ȱ
¢ȱȱȱ ȱȱȱ
ŗşŝşDZȱǰȱǰȱȱȱ
ȱǯȱ¢ȱ
ȱȱȱȱ
ȱŞǰȱŘŖŖŞȱ
ȱȱȱ
ŝȬśŝŖŖȱ
ǯǯȱ
ŚŖŖŖśȱ
ȱȱȱ
Pr
epared for Members and Committees of Congress
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
¢ȱ
The American automobile industry has serious financial problems. Corporate executives from the
Big Three (General Motors, Ford, and Chrysler) have testified before Congress about their need
for federal credit (direct loans and guaranteed loans). This report examines the Chrysler loan
guarantee program for possible insights that could assist Members of Congress in evaluating
proposals to provide federal credit assistance.
In 1979, Chrysler applied for federal loan guarantees. In 1979 and 1980, the economy was in
recession and the price of oil had unexpectedly increased dramatically. However, at that time
there was no financial liquidity crisis, as is the case today. Most of the arguments for and against
the proposed Chrysler loan guarantee program are relevant to current proposals for credit
assistance to the Big Three. For example, in the 1979 debate, proponents argued that the Chrysler
loan guarantee would save many jobs. But opponents contended that the financial capital obtained
for Chrysler by the proposed loan guarantee would have been used by other firms to expand their
productive facilities, output, and employment. Thus, any Chrysler job losses could be offset by
gains at other firms.
Provisions in the Chrysler Loan Guarantee Act of 1979 included the establishment of a Chrysler
Loan Guarantee Board, extensive federal oversight of Chrysler’s operations, detailed reporting
requirements by Chrysler’s management, shared sacrifice of parties benefiting from the loan
guarantee, and protection of the federal government’s interest.
Chrysler used federal loan guarantees to borrow $1.2 billion of the $1.5 billion available and
redeemed its guaranteed loans in 1982. Some critics argued that Chrysler was only able to return
to profitability because of the imposition by the U.S. government of “voluntary” import quotas on
Japanese vehicles. In 1980, the Chrysler loan guarantee was treated as a contingent liability with
no initial cost at the time the guarantee was provided. Because Chrysler repaid all of its
guaranteed loans, the U.S. government incurred no budgetary cost. Furthermore, the U.S.
government received warrants to buy Chrysler stock, which it subsequently sold at auction to
Chrysler for $311 million. Thus, it can be argued that the U.S. government made a profit from the
loan guarantee program.
Currently, the Federal Credit Reform Act requires that the reported budgetary cost of a credit
program equal the estimated subsidy costs to the taxpayer at the time the credit is provided. For
proposed legislation establishing a new credit program, the Congressional Budget Office is
responsible for making the initial estimate of the subsidy cost. Once legislation has been enacted,
the Office of Management and Budget estimates the subsidy cost on the credit program. An
appropriation for the annual subsidy cost of each credit program is made into a budget account
called a “credit program” account. Thus, under today’s budgetary rule, legislation providing
direct loans or loan guarantees to assist the automobile industry would require the inclusion of the
estimated subsidy cost, which would require an appropriation of budget authority.
This report will be updated as issues develop and/or in the event of new legislation.
ȱȱȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
ȱ
Background ..................................................................................................................................... 1
Arguments For and Against the Guarantee...................................................................................... 2
Major Provisions of the Loan Guarantee Act .................................................................................. 2
Results of Loan Guarantee .............................................................................................................. 4
“Voluntary” Import Quotas ....................................................................................................... 4
Budgetary Cost of Guarantee .................................................................................................... 5
Current Budgetary Cost of Federal Credit....................................................................................... 5
Conclusions ..................................................................................................................................... 6
ȱ
Author Contact Information ............................................................................................................ 7
ȱȱȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
he American automobile industry has serious financial problems. Corporate executives
from the Big Three (General Motors, Ford, and Chrysler) have testified before Congress
T about their need for federal credit (direct loans and guaranteed loans). This report
examines the Chrysler Corporation Loan Guarantee Act of 1979 for possible insights that
could assist Congress in evaluating proposals to provide federal credit assistance.
