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

[2] Ironically, automation would later eliminate most of the jobs suspended after the union's concessionary bargaining (see Business Week, 23 May 1983, 168–170).

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.