock, which was at its lowest value in 1979 ($7.63 per share), when Chrysler approached the UAW for contract concessions (Newsweek, 13 Aug. 1979, 52, 61). Moreover, by 1980 more than 210,000 workers had lost their jobs (Business Week, 24 Mar. 1980, 79), with no guarantee of job protection in sight. Some observers were angry at the UAW's stand, arguing that the workers had a stake in Chrysler's survival. Arnold R. Weber suggested in a New York Times column (24 Aug. 1979, D2) that the UAW "could use a substantial portion of the [union's $300 million strike] fund to take an equity position in the company." Congressman Kelly argued that "instead of striking to further depress conditions of production in the United States, they ought to use [the

strike fund] . . . to try and save the jobs of the UAW members that are involved with Chrysler" (U.S. Congress, House 1979a, 248).

The union refused to consider the proposal on the grounds that such an investment would severely undermine their bargaining position against Ford and GM. In addition, Fraser pointed out that using the union's strike fund for other purposes would violate the union's constitution: "Under the terms of our constitution . . . there are several restrictions on [the use of the strike fund]. . . . There is a question in my mind whether you can take money that is supposed to protect all of the workers in our union in times of strike and give that money to one section of our union" (U.S. Congress, House 1979a, 290). Instead, the union suggested that it could offer some aid in contract negotiations in exchange for "representation on the Chrysler board of directors and participation in the management decisions at all levels of the corporation" (New York Times, 24 Aug. 1979, D2). Worker representation on a corporate board had no precedent in U.S. labor history.

By October 1979 the prospects of worker representation on the board and employee stock ownership in exchange for union concessions to Chrysler looked promising. Both the union and key members of the Senate (such as Majority Leader Robert C. Byrd and Senate Finance Committee Chairman Russell Long) became convinced that any federal aid "ought to be conditioned on Chrysler's workers' being able to win a chunk of the corporation, or at least to influence decisionmaking 'at all levels of the corporation'" (Business Week, 1 Oct. 1979, 46). Senator Donald W. Stewart entered a statement into the Congressional Record on 10 October 1979 supporting the notion of an employee stock ownership plan and asserting that such stock should carry voting rights for the employee-owners to facilitate worker participation in management decision making: "If we are to achieve the revitalization of Chrysler, each employee must be sure that he [sic ] has some voice in the future of his [sic ] company." Several members of Congress argued: "If the current owners are asking employees to make sacrifices, it is important that the employees gain something in return, such as an increased ownership share and participation in the company" (U.S. Congress, House 1979a, 333, 327).

One of the most important levels of participation the UAW de-

manded was in pension investment decisions—an implicit recognition of the power afforded the controllers of pension funds and the political implications of worker participation in pension fund investment decisions (see Rifkin and Barber 1978). The UAW's plan would have given workers a voice in the control of those capital flows derived from their own deferred wages and a strong weapon in the class struggle. For example, the UAW and Chrysler "agreed that, in the future, part of the company's pension contributions will be used to fund 'socially desirable projects,' rather than to buy common stocks or government securities, as in the past." Such projects might include

home mortgages, health maintenance centers, and nursing homes in communities with Chrysler plants. . . . In a related provision, the union won the right to name up to five companies each year whose stock it wants the pension fund to shun because of their involvement in South Africa and their failure to endorse the "Sullivan principles" of racial equality. (Business Week, 12 Nov. 1979, 93)

Note, however, that the agreement to fund such projects did not include labor participation in determining the actual projects to ultimately receive funding or the amount each project would get. The union also demanded worker participation in decisions concerning plant closings. As of 1987 Chrysler's pension contributions had not funded any of the "socially desirable projects" the union had suggested. Indeed, in February 1982 the firm asked the union to allow it "to defer for a second time payments of $187 million to [the union's] pension fund" (New York Times, 22 Feb. 1982, D1).

The Carter administration looked favorably on the use of employee stock ownership plans to aid the ailing firm. The struggle over contract concessions in exchange for labor representation on Chrysler's board, worker participation in decision making, and profit sharing for workers became key issues in Chrysler's attempt to persuade workers to bail it out. In March 1980 Fraser was elected to Chrysler's board of directors at its annual stockholder meeting (New York Times, 4 Nov. 1979, F19).

In mid-October 1979 Fraser offered Chrysler a "package of possible contract concessions," including the deferral of $200 million in pension fund payments for 1979 and a lower wage and benefit

package than that offered Ford and GM workers. This offer represented "a departure from the [union's] 42 years of history and practice and tradition" (U.S. Congress, House 1979a, 288, 275; New York Times , 18 Oct. 1979, D5). Fraser also suggested that the UAW would "be willing to lend virtually all of the union's $850 million in pension funds to Chrysler, provided the loan was fully guaranteed by the federal government to protect the worker's benefits" (New York Times , 20 Oct. 1979, 31). But Fraser still refused to lend Chrysler any money from the union's strike fund. He further insisted that although Chrysler workers were willing to negotiate a less advantageous contract with Chrysler than with GM or Ford, they must have parity with the workers of the other two firms by the end of the three-year contract. The wage and benefit concessions meant that Chrysler workers earned $2,000 less than their counterparts at Ford and GM over the three-year contract (Business Week , 12 Nov. 1979, 93).