ȱ
In the 1960s and 1970s, the Chrysler Corporation had a history of financial instability. During
recessionary periods it had incurred large losses, but during periods of prosperity the corporation
had usually earned high profits. Yet between 1967 and 1980, the company’s domestic market
share had declined from 16% to 8.6%, arguably due to managerial errors, foreign competition,
regulatory controls, and the energy shortage at that time.
Chrysler failed to introduce a small car in the late 1960s, even though Ford produced the Pinto
and General Motors began manufacturing its Vega. Chrysler refused to manufacture a new small
automobile until it introduced its Plymouth Horizon and Dodge Omni models in 1977. The rising
cost of gasoline, changing consumer tastes, and Environmental Protection Agency’s (EPA’s) fuel-
efficiency standards contributed to Chrysler’s troubles, because it had not shifted its production to
smaller vehicles. Some corporate financial experts assert that Chrysler should have reduced its
dividends in the early 1970s and used the funds to modernize its plant and equipment. Also,
Chrysler made a belated attempt to compete overseas with Ford and General Motors, which was
unsuccessful.
In 1979, huge losses compelled Chrysler to sell off some of its subsidiaries, close plants, and
reduce its employment. In July 1979, Chrysler requested and subsequently received federal loan
guarantees to avoid bankruptcy. Losses continued throughout 1979, and Chrysler’s total loss for
the year was $1.126 billion.1
Ford and General Motors were in better financial condition than Chrysler, but also experienced
large losses in 1979 and 1980 because of the sharp rise in the price of gasoline and the worst
economic downturn since the Great Depression. “In 1980, the Big Three [General Motors, Ford,
and Chrysler] lost a record $4.2 billion as their sales in that year plummeted 30% below 1978
sales, reaching their lowest level since 1961.”2 As will be discussed in a subsequent section of this
report, in 1981, the Big Three advocated and received the imposition by the federal government
of “voluntary” import quotas on Japanese vehicles. These “voluntary” import quotas contributed
to the return to profitability of General Motors and Ford, as well as Chrysler.
1 U.S. General Accounting Office, Guidelines for Rescuing Large Failing Firms and Municipalities, GAO Report
GGD-84-34, March 29, 1984, p. 15.
2 Stephen D. Cohen, The Route to Japan’s Voluntary Export Restraints on Automobiles, Working Paper No. 20,
School of International Service, American University, p. 2. Available at http://www.gwu.edu/~nsarchiv/japan/
scohenwp.htm, visited Dec. 1, 2008.
ȱȱȱ
ŗȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
ȱȱȱȱȱ ȱ
Advocates of the loan guarantees advanced four primary arguments. First, if Chrysler defaulted
there would be an enormous loss in employment. Many of these job losses would occur in firms
supplying parts and materials to Chrysler. Data Resources Inc. conducted a simulation of the
Chrysler collapse and concluded that there would be a 500,000 near-term loss in employment and
a longer-term additional employment loss of between 200,000 and 300,000. Second, some of
Chrysler’s difficulties were beyond its control, particularly large price increases in oil obtained by
the Organization of Petroleum Exporting Countries. Third, federal safety, environmental, and fuel
efficiency standards had been disproportionately costly for Chrysler compared to General Motors
and Ford, because the larger corporations had longer production runs and thus could spread out
their regulatory costs over more units. Consequently, Chrysler “deserved” federal compensation
for its costs incurred in meeting federal regulations. Fourth, Chrysler manufactured the main
battle tank for the U.S. Army; hence, if Chrysler went bankrupt national defense would be
weakened.
