Santa Calls on Chrysler

Congress acts to save the automaker from bankruptcy

It is the most extravagant Christmas gift a bountiful Uncle Sam has ever given a U.S. company. Just before recessing for the holidays, Congress last week agreed to extend an extraordinary $1.5 billion loan guarantee to the ailing Chrysler Corp. and sent the measure to the White House for Jimmy Carter's signature. The gigantic bailout, dwarfing the $250 million Lockheed loan guarantee of 1971, is designed to save from bankruptcy the nation's third largest automaker and tenth ranking manufacturer (1978 sales: $13.6 billion). With Chrysler's losses mounting daily, its 1979 deficit is almost sure to exceed $1 billion, the gaudiest splash of red ink in U.S. corporate history.

While Washington may have given Chrysler a reprieve and preserved jobs for its 137,000 employees in an election year, the action may be a dangerous example for a system in which the right to fail is as enshrined as the right to succeed. Moreover, if Chrysler cannot make a U-turn and start generating the profits needed to pay back its loans, the U.S. taxpayer could get stuck with a portion of the $1.5 billion tab. Assessing the action of his colleagues, Senator Barry Goldwater, the Arizona Republican who is a leading advocate of keeping government out of the private sector, called the bill "the biggest mistake Congress has ever made."

The measure, however, is far from a pure giveaway. For one thing, the loan guarantee is not a handout but simply the Government's pledge to reimburse private parties for the money, up to $1.5 billion, that they lend to Chrysler if the auto firm is unable to repay the loans. This promise should enable Chrysler to return to the money markets that have been closed for the past year. The automaker, moreover, will pay the Treasury an annual fee of at least 1% of the sum guaranteed.

Chrysler will be eligible for the federal guarantee only if it raises $2 billion on its own from sources specified by the legislation. From domestic banks, financial institutions and other creditors, for example, Chrysler must find $400 million in new loans that would not be covered by the Government's guarantee. Because the fate of Chrysler's suppliers and dealers is so closely tied to that of the automaker, Congress insists that they contribute $180 million by such means as buying stock or extending loans. Similarly, the states and cities that benefit economically as the sites of Chrysler plants must kick in $250 million. An additional $300 million is to be raised by selling more of the company's assets. (Chrysler has liquidated more than $400 million of its holdings this year.)

On top of this, the key requirement imposed by Congress is the contribution from Chrysler's workers. Although its blue-collar employees have already agreed to forgo expected wage increases amounting to $203 million in the next three years, Congress insists that an extra $259.5 million be cut. This will force Chrysler and the United Auto Workers to renegotiate the contract that they concluded in November. Said Senator William Roth, the Delaware Republican: "Our proposal would have to be ratified by the workers. Ultimately, it is up to them." White collar employees will also be hit; their wage packages are to be trimmed by $125 million.

Chrysler's management will have to yield some of its autonomy. A board, consisting of senior federal financial officials as well as the Secretaries of Labor and Transportation, will oversee the firm's operations in detail. Congress's general accounting office will have the right to audit the company's books.

By the time the two houses of Congress began debating the Chrysler bill last week, the threat of bankruptcy was intensifying at an alarming rate. Because of the current general slump in auto sales, down 21% last month, Chrysler has been running out of money faster than had been anticipated. The giant corporation could be broke by mid-January, a month ahead of its projections. To give Chrysler the time to raise the funds it needs, Congress had to act before the holiday break. In a rare emotional appeal to the House of Representatives, Speaker Tip O'Neill brought a hush to the chamber as he recalled the dark days of the Great Depression and warned that failure to save Chrysler would result in worker layoffs large enough to trigger a new depression. Said he: "We won't be able to dig ourselves out for the next ten years." In the Senate, Massachusetts Democrat Paul Tsongas described how his home town of Lowell, Mass., had been crushed by the decline of the textile industry and declared that he "did not want to do to Detroit what others have done to my city."

Even more effective than these appeals was the lobbying offensive launched by Chrysler, the U.A.W. and the Administration. Jimmy Carter got on the phone to urge key legislators to back the bill, as did Chrysler Chairman Lee Iacocca, who placed a series of calls from his corporate suite in Highland Park, Mich. Meanwhile, U.A.W. President Douglas Fraser (who is now also a Chrysler board member) cornered Senators in the chamber's ornate reception room. These pro-Chrysler forces stressed the argument that the collapse of the firm would be an economic disaster for the nation. This contention, however, is disputed by a number of experts. Under bankruptcy proceedings, for example, most of the plants could be kept running under a court-appointed trustee. And even if Chrysler were forced to liquidate, which is a worst-case situation, a number of its operations would presumably be bought and revitalized by other firms.

But in the end, economic issues seemed to count for less in the cloakrooms on Capitol Hill than a powerful political argument: Did legislators, in an election year, want to risk appearing unconcerned about Chrysler workers' jobs?

For Iacocca, the former top Ford executive signed on a year ago by Chrysler to save the day, the victory in Washington was just the beginning of the struggle. The engaging and voluble troubleshooter looked more relaxed than he had in months as he told TIME Detroit Bureau Chief Barrett Seaman: "Chrysler has to start a new inning. We've got to turn around a car company, get the quality in the cars and get them out on time." His first priority is what he calls a "confidence program." As soon as Carter signs the loan guarantee, Chrysler will blanket the country with television, newspaper and magazine ads flashing the word that the company has come back from the brink. Says Iacocca: "I've got to convince the public that we're in business to stay." Chrysler employees will be treated to pep talks videotaped by Iacocca and be given T shirts proclaiming WE CAN DO IT.

If he can get his cash, Iacocca hopes to save Chrysler by introducing next fall his so-called K cars: fuel-efficient, front-wheel drive compacts that will replace the company's Volare and Aspen models and compete with the similar and fast-selling X cars of General Motors. In addition, Iacocca plans to expand production of Chrysler's popular subcompact Omni and Horizon. Says he: "We're set up to build every small car we can. By 1981, 67% to 70% of our total cars will be small, front-wheel drive, compact and subcompact cars--far more than anybody else--getting 25 to 30 miles per gallon and up." But Iacocca also plans to field a big, new Imperial next year. Though he realizes that he will be criticized for building this kind of auto when demand is mounting for small cars, he argues that not only is there still a market for a luxury vehicle but that its potential for profits is enormous. He adds that the investment will be relatively modest because the new Imperial will be a modification of an existing Chrysler model. Says he: "Big deal. I did it with the Mark at Ford; it was a Thunderbird with a new wrapper. I took a Falcon and made it into a Mustang."

Iacocca's optimism is not universally shared. Market conditions could be worse next year than Iacocca anticipates, and the competition will be cutthroat. For example, though Chrysler plans to invest some $12.6 billion in new cars and trucks over the next five years, GM will be pouring $38 billion into new models, and Ford will be committing $20 billion. But Iacocca is philosophical about being the smallest of the Big Three. Says he: "That's the way it is. I've always said that we've got to play it smarter. I love to play poker with these big guys. But I go in with this little stack of chips and I look over at these guys with big stacks and it scares the hell out of me."

Before Iacocca plays poker with GM and Ford, he must sit down with an equally tough card shark, the U.A.W.'s Fraser, to renegotiate Chrysler's new contract with its workers. If they fail to find a wage formula that meets the requirements set by Congress, the federal guarantee package will fall apart, and Chrysler's very survival will again be in grave doubt. qed

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