The union's concessions to Chrysler made up the bulk of the $500 million worth of concessions the automaker had to raise from its "constituents and employees" in its bid for federal aid (Business Week , 5 Nov. 1979, 55). The company's survival plan included $203 million in UAW wage concessions and the union's $200 million pension fund rollover for Chrysler (U.S. Congress, House 1979a, 318). Fraser acknowledged the union's lack of enthusiasm for the concessions it made to the firm, saying, "We're doing what we have to do" to save members' jobs (Business Week , 5 Nov. 1979, 55). He urged the federal government to provide loan guarantees to the firm.

Workers' concessions to Chrysler were considered insufficient when the House Committee on Banking, Finance, and Urban Affairs approved the federal loan guarantees for $1.5 billion. Alfred E. Kahn, chairman of the Carter administration's Council on Wage and Price Stability, suggested that the government was guaranteeing worker's wage increases and argued that the contract concessions made by the union "'should not . . . be considered adequate' to satisfy the legislation's requirement that workers and other parties with a stake in Chrysler's future make sacrifices to help the company survive" (New York Times , 16 Nov. 1979, D13). Yet by the end of the House subcommittee hearings, Congressman James J. Blanchard pointed out that although the point

of the loan guarantee legislation was to ensure that all interested parties with a stake in the firm make concessions, "the UAW is the only party, thus far, that has made any form of concession" (U.S. Congress, House 1979a, 1395).

When the Senate Banking, Housing, and Urban Affairs Committee approved $1.5 billion in federal loan guarantees for the firm, it required the workers to give up wage increases already approved in their three-year contract with Chrysler. This concession would impose a wage and compensation freeze for three years and required that the contract be renegotiated for the company to draw on the loan guarantees. The committee's demand marked "an unusual intervention by Congress in the collective bargaining process" (New York Times , 30 Nov. 1979, D1).

The union flatly rejected the three-year wage freeze, "even if [doing so meant] bankruptcy for the company" (New York Times , 5 Dec. 1979, D4). fraser felt that the UAW was being asked to bear the greatest burden in the Chrysler bailout when labor had no voice in the poor managerial decisions that had produced the situation (U.S. Congress, House 1979a, 298).

The union's militant stand forced the Carter administration to acknowledge that the Senate's proposed wage freeze placed an "inequitable burden on the workers" and to suggest modifications to the bill (New York Times , 5 Dec. 1979, D4). Even Chrysler sided with the union in denouncing the Senate bill, perhaps out of fear that a complete lack of cooperation by labor would destroy the firm's chances for federal aid.

The union's militancy also confronted the hardened position of the banks. Both groups were important to the survival of Chrysler, because both were required to make concessions to support the firm and enable it to qualify for the federally guaranteed loans. But neither group wanted to "make the first move to rescue the sinking auto maker" (Business Week , 1 Dec. 1979, 36). A Business Week analysis implied that the banks and the union were equally strong in the struggle (17 Dec. 1979, 32; 16 Mar. 1981, 28). However, labor was hardly the equal of the banking community. The UAW had far more to lose in a Chrysler bankruptcy than the banks. Indeed, the banks' investment would be protected by the federal loan guarantees. Their more favorable position in a bankruptcy, as well as their direct hegemonic control of capital flows, enabled the

banks to stall labor, whose only strength was the ability to strike (a strength it could not exercise for fear of job losses if Chrysler went bankrupt).

The UAW relented first when Fraser suggested that the union might be willing to "grant some further concessions to help Chrysler survive" by reopening its Chrysler contract. The union still adamantly opposed a three-year wage freeze. At a 3 December 1979 meeting of the UAW's 233-member Chrysler Bargaining Council in Washington, D.C., "almost to a man [sic ], they said that they would rather shut down the shop than take a three-year freeze." The union refused to reopen its contract to aid Chrysler without an "'equity of sacrifice' between workers, bankers, and the company" (Business Week , 17 Dec. 1979, 31). The search for equity dissolved when the union relented and reopened its contract negotiations with Chrysler, providing the company with "$446 million in concessions from the industry pattern contract" (New York Times , 8 Feb. 1980, D2). By now workers had conceded a total of $460 million in wages and benefits. Nevertheless, in December 1980 Chrysler again asked the union for a wage freeze to "persuade the Government to authorize additional loan guarantees for the company." Once again the union bristled. Fraser suggested that the company "go elsewhere first this time." Chrysler planned to ask its banks to convert $500 million in unguaranteed loans to preferred stock, because "a bank that would enter such an arrangement would be unable to make claims against Chrysler if the company failed" (New York Times , 13 Dec. 1980, A1, 37). Needless to say, the banks opposed the plan.