Opponents of the loan guarantee to Chrysler buttressed their case with five basic arguments. First,
they contended that the analysis made by Data Resources Inc. was misleading. The financial
capital which Chrysler would obtain with the loan guarantee could be used instead by other firms
to expand their productive facilities, output, and employment. In addition, part of Chrysler’s lost
sales would be picked up by General Motors and Ford. Second, the entire economy was
experiencing high energy costs; thus a single firm such as Chrysler did not warrant preferential
treatment due to the energy problem. Third, most of the regulatory costs incurred by Chrysler
were due to fuel-efficiency standards. Yet Chrysler would have been compelled to improve the
average mileage of its automobiles anyway, because of the rising cost of energy. Fourth, if
Chrysler went bankrupt it would go into receivership under existing bankruptcy legislation.
Profitable operations, such as its tank production division, would continue as a subsidiary of
another corporation or as a new corporation. Fifth, the Chrysler loan guarantee might encourage
other large corporations to obtain federal financial assistance. This would lead to a greater federal
role in the economy and a reduction in the efficiency of private capital markets in allocating
credit.
ȱȱȱȱȱ ȱȱ
In January 1980, Chrysler Corporation Loan Guarantee Act of 1979 (the Act) was signed into law
as P.L. 96-185. The Act included numerous provisions, which are summarized as follows:3
• The Act established the Chrysler Corporation Loan Guarantee Board (the Board),
which was composed of the Secretary of the Treasury (chairperson of the Board),
the Chairman of the Board of Governors of the Federal Reserve System, and the
Comptroller General of the United States. The Secretary of Labor and the
Secretary of Transportation served as ex officio nonvoting members of the Board.
3 The provisions described in this section of this report are from the following source: U.S. Congress, House, Chrysler
Corporation Loan Guarantee Act of 1979, Conference report no. 96-730 (to accompany H.R. 5860), Washington, Dec.
20, 1979, 19 p.
ȱȱȱ
Řȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
• The Board was responsible for determining the terms and conditions under which
it would make commitments to guarantee the payment of principal and interest
on loans to Chrysler if the Board determined that (1) Chrysler had an energy-
saving plan satisfactory to the Board, (2) the loan guarantee was necessary to
prevent serious negative effects of the economy, (3) Chrysler had submitted a
satisfactory operating plan, and (4) Chrysler had submitted to the Board a
satisfactory financing plan to meet the financing needs of the operating plan and
which included an aggregate amount of nonfederally guaranteed assistance of at
least $1.43 billion from Chrysler, banks, financial institutions, other creditors,
suppliers, dealers, stockholders, labor unions, employees, management, state and
local and governments, and others directly deriving benefit from the production,
distribution, or sale of the products of Chrysler.
• A loan guarantee could be issued only if the Board determined that (1) credit was
not otherwise available to Chrysler under reasonable terms or conditions, (2)
Chrysler’s prospective earning power and the value of the security pledged had to
furnish reasonable assurance of the repayment of the guaranteed loan, (3) the
loan to be guaranteed had an interest rate determined by the Board to be
reasonable, (4) Chrysler’s operating and financing plans continued to meet Board
requirements, (5) Chrysler was in compliance with its operating and financing
plans, (6) the Board had received assurances that Chrysler’s operating and
financing plans are realistic and feasible, (7) Chrysler agreed to reporting
requirements of a revised operating and financial plan covering the period of the
loan guarantee; and within 120 days following the close of each fiscal year, an
analysis reconciling the corporation’s actual performance with the operating and
financial plan was submitted, (8) there was no substantial likelihood that Chrysler
would be absorbed by or merged with any foreign entity, and (9) Chrysler was in
compliance with the terms and conditions of the commitment to issue the
guarantees required by the Board. Any determination by the Board that the
conditions established by the Act had been met would be conclusive. The Board
would prescribe and collect a guarantee fee sufficient to compensate the federal
government for all administrative expenses related to the guarantee but in no case
could such fee be less than one-half of 1% per annum of the outstanding principal
amount of loans guaranteed. The Board was to ensure that the federal
government is compensated for the risk assumed in making guarantees. Thus, the
Board was authorized to collect an additional fee above the fee to cover
administrative costs, to enter into contracts allowing the federal government to
participate in gains from the financial success of Chrysler, or use instruments
deeded appropriate by the Board. All amounts collected by the Board would be
deposited in the Treasury as miscellaneous receipts.
