Publication Date

12-8-2008

Abstract

[Excerpt] 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.

Comments

Suggested Citation
Bickley, J. M. (2008). Chrysler Corporation Loan Guarantee Act of 1979: Background, provisions, and cost (R40005) [Electronic version]. Washington, DC: Congressional Research Service. http://digitalcommons.ilr.cornell.edu/key_workplace/569/

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