In January 1981 the Chrysler Loan Guarantee Board gave the company "conditional approval" to draw $400 million more from its fund. Once again the condition was "major concessions from the United Automobile Workers, the company's lenders, and its suppliers." Chrysler asked the union to give up cost-of-living adjustments and wage increases totaling $622 million, which represented a 13 percent pay cut. Although Fraser had bargained the company down from its original request of $676 million, he termed the wage freeze "'the worst economic settlement' he had ever had to negotiate" (New York Times , 15 Jan. 1981, 1, D3). Iacocca (1984, 233) estimated that "over a nineteen-month period, the average working guy [sic ] at Chrysler gave up close to $10,000."

The union conceded to the wage freeze in the hope of preventing job losses from a Chrysler bankruptcy, which UAW leaders considered the only alternative outcome to the bailout (see Iacocca 1984, 207–208). Bankruptcy would be disastrous for the union, which was already steadily losing members. Although some speculated that a foreign auto manufacturer would have gladly taken over Chrysler's operations (see Schwartz and Yago 1981), a takeover was not necessarily in the best interest of organized labor. Foreign automakers (especially Japanese firms, the most likely takeover candidates) have generally had poor relations with labor unions.

Ironically, labor suffered enormous layoffs even with the concessions. By the end of 1981 Chrysler was operating with 87,825 employees, compared with 133,811 in 1979 (New York Times , 29 Aug. 1982, F8). The union's fear of job losses resulting from their refusal to make concessions proved naive.

Chrysler had to give back some of the pension concessions and gave the union "a commitment . . . that it would not close five plants during the life of the contract" (New York Times , 15 Jan. 1981, D3). The company also agreed that any further layoffs would include "supervisors . . . in the same proportion as their ratio to union members in the work force" (Business Week , 9 Feb. 1981, 30). But this agreement was relatively insignificant, since more than 210,000 union workers had already lost their jobs (Business Week , 24 Mar. 1980, 79).

In addition, Chrysler agreed "to consult—perhaps even negotiate—with UAW local committees on all decisions that 'might adversely affect' job security, such as layoffs and plant shutdowns" (Business Week , 9 Feb. 1981, 30). Workers also got a profit-sharing plan from the company. But the employee stock ownership plan implicitly placed a further risk of financial loss on workers in the event of a Chrysler bankruptcy. Workers also took on an inequitable burden compared with the firm's principals:

To be sure, Chrysler is a long way from having a net worth of $3.5 billion (the point below which Chrysler has agreed with its banks not to pay out dividends). Thus, shareholders are much more likely to see dilution than dividends in the near future. Disquieting, too, is the fact that Chrysler officers and directors are willing to risk so little of their own money on the company's future. (Business Week , 8 June 1981, 103)

Ford and GM, which had been watching Chrysler's struggles from afar, decided that they too would like to squeeze concessions from the union, which had been "one of the nation's leaders in winning wages and benefits for its members." Although these companies were not as financially troubled as Chrysler, they claimed they were unable to compete with Japanese automakers, which operated with lower labor costs. Both firms threatened to "shift more of their production overseas to areas of lower wage costs if the union [did] not accede to their requests" (New York Times , 3 June 1981, D1). But neither wanted to make the concessions to the union that Chrysler had made, and the union flatly rejected their demands. By 1982, however, the UAW had given in and made substantial concessions to both firms (see New York Times , 1 Mar. 1982, A1; 22 Mar. 1982, A1; 10 Apr. 1982, 1). The UAW's struggle with GM and Ford demonstrated that Chrysler's bankruptcy was not the main threat to labor. Rather, "runaway shops" and the internationalization of production posed the greatest threat. The automakers' ability to shift production to foreign countries with cheaper, nonunionized labor gave the firms a decisive advantage in their dealings with the union. And it undermined Chrysler's and the union's pleas for a federal bailout to avoid massive unemployment.

Of the few concessions the union was able to get from Chrysler in exchange for forfeiting $1 billion in wages and benefits, Fraser was most pleased with the unprecedented representation of workers on Chrysler's board. He argued that the success of the UAW would help spread the idea. Many observers considered Fraser's presence on the board a conflict of interest, criticizing him as a special-interest director representing the needs of a single group in the firm. But as Donald E. Schwartz noted, banks have a long history of representation on nonfinancial corporate boards, and their presence is analogous to the union's (Business Week , 19 May 1980, 149). Even Iacocca (1984, 236–237) agreed, adding that labor's presence on corporate boards is "pretty standard in Europe. And in Japan they do it all the time. So what's the problem?"