• The Act described the proportionate share to be contributed by employees in
order for Chrysler to receive the loan guarantees.
• The Act required Chrysler to establish an employee stock ownership plan
(ESOP).
• The amount of loan guarantees could not at any time exceed $1.5 billion in
aggregate principal amount outstanding.
• Loans guaranteed under the Act would be payable in full not later than December
31, 1990.
ȱȱȱ
řȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
• The Board was authorized to inspect and copy all accounts, books, records,
memoranda, correspondence, and other documents and transactions of Chrysler.
• In order to protect the federal government’s interest, the Board was granted
extensive oversight authority including approval of the sale of any asset with a
value in excess of $5 million and a labor contract having an aggregate value of
future wages and benefits of $10 million or more. Debts owed the federal
government would have priority, but the Board could wave such priority.
• The Secretary of Transportation would submit to the Board and to Congress a
planning study providing an assessment of the long-term viability of Chrysler’s
involvement in the automobile industry.
• The Board would submit reports to Congress semiannually for 1980 and 1981
and annually for later years.
• The authority of the Board to issue loan guarantees was to expire on December
31, 1983.
• The administrator of the Small Business Administration would investigate
whether or not small-business automobile dealers should receive federal loans
and loan guarantees.
• The Act included amendments to the Electric and Hybrid Vehicle Research,
Development, and Demonstration Act of 1976.
ȱȱȱ ȱ
Chrysler used $1.2 billion of the $1.5 billion in loan guarantees. The corporation downsized its
operations and returned to profitability. “The restructuring took place fairly quickly with less
interruption of the firm’s operations than would have occurred in a bankruptcy.”4 In 1982,
Chrysler was profitable and redeemed its government guaranteed notes in June and August of that
year.5
ȃ¢Ȅȱ ȱȱ
Some critics argue that Chrysler was able to return to profitability because of the imposition by
the U.S. government of “voluntary” import quotas on Japanese automobiles, which were
negotiated by the Reagan Administration and announced by the Japanese government on May 1,
1981. The Big Three and the United Automobile Workers advocated for restrictions on Japanese
automobile imports. Supporters of quotas in the Reagan Administration argued that the American
automobile industry needed temporary restraints on imports in order to permit “breathing room”
for the Big Three to retool their factories for the production of more fuel efficient vehicles.6 The
“voluntary” import quotas provided financial benefits to the Big Three and American workers in
4 U.S. General Accounting Office, Guidelines for Rescuing Large Failing Firms and Municipalities, p. 18.
5 Ibid., p. 17.
6 Stephen D. Cohen, p. 6.
ȱȱȱ
Śȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
the automobile industry. But, major Japanese manufacturers realized “windfall” profits and
American consumers paid higher prices for vehicles.7
¢ȱȱȱ ȱ
Before FY1992, federal loan guarantees were treated as a contingent liability of the U.S.
government. Thus, at the time a loan guarantee was granted, there was no budgetary cost.
Because Chrysler repaid all of its guaranteed loans, no budgetary cost was incurred by the U.S.
government. In addition, in return for the loan guarantee, the U.S. government had received from
Chrysler 14.4 million warrants to purchase Chrysler stock at $13 per share until 1990. On
September 12, 1983, the U.S. government auctioned these warrants, and Chrysler purchased them
for $311 million.8 Thus, it can be argued that, from a budgetary standpoint, the Chrysler loan
guarantee program made money for the U.S. government.
