Chrysler Bailout 2009: Third Time's A Charm?

By Andrew Beattie | June 04, 2009 AAA
Chrysler Bailout 2009: Third Time's A Charm?

Even with the artificially sped up calendars ruling mall displays, it's an odd time to think about Christmas. Investors can be forgiven for feeling a cold wind, however, considering that Chrysler is in bankruptcy - again. So will this second strike be the one that finally puts the company on the path to long-term viability, or will it only find itself without a leg to stand on once again?

Strike One
Chrysler's first brush with bankruptcy unfolded in 1979 and culminated in the December decision to bail out Chrysler to the tune of $1.5 billion.

Technically speaking, it wasn't an official bankruptcy. A Chapter 11 was never entered into the books. The company, under the guidance of President and CEO Lee Iacocca, underwent an unofficial bankruptcy before even going to the government. It used its flagging performance and the specter of a looming bankruptcy to force serious concessions from the union and its creditors. Then it went to the government with documentation about how far it had already come in cutting costs and planning for recovery, just like any smart consumer looking for a consolidation loan. (For more on this, read Chrysler And The 1979 Bailout.)

The Play
Chrysler's precarious position at the time owed a lot to the oil crises, stagflation, foreign competition and, yes, government regulation. New regulations in the '60s and '70s did put more of a burden on Chrysler than it did on Ford (NYSE:F) or GM (NYSE: GM) because the latter were able to spread those extra legislated expenses over a larger volume of vehicle sales. On the flip side, however, Chrysler's deal with the government secured lower lending rates than the healthier Ford because the company was explicitly backed by the government - even though Ford was strong and solvent. (For background on Ford, read Henry Ford: Industry Mogul And Industrial Innovator.)

Still, the bridge loans did carry Chrysler through the hard times and the company did reasonably well - until now.

Chrysler paid back its explicit loans years ahead of schedule, but was never assessed a "fee" for the government backing that lowered its cost of capital. Despite certain shortcomings, the Chrysler bailout in 1979 has largely been seen as a success. That line of thinking is being questioned now that Chrysler is once again languishing due to high fuel costs and foreign competition.

Strike Two ...
Uncle Sam has saved Chrysler with money from taxpayers' pockets despite the fact that it failed the same test twice. For the sake of taxpayers' investment, we have to hope that this chance will prove to be the charm for Chrysler. From the perspective of bondholders, however, Chrysler has reneged on its debts yet again. This will ultimately raise lending costs for Chrysler in the future - lenders have long memories - and add yet another hurdle to the company's recovery. There may be room for another miracle for Chrysler, but it's hard to believe in such things in the dog days of summer.

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