Where Fraser saw worker representation on Chrysler's board as a ground-breaking development in the labor movement, Lane Kirkland, president of the AFL-CIO, recognized that power de-

rives from the organized command of capital flows and not from corporate directorships. Kirkland argued that corporate boards are unimportant in the development of policy and saw "control over pension, welfare and other funds" as "a far more effective tool for labor unions" (New York Times , 16 Nov. 1981, A1).

In this view the struggle over the survival of Chrysler offered the union a small, insignificant development in the class struggle (union representation on Chrysler's board of directors) in exchange for major, unprecedented, and damaging concessions by labor. The banks' intransigent position forced the UAW to bear the largest burden of federally required concessions for Chrysler to qualify for the loan guarantees. Where labor lost $1 billion in wages and benefits and over 210,000 jobs, the banking community traded debt for equity in the firm—a risk from which the banks have subsequently profited. Labor's concessions were not risks but lost battles that it would have to fight again later. Meanwhile, the banks did not advance any new money at all.

State and Local Governments, Dealers, and Suppliers

Chrysler's desperate situation, aggravated by the intransigence of the banking community, was not lost on several northern Midwest states, home to tens of thousands of Chrysler workers whose jobs were threatened. Fearing the strain such a high level of unemployment could impose on local budgets and social programs, Michigan gave a fifteen-year loan of $150 million to help Chrysler qualify for the federal loan guarantees (New York Times , 1 May 1980, D1). In addition, Michigan law provided for "the deferral of property taxes on any improvement in industrial facilities designed to produce products already being produced in obsolete plants" (U.S. Congress, House 1979a, 373). Under Michigan Public Act 198, Chrysler was able to invest $200 million to update its Detroit facilities. Indiana approved a $32 million investment in Chrysler (New York Times , 1 May 1980, D4). Delaware joined Michigan and Indiana in offering support to Chrysler, for a tri-state total of $190 million (New York Times , 20 Aug. 1980, D4). Illinois gave Chrysler a $20 million loan from its lottery revenues (New York Times , 15 Jan. 1981, D3).

Suppliers and dealers also made concessions to Chrysler and were involved in a private offering of Chrysler stock to help save the firm. In addition, Chrysler's purchasing agents were busy trying to "shave more dollars of contract with suppliers" (Moritz and Seaman 1981, 298). Furthermore, Chrysler's 3,000 suppliers deferred $200 million in payments due from Chrysler and agreed to freeze prices during 1981 and to "cut prices 5% from that level for the first quarter" (New York Times, 2 Jan. 1981, D1; 12 Jan. 1981, D1). Finally, Chrysler secured $36 million in price concessions from its suppliers and continued to negotiate for another $36 million (Moritz and Seaman 1981, 333).

Aftermath

By 1979 the federal government had assumed the risk of guaranteeing $1.5 billion in loans to Chrysler, a risk the financial institutions were unwilling to take. Chrysler's UAW workers had given the firm $622 million in wage and benefit concessions, and its salaried personnel had conceded $161 million. The company's suppliers had agreed to price concessions of $36 million and continued negotiating more concessions (such as extensions of payments due). Several state and local governments had provided Chrysler with loans and tax credits, and the Canadian government had given a $200 million loan guarantee. The financial institutions agreed to convert "$560 million in long-term debt to equity in the form of preferred stock, and the forgiveness, at Chrysler's option, of the remaining debt at 30 cents on the dollar" (Moritz and Seaman 1981, 333). Schwartz and Yago (1981, 202) estimated that this bank concession represented 50 percent of Chrysler's debt to the banks.

Although all those who had a stake in Chrysler made concessions to the firm, it is important to weigh the concessions against the outcome. Chrysler's financial institutions never gave the firm any new money in the form of new loans. Rather, they deferred or converted a portion of Chrysler's debt, initially writing off about 50 percent. In exchange for these concessions, the federal government assumed the risk of bailing out the banks' investments in a firm with a history of poor management decisions. In addition, the banks got what they originally wanted before the struggle over

Chrysler's rescue began (and before the UAW was forced to make unprecedented concessions): a pared-down Chrysler Corporation. The banks considered the new structure more efficient for their short-term imperative to issue positive quarterly and annual profit statements (a goal that often undermines long-term profits). The banking community also insulated itself from further risk—an objective neither labor nor the state was able to attain.

Chrysler's management had stubbornly insisted from the beginning that the firm had to remain a full-range automaker to survive in the long run as a major competitive firm. In addition, it faced retooling requirements for all its cars to meet federal fuel economy standards by 1985 and, more important, to meet the growing consumer demand for small fuel-efficient cars. Chrysler estimated that it needed $13.6 billion to continue its product line and retool its plants, projecting that both efforts would produce a "2.1 billion cash shortage by 1983." Chrysler's banks projected shortages of $4 billion and insisted that "the only alternative to deeper debt . . . is to trim the product program" (Business Week, 21 Jan. 1980, 33). But Iacocca remained determined that Chrysler would continue as a full-line producer.