ȱ¢ȱȱȱȱȱ
The Omnibus Budget Reconciliation Act of 1990 (P.L. 101-508) added Title V to the
Congressional Budget Act.9 Title V, also called the Federal Credit Reform Act of 1990 (FCRA),
changed how the unified budget reports the cost of federal credit activities (i.e., federal direct
loans and loan guarantees).10 Before FY1992, for a given fiscal year, the budgetary cost of a new
direct loan or loan guarantee was the net cash flow for that fiscal year. This cash flow measure
did not accurately reflect the true cost of a loan or loan guarantee, which is its subsidy cost over
the entire life of the loan or loan guarantee.
Beginning with FY1992, federal credit reform legislation required that the reported budgetary
cost of a credit program equal the estimated subsidy costs at the time the credit is provided. The
FCRA defines the subsidy cost as “the estimated long-term cost to the government of a direct loan
or a loan guarantee, calculated on a net present value basis, excluding administrative costs.” This
places the cost of federal credit programs on a budgetary basis equivalent to other federal outlays.
This change means, because the subsidy costs of discretionary credit programs are now provided
through appropriations acts, the discretionary credit programs must then compete with other
discretionary programs on an equal basis. Funding for most mandatory credit programs (generally
entitlement programs) is provided by permanent appropriations. For a proposed credit program,
the Congressional Budget Office is required to estimate the subsidy cost. If legislation is passed
that includes this credit program, the Director of the Office of Management and Budget (OMB) is
responsible for coordinating the estimation of subsidy costs.
7 Robert W. Crandall, “Import Quotas and the Automobile Industry: The Costs of Protectionism,” The Brookings
Review, vol. 2, no. 4, summer 1984, pp. 8-16.
8 Gary Putka, Chrysler to Pay U.S. $311 Million for Its Warrants, Wall Street Journal, Sept. 13, 1983, p. 3.
9 For a comprehensive analysis of the current budgetary treatment of federal credit, see CRS Report RL30346, Federal
Credit Reform: Implementation of the Changed Budgetary Treatment of Direct Loans and Loan Guarantees, by James
M. Bickley.
10 Currently, the budgetary cost of federal credit does not include market risk. A Congressional Budget Office (CBO)
report examined two ways of including the market price for risk: risk-adjusted discount rates and option-pricing
methods. CBO made estimates for the cost of the Chrysler loan guarantee using these two methods, which are available
in the following report: Congressional Budget Office, Estimation the Value of Subsidies for Federal Loans and Loan
Guarantees, Aug. 2004, 27 p.
ȱȱȱ
śȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
An appropriation for the annual subsidy cost of each credit program is made into a budget
account called a credit program account. Funding for the subsidy costs of discretionary credit
programs is provided in appropriation acts and must compete with other discretionary programs
for funding available under the constraints of the budget resolution. Most mandatory credit
programs receive automatic funding for the amount of credit needed to meet the estimated
demand by beneficiaries. Mandatory programs are generally entitlement programs for which the
amount of funding depends on eligibility and benefits rules contained in substantive law. The
subsidy cost of federal credit is scored as an outlay in the fiscal year in which the credit is
disbursed by either the federal government or a private lender [Section 504d]. For mandatory
credit programs, any additional cost from reestimates of subsidies for a credit program is covered
by permanent indefinite budget authority. This additional cost is displayed in a subaccount in the
credit program account.
Also, beginning with FY1992, each credit program has a nonbudget financing account. Each of
these nonbudget financing accounts receives payments from its associated credit program account
equal to the subsidy cost at the time a new loan or loan guarantee is provided. They also acquire
the value of the unsubsidized portion of the loans (actual disbursements by the government minus
the subsidy cost). These amounts are borrowed from the Treasury through the loan program.11
Furthermore, the financing accounts contain all other cash flows between the public and the
government associated with each credit program [Section 502(5E6-7)]. These flows include “the
disbursement and repayment of loans, the payment of default losses on guarantees, and the
collection of interest and fees.”12 Because they are nonbudget, the cash flows into and out of these
accounts are not reflected in total outlays, receipts, or surplus/deficit. The budget authority of a
credit program provides the means for the credit program account to pay to the financing account
an amount equal to that program’s estimated subsidy costs. The off budget borrowing from the
Treasury for the unsubsidized portion of a credit program is included in the national debt.
