Chrysler Bailout *

Automaker Chrysler is facing bankruptcy. Its executives come to Washington to ask for a government bailout. The United States economy is in recession. Sound familiar?

But the year was 1979. Lee Iaccoca was Chrysler’s CEO. And the amount granted in the form of guaranteed loans was a mere $1.5 billion. “They spend that much on paperclips for bailouts nowadays,” quipped Michael A. Driggs, who was involved in the first Chrysler bailout. He spoke at a Legal Affairs Committee luncheon on April 22.

Mr. Driggs, an examiner at the Office of Management and Budget at the time, was tapped to head the Chrysler bailout. As executive director of the Chrysler Corporation Loan Guarantee Board at the Department of the Treasury, he reported to three superiors: the Treasury secretary, the Federal Reserve chairman, and the comptroller general. There was no task force, as is the case today.

Chrysler, he said, asked for government loans. But the board agreed only to guarantee company bonds. The bonds were redeemed by Chrysler in 1982. Moreover, the government made a return of $350 million from the sale of warrants it received in return for the guarantees.

Unlike today, when the chairman of troubled General Motors was compelled to resign, the government did not fire Chrysler’s officers or impose its view on what products the company should make. Again, in contrast to today, the government did not show favoritism toward any of the stakeholders in Chrysler. Instead it forced the corporation to come up with its own plans for survival. “Chrysler would come in with a plan. And we’d say, ‘Not conservative enough. Try again.’” Once, he disclosed, they even threatened to force the company into bankruptcy if Iaccoca did not agree to a more realistic plan.

Chrysler continued to be troubled. In 1998 it merged with Daimler, a stormy relationship that ended a decade later. Today it is faced with a merger with Fiat.

Mr. Driggs lamented the fact that the government has apparently not learned from the first Chrysler bailout. The Carter administration and the Democratic-controlled Congress had already had experience bailing out companies like Penn Central and Lockheed. “They knew the seductive addiction of federal subsidies without conditions – or linked to political considerations rather than economic realities. This pool of experience has been lost to our government, perhaps because as a country we do not remember our history well.”

But the speaker speculated that today the government has invested so much money in Chrysler ($4 billion in government loans granted last December and $6 billion more requested) that it can’t readily pull out and follow the formula he and his board established 30 years ago.

*The above is an article that appears in the monthly newsletter of The Cosmos Club, Washington, DC, describing a speech I gave at the club. (Michael Driggs)