By 1982, however, Chrysler was a shadow of the inefficient multinational that Townsend and Riccardo had built. Iacocca sold its European, South American, Australian, and South African facilities, keeping only the Mexican and Canadian divisions. Chrysler was now a smaller domestic automaker dependent on Japan's Mitsubishi for subcompact cars and trucks and on Peugeot, which along with Mitsubishi provided engines and other parts for Chrysler (Moritz and Seaman 1981; New York Times, 20 Feb. 1982, 31; 17 Mar. 1982, D4). It still trails behind GM and Ford in market share. Chrysler emerged from the struggle with a radically limited product line, furthering the financial community's short-run interest in securing the firm's cash flow so that banks could recover their investment. The banks' interests took precedence over Chrysler's long-term interest in maintaining flexibility to respond to changing consumer demands and to remain a competitive automaker among the Big Three.

Ironically, the rationale several sources gave for a federal bailout of Chrysler was the preservation of hundreds of thousands of jobs and the avoidance of a national recession and devastating depres-

sion conditions in particularly hard-hit metropolitan areas (such as Detroit). An example of the drastic drop in the number of jobs in the U.S. auto industry can be seen in Tables 2 and 3. In little more than half a decade (from 1977 to 1982) the number of workers employed in the motor vehicles industry declined significantly. The loss of jobs derived in part from the industry's inability to compete successfully with foreign automobile imports. Yet after the passage of the Federal Loan Guarantee Act,

Chrysler employed less than 60% of the people it had in 1978, only a third of the 250,000 who had worked there in 1977, and its continued survival depended on even more plant closings and consolidations . . . More than half of the jobs lost through the consolidation process were in Michigan, Ohio, and Indiana. (Moritz and Seaman 1981, 335–336)

Unemployment in Michigan was more than 11 percent by late 1981, and the state was losing tax revenues so quickly that it cut $270 million in badly needed welfare and social programs from its budget (New York Times, 23 Oct. 1981, A16). Furthermore, the national recession Congress feared occurred despite the passage of the Federal Loan Guarantee Act. In fact the rate of unemployment in Michigan, Indiana, and Ohio continued to rise until 1984, and for all years between 1981 and 1984 the rate for all three states was higher than the national rate (see Table 4).

Some might argue that Chrysler's workers stood to gain from the federal loan guarantee package in a trickle-down fashion. They would recover their financial losses through future wage increases from a restructured and presumably healthy Chrysler. Indeed, Chrysler has now been operating as a profitable automaker (although the banking community refused to take the risk of financially supporting that restructuring period). By the close of 1983 Chrysler's sales had improved 71 percent over 1981 (Business Week, 21 Mar. 1984, 21), and the firm had captured an "impressive" 15 percent of the market (New York Times, 8 May 1984, 14). By April 1983 profits had risen to $172.1 million from $149.9 million for the same period in 1982 (New York Times, 22 Apr. 1983, D1). Chrysler's annual profit for 1983 was $925 million, "the best by far in Chrysler's history" (Iacocca 1984, 278). By the end of 1983 Chrysler's earnings per share had reached $5.79; first-quarter figures for 1984 indicated that earnings per share were up to $9.46 (Business Week, 14 May 1984, 87). The firm had also announced that capital spending for 1983 would increase by 82 percent—from $823 million in 1982 to $1.5 billion in 1983 (New York Times, 19 Mar. 1983, 32). As an indicator of the growing optimism of the firm's health, Standard and Poor's raised Chrysler's debt rating from CCC to B in May 1983 (New York Times, 24 May 1983, D10). Similar trends emerged for 1984: figures for the first quarter revealed a 59 percent increase in sales and a 310 percent increase in profits over 1983. By comparison, Ford's sales in-

creased by 37 percent and its profits by 325 percent; GM's sales increased by 37 percent and its profits by 147 percent. Chrysler's margins (that is, the difference between net sales and the cost of merchandise sold) were up 14.4 percent in that first quarter of 1984, compared with 5.6 percent for the same quarter in 1983 (Business Week , 14 May 1984, 87). Financial institutions continued to hold preferred shares in the firm in exchange for Chrysler's debt. They also received $404 million in interest and nearly $67 million in administrative fees (Iacocca 1984, 283).