ȱ
This report examined the Chrysler Corporation Loan Guarantee Act of 1979 for possible insights
that would assist Congress in evaluating proposals to provide federal credit assistance to the Big
Three. In 1979-80, the economy was in recession and the price of oil had unexpectedly increased
dramatically. However, there was no financial liquidity crisis, which currently exists. Most of the
arguments for and against the proposed Chrysler loan guarantee program are relevant to current
proposals for credit assistance. Provisions in the Chrysler Loan Guarantee Act of 1979 included
the establishment of a Chrysler Loan Guarantee Board, extensive oversight of Chrysler’s
operations, detailed reporting requirements by Chrysler’s management, shared sacrifice of parties
benefiting from the guarantee, and protection of the government’s interest. Chrysler borrowed
$1.2 billion of $1.5 billion available and redeemed its guaranteed loans in 1982. Some critics
argued that Chrysler was only able to return to profitability because of the imposition by the U.S.
government of “voluntary” import quotas on Japanese vehicles. In 1980, the Chrysler loan
guarantee was treated as a contingent liability with no initial cost at the time the guarantee was
provided. Currently, the FCRA requires that the reported budgetary cost of a credit program equal
11 These transfers within the government represent transfers of budgetary resources rather than actual financial
resources.
12 U.S. Executive Office of the President, Office of Management and Budget, Analytical Perspectives, Budget of the
United States Government, Fiscal Year 2009, p. 359.
ȱȱȱ
Ŝȱ
¢ȱȱȱ ȱȱȱŗşŝşDZȱǰȱǰȱȱȱ
ȱ
the estimated subsidy costs at the time the credit is provided. For proposed legislation
establishing a new credit program, CBO is responsible for making the initial estimate of the
subsidy cost. For example,
The Advance Technology Vehicles Manufacturing Loan Program (ATVMLP) was
authorized under Section 136 of the Energy Independence and Security Act of 2007 (P.L.
110-140). Congress provided the necessary funding for the loans in a continuing resolution
for federal appropriations (P.L. 110-329), approved Sept. 30. The continuing resolution
contained provisions to enable automakers to access $25 billion in government loans to
retool assembly lines to make more fuel-efficient vehicles. The resolution, enacted to fund
the federal government through March 2009, included $7.5 billion to cover the cost of the
loan program as estimated by the Congressional Budget Office.13
Once legislation has been enacted, OMB estimates the subsidy cost on the credit program.
This report’s examination of the Chrysler loan guarantee program raises some concerns relevant
to today’s debate about credit assistance to the Big Three. First, current economic conditions
differ for the automobile industry. In 1979, the downturn in automobile sales for the Big Three
appeared temporary. Today, the downturn in automobile sales for the Big Three may be protracted
and sales may not recover if brands are eliminated and plants permanently closed. Second, in
1979, the budgetary treatment of loan guarantees and direct loans was on a cash flow basis. A
loan guarantee was initially treated as cost free because it was a contingent liability of the U.S.
government. Thus, possible future costs of a default were not considered. A direct loan was
treated as a direct outlay, which did not consider the repayment of principal and interest. Today
the cost of a credit program is the estimated subsidy cost to the taxpayer at the time the credit is
provided. Third, in 1979 and 1980, if Chrysler ended automobile manufacturing, part of this
decline in employment would have been offset by increased employment by General Motors and
Ford. But, today this would not occur because all of the Big Three are in financial trouble and are
requesting federal credit assistance.
ȱȱ ȱ
James M. Bickley
Specialist in Public Finance
jbickley@crs.loc.gov, 7-7794
13 Bureau of National Affairs, Daily Report for Executives, no. 216, Nov. 7, 2008, p. A4.
ȱȱȱ
ŝȱ