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Chapter Three— Chrysler Corporation: Bailing Out the Banks
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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.


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