The federal government also profited from the federal loan guarantee program for Chrysler: The automaker had agreed to pay the loan guarantee board a monthly administrative fee of $1 million. Iacocca estimated that Chrysler's "January payment alone covered their annual expenses, so the next $11 million was pure profit for the Treasury." All told, the federal government received $33 million in administrative fees by the time Chrysler paid off its loans. In addition, Chrysler had issued 14.4 million stock warrants to the loan board in 1980 as collateral for the guaranteed loans. At the time the stocks were worth about $5 per share. By 1984 their value had increased to about $30 per share, giving the federal government a profit of more than $311 million. One member of Congress suggested that the windfall be used to "retrain unemployed autoworkers" to "help the guys [sic ] who lost their jobs when Chrysler had to cut back." But the state was "not interested," and the money went into the general fund (Iacocca 1984, 256, 283, 285). The state thus profited handsomely from bailing out the

banks' investments, while refusing to share that profit with the workers who had paid for the bailout with their jobs.

Despite Chrysler's obvious good health, labor had still not recovered the losses it incurred at the concessionary bargaining table. Chrysler's UAW workers did not reach pay parity with their GM and Ford counterparts as promised until 1985. The three-year 1985 contract between the UAW and Chrysler included a one-time immediate cash bonus of $2,120, an hourly increase of 5.25 percent over the contract's three years, a second-year single payment of $750, and "a new 'profit-sharing' plan" that would pay workers "$500 each in 1987 and 1988, then convert to a formula tied to company earnings in 1989" (Business Week , 4 Nov. 1985, 30). Chrysler repeatedly postponed resuming payment of its contribution to the UAW pension fund (New York Times , 20 Jan. 1982, D4; 22 Jan. 1982, D9). In late 1983 the firm finally made a $270 million contribution to the pension fund, with another scheduled contribution of almost $500 million in 1984—including a $250 million payment it had postponed since 1980 (New York Times , 16 Sept. 1983, D3). This long-awaited resumption of payments to the fund occurred seven months after Chrysler announced that it had substantially increased executive salaries (New York Times , 19 Mar. 1983, A32). More important than the delay itself was the motivation behind it. The firm argued that it wanted to keep cash on hand in case it was needed. Apparently the strategy of postponing pension fund obligations was an important part of Chrysler's "wooing back a critical ally: the financial community" (Business Week , 2 Aug. 1982, 18). The strategy succeeded. By mid-1982 "39 major banks agreed to a new $500 million financing package for [Chrysler's] subsidiary, Chrysler Financial Corporation" (Business Week , 2 Aug. 1982, 18).

In the end the struggle to rescue Chrysler left the banking community and government committees in control of the firm, though not as equal partners. As organized controllers of the lending capital Chrysler so desperately needed, the banks were (and continue to be) in a position to collectively put up or deny money to the firm. Despite the federal loan guarantees, the money invested in the firm came from the banks, which could at any time deny new capital to Chrysler.

The disparity in power between the financial institutions and

the federal government in this case clearly demonstrates that the corporate crisis was not produced by the state and its regulatory standards. Rather, a long history of poor management decisions produced a cash shortage at Chrysler that forced the firm to go to its banks for more funds. The banks' refusal to advance more loans forced Chrysler to plead for aid from the federal government, setting in motion the long struggle with the banks, labor, and the state to define Chrysler's situation. The corporate crisis Chrysler experienced was produced by the banking community's steadfast refusal to advance new loans to the firm.

Chrysler was not alone in its financial difficulties. The Big Three automakers all experienced sharply declining sales. To stem their losses both GM and Ford struggled with the UAW for concessions similar to those Chrysler had won. But many of the difficulties at Ford and GM sprang from the same decision-making processes that sent Chrysler to its banks and into crisis. Industrywide decisions to produce large cars and to neglect to develop fuel-efficient small cars at a reasonable price provoked American consumers to turn to foreign competitors. The automakers' shortsighted decisions reflect the internal contradictions of a capitalist political economy. In brief, small cars return a small rate of profit. Managers' stubborn pursuit of the short-run profits of large-car sales ensured financial difficulties in the long run (see Detroit Socialist Collective 1980, 22–23; Business Week, 22 Sept. 1980, 84; Iacocca 1984, 154). The only way to avert the effects of declining sales and cash shortages was for Chrysler (and eventually GM and Ford) to go to the banks for rescue, giving the banks great collective power over the automakers.

Assessing the Losses

The Banks

As I argued earlier, banks do not have absolute or unconstrained power. At the conclusion of the struggle over federal loan guarantees for Chrysler, the banks had written off $600 million of Chrysler's debt. All parties involved with Chrysler lost in negotiating the rescue. Labor, suppliers, and local, state, and federal governments all compromised and made major concessions. But the banks lost

the least and were able to achieve more of their original demands. They never put up any new money, and they emerged from the struggle with the trimmed-down Chrysler Corporation they wanted, with no risk of losing their money later.

Indeed, in 1983 Chrysler issued 26 million shares of common stock as a strategy to raise $432 million to offer to Chrysler's creditors in an effort to eliminate $1.1 billion in preferred shares held by the banks (New York Times, 29 Mar. 1983, D1). Business analysts were quick to point out that

although the value of the new common shares that banks and insurance companies would receive in the transaction would be little more than half the amount of what they were owed by the company . . . the common shares gave the financial institutions a far greater degree of flexibility in attempting to recover their investment than they had with the preferred shares. (New York Times, 14 Jan. 1983, D3)

Moreover, Chrysler was able to make its final payment on a $1.3 billion bank debt six weeks early (New York Times, 28 Jan. 1982, D4). The firm paid off its entire loan by mid-1983, seven years early (New York Times, 13 Aug. 1983, 1; see also Iacocca 1984, 279–280). With the loans repaid, the banks' equity in the firm has produced a healthy profit. And the value of the banks' twelve million Chrysler stock warrants increased from $3.50 per share in 1979 to $35 per share in 1983 (Iacocca 1984, 279).^[3]

In addition, the banking community got its long-desired bank deregulation, a concession by the state that greatly benefited large banks and ultimately hurt or destroyed small banks. Most important though, the banks recovered their investment early, thus accomplishing their primary objective—even as the new healthier Chrysler continues to struggle to remain competitive.

Labor

Whereas the banks got the outcome they wanted from the start, labor lost the most. The job losses and contract concessions represented a major setback for the UAW in particular and for labor in

general. In exchange labor won the "meaningless symbolism" of representation on Chrysler's board (Schwartz and Yago 1981, 200). Indeed, labor lost more from the Chrysler rescue than it would have from a bankruptcy. Had Chrysler declared itself bankrupt, it would have received protection from its creditors under Chapter XI bankruptcy laws while it reorganized. Such a reorganization would have required (1) producing only the fuel-efficient cars demanded by the market and closing the plants that manufactured the big gas-guzzlers (that is, Chrysler would have had to pare down from a full-line automaker); (2) selling underused plant facilities (most likely to foreign producers anxious to buy existing U.S. facilities at low prices); and (3) "affiliating with another automaker," such as Peugeot or Mitsubishi, which would have given Chrysler "access to European or Japanese designs—thus saving costs—and to its partner's financial resources" (Business Week, 24 Dec. 1979, 70–72; Schwartz and Yago 1981, 200). But the firm insisted that it could not survive under Chapter XI and struggled to get the federal loan guarantees, ostensibly to save jobs.

Ironically Chrysler has now undergone most of the changes that would have occurred under the Chapter XI reorganization Iacocca so steadfastly resisted. But because the firm refused to reorganize under bankruptcy, it has had no protection from its creditors. Instead, it has paid enormous sums in interest rates and administrative fees to both the banks and the Treasury Department—money that the firm could have used more productively to retool its facilities. Indeed, Chrysler's federal bailout actually led to more plant shutdowns and unemployment by allowing the firm to remain a full-line producer. Chrysler then tried to increase its cash flow quickly by overpricing its K-cars (the cars expected to restore Chrysler's profitability). Strong consumer resistance slowed sales, forcing plant shutdowns and more job losses. Under Chapter XI reorganization, Chrysler would have been able to market its K-cars at extremely competitive prices, thus avoiding further labor sacrifices.

Conclusion

Many observers argued that the predicament of the American auto industry was caused and aggravated by foreign intrusion (particularly by Japanese manufacturers). But U.S. auto industrialists are

"surprisingly willing to concede that their problems are largely their own doing. Studies of the Japanese auto industry, including those conducted by U.S. car companies, lay much of the blame for Detroit's predicament on sloppy management methods, not labor costs" (Business Week, 14 Sept. 1981, 97; see also Iacocca 1984, 151–166).

The industry's self-assessment attests that managers can produce internal problems and financial difficulties for a firm at the operational level. (Pahl and Winkler [1974] call this ability "operational power".) But the processes of managerial discretion occur in a historical context—in an advanced capitalist political economy where the imperatives of short-term profit seeking (and the prevention of subsequent falling rates of profit), growth, and expansion delimit the range of alternative decisions. This environment constrains management to make short-term decisions detrimental to the firm in the long term (see Detroit Socialist Collective 1980; Iacocca 1984, 154). Thus managers make decisions within the structural limitations of the political economy, increasing the reliance of nonfinancial firms on the banking community. These structural constraints also contribute to the financial community's power as organized controllers of lending capital.

The major banks' ability to force the small recalcitrant banks to accept the loan agreement illustrates the process of hegemony formation, whereby the banking community unites around common interests. As in W.T. Grant's bankruptcy, bank hegemony seriously hampered other participants in their struggle to counter the power of the banking community.

The banks' ability either to elicit a federal bailout of Chrysler or to force it into bankruptcy demonstrates their power to define corporate crises. Although many bankers acknowledged that Chrysler might still go bankrupt when its federal loan guarantees ran out in 1983, the large banks were in the position to force labor, the state, and recalcitrant members of the banking community to bail out the firm, thus protecting the banks' investments. Iacocca (1984, 241) noted that the banks were "far less inclined to compromise than our [Chrysler's] suppliers and our workers. For one thing, their survival didn't depend on our recovery. For another, the sheer number of banks was overwhelming." Had the banks refused to agree to the federal loan guarantee requirements, their decision

would have defined Chrysler as a corporation in crisis and precipitated its bankruptcy.

Chrysler's lead bank acknowledged this power to construct corporate reality. McGillicuddy, of Manufacturers Hanover, testified that "the banks, in effect, have acted to protect Chrysler from being in a default position." When asked if the banking community had the power "to foreclose on Chrysler at this particular point or to initiate bankruptcy proceedings against them," McGillicuddy replied, "Yes" (U.S. Congress, House 1979a, 848). His testimony acknowledged the power of the banking community to choose whether to support a firm with massive investments (in the form of loans and stocks held in pension and trust funds) and agreements to defer payments of existing loans, or to force that firm into bankruptcy. Even a seemingly semantic exercise can have real consequences in the definitional process. During congressional hearings on international debt, William J. McDonough, executive vice president and chief financial officer of the First National Bank of Chicago, indicated that the banking community often refers to problematic loans in developing countries as "substandard," "doubtful," and "loss" as euphemisms for default (U.S. Congress, Senate 1983b, 235). Using labels other than "default" (which creates a liability or loss for the banks) enables the banking community to define the situation as current business (which is an asset for banks). The unified control of capital flows empowers banks to impose the label of their choice.

The power of banks to force concessions from the state contradicts a capture theory of the state (Miliband 1969). Banks do not need representatives in positions of political power in the government; their power is economically based and can overrule the political power of the state. In the Chrysler case the banking community's structural bases of hegemony enabled it to constrain the relative autonomy of the state without participating directly in state decision-making processes. Moreover, the collective power of the banks exceeded their ability to produce economic disaster at federal and local levels. Senator William Proxmire pointed out that "since the bankers are community leaders who frequently either contribute or lend large sums to members of Congress to finance election efforts, bankers are listened to with great respect in Congress" (Proxmire 1979, 99).

The banking community was able to capitalize on its power over Congress and on Iacocca's unwillingness to trim Chrysler's operations under a Chapter XI bankruptcy reorganization. Iacocca insisted that such a bankruptcy proceeding would destroy rather than help the company's chances of recovery: "Consumer psychology" would "produce fears of loss of warranties, parts, and servicing in the future, and cause consumers to refrain from buying a Chrysler product" (U.S. Congress, House 1979a, 86, 90–91, 164; Iacocca 1984, 209–210). Although many firms have reorganized successfully under Chapter XI (for example, Allied Supermarkets and Toys R Us), Congress did not press Chrysler to follow suit. The reason for congressional reluctance is clear. If Chrysler had taken Chapter XI protection from its creditors, the banks would not have collected on their existing loans. And according to Proxmire's analysis, members of Congress have good reason not to cross the banking community.

Under a bankruptcy procedure, some argue, "no further raids on the public treasury would have occurred." Indeed, the relative burdens and benefits of a bankruptcy can be summed up as follows:

A bankrupt Chrysler would have been smaller (thus decreasing the power of its executives), its stock would have been less valuable (thus producing massive capital losses for investors) and its enormous debt would have been only partially repaid . . . None of the developments would have hurt most Americans; instead, only executives, stockholders, and bankers would have suffered. It is no wonder, then, that Chrysler management has saddled the American people with a bail-out-or-bust choice. (Schwartz and Yago 1981, 201)

It is also no wonder that Chrysler's bankers, with the power of collective purse strings, forced the state to bail out their investment in the firm with federal loan guarantees.

The state's pressure on the UAW to grant ever more concessions attests to the relative power of the banking community. When a stalemate developed between the workers and the banks, the state coerced the weaker of the two: labor (which faced graver consequences in a Chrysler bankruptcy). The state acted as the only social control agent with the legitimacy to enforce concessions from labor on behalf of the banks. We will see similar patterns of state relations in later chapters.

Although many observers believe that the bank's behavior made prudent business sense, it is crucial to remember that only the banks had the ability to protect what they saw as their best interests. The state, labor, suppliers, and dealers were unable to counter the collective control of capital flows and therefore were less able than the banks to protect their interests. Moreover, the banks' threat to push Chrysler into bankruptcy was not a last resort to remedy a serious cash flow shortage. Less extreme efforts (such as requiring changes in corporate policy far earlier than 1979) were never tried. Rather, the threat of bankruptcy was part of a power struggle to force the state to bail out the banks' investments in a company with a thirty-year history of questionable managerial decisions.