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.