Fanning the Flames
By David Ruggles
Recent quotes from high-profile individuals have really kept the pot boiling in recent days. First, Arizona senator and previous presidential candidate John McCain was quoted as saying, “If anybody believes that Chrysler is going to survive, I'd like to meet them." This touched off a firestorm of comments from a variety of people with differing opinions, including congressmen from the state of Michigan. Meanwhile, Michael Steele, chairman of the Republican National Committee, called General Motors Corp.’s $1.2 billion third-quarter loss “further proof that President Obama's economic experiments are wrong for America." All this during a week in which talk abounded about GM’s potential IPO plans and the Dow hit 10,400.
In the middle of all this, Lee Iacocca weighed in with his opinion. In his mind, “Chrysler has a better chance of survival than does GM, which is just too big.” In my mind, Chrysler’s chance of survival is 50-50 at best, while GM’s chances are much better. But I’m not a politician, so I can speculate publicly. I am, however, rooting for both companies for the good of the country and all the people who depend on the auto industry.
I recall the tone and buzz during the previous Chrysler bailout. After the economy began to turn around and Chrysler became profitable again, Iacocca became so incensed at a comment made by President Ronald Reagan that he paid off the government-guaranteed loans early. This, despite the fact that Chrysler did not receive an interest credit for the early payoff, which represented an unexpected windfall to the taxpayer. Reagan had reportedly whispered in Iacocca’s ear that it was a good thing Jimmy Carter was in the White House, or Chrysler would have been “down the tubes,” or some such comment. In Iacocca’s mind, there was serious satisfaction to be had by paying the government off early — almost as good as spitting in Reagan’s eye. In addition, he got the government out of Chrysler’s business. Taxpayers made out well on the previous auto industry bailout. Not commonly known is the fact that the government imposed an additional $1 million per month administrative fee in addition to collecting interest at the rate of 15.9%. Taxpayers also saved the expense of hundreds of thousands of people on unemployment compensation and the forced assumption of Chrysler’s pension liability on the Federal Pension Guarantee Fund. Unfortunately, the previous Chrysler bailout success was wasted with the DaimlerChrysler “merger of equals” and the ill-fated sale to Cerberus Capital Management LP.
A re-read of Iacocca’s autobiography from 1984 is just as interesting 25 years later as it was at the time, and provides real insight to the events of that era. There are some real similarities with current events in the auto industry. In the book, Iacocca rails at the government Loan Guarantee Board, the Auto Task Force of their day, for making Chrysler sell its corporate jet. He recalls the decision to pay the government guaranteed loans back seven years early, even though it was a risky move at the time and saved no interest. It took the government a month to figure out how to deal with a loan guarantee paid off early, especially one in the amount of $813,487,500. Iacocca won a bet with New York City Mayor Ed Koch — a bushel of apples — over who would pay off its loan guarantees first, New York City or Chrysler. Chrysler had borrowed $1.2 billion for 10 years, but paid it back in full in three. The automaker paid $404 million in interest and $33 million in administrative fees. In addition, the government received $311 million for warrants issued at $13 per share, at a time when Chrysler shares were trading for around $30. This was an additional windfall for the taxpayers in return for a temporary foray into “socialism,” a term heard loudly and often in those days. Iacocca takes some real shots at the Reagan administration and “laissez faire” economics in his book.
Auto industry history is being written again. Auto manufacturers can make money as fast as they can lose it. GM’s and Chrysler’s future is uncertain at best, as is the economy that supports the industry as a whole. Oldsmobile, Plymouth, Eagle, Pontiac, and Saturn are brands that have disappeared or are on their way out. But for those who assert the government can’t do anything right, the previous auto industry bailout had a great outcome for taxpayers. This time around, I hope the “nattering nabobs of negativism,” to quote Spiro Agnew, will be forced to eat crow again.
David Ruggles is a former dealer-owner and consultant with nearly 40 years’ experience in the auto industry. He has conducted an annual seminar on auto dealership issues and processes in Japan since 1993, and helped develop specialty software focused on pre-owned leasing. He can be reached at firstname.lastname@example.org.
The following was cut for space reasons, and for being overly political for the publication:
It will certainly be interesting if GM can achieve a successful IPO, pay off the government loans, and buy out the government stock holdings at a profit to taxpayers. In the minds of some, there must not be any precedent for the government doing anything successfully. I suspect there are some who might replay Steele’s quote, and those of others who opposed the GM/Chrysler bailouts, back to them repeatedly during a political campaign at some point. But Steele is known for having “foot in mouth” disease, and I’m pretty sure McCain’s future political aspirations do not extend beyond the state of Arizona. As I recall, it was a Republican administration that "bridge loaned" GM and Chrysler with approximately $17 billion dollars in December 2008, after Congress had turned down its own bailout plan.