What We Can Learn from the 1979 Bailout

Economy, Politics, US Economy, US Politics

Almost thirty years ago, an automotive CEO appeared before Congress to ask for help.  His company was failing due to poor management decisions, run away gas prices and an overall economic slowdown.  If only he could get enough money to stay in business, his company’s next generation of small, fuel efficient cars would hit the market and lead to the company’s success.  His company employed 40,000 US workers and laying them off would be a disaster at a time when the economy was already struggling.  He’d even work for a dollar a year.  Sound familiar?

Congressmen in 1979 were not novices to the bailout game.  Lockheed had showed up in 1971 looking for monetary help after poor business decisions and an economic slowdown brought them to the brink of bankruptcy.  They claimed 60,000 jobs were at risk in a down economy. Congress and the Nixon administration narrowly passed a quarter of a billion dollars in loans to keep them going.  By 1977, all the money had been paid back and the government turned a small profit.  President Ford ended up in a dispute with his vice president in 1975 over a plan to keep New York City afloat.  The loans to the Big Apple were paid back in full.  Now Chrysler was looking for help.  What can we learn from the Carter administration’s response?

  1. Chrysler asked for the moon.  Lee Iacocca stood in front on Congress asking for $1 billion in direct cash assistance in the form of tax rebates or other direct contributions.  He wanted Chrysler to be exempt from government pollution regulations just coming into effect.
  2. Congress told him to pack sand.  No direct cash infusions, no exemptions from environmental laws.  The Carter administration demanded a detailed operating plan showing how the cash would be used and mapping out a path to prosperity.
  3. The bailout looked a lot like a bankruptcy.   The harsh reality is that Chrysler did not have enough business to support the workforce they had.  Chrysler ended up putting half of that workforce on the street.  Chrysler paid off some debts for 30 cents on the dollar, issued warrants in exchange for payment to other creditors and demanded extreme concessions from their suppliers including making them extend months of credit to the company before getting paid.  Doesn’t that sound like a bankruptcy without a judge?
  4. The bailout that looked like a bankruptcy but wasn’t worked.  Chrysler’s K cars were a hit, the stock recovered, the government got it’s money back

How can we apply this?  Congress can look back at this and other bailouts and see some clear patterns.  First, Congress has to demand a plan be in place that has a reasonable chance of success.  Second, Congress must closely evaluate what is truly required versus what is asked for.   Third, loan guarantees with a recognition that the tax payer’s guarantee also has value that must be repaid are effective.   Direct cash payments aren’t the way to go.   Fourth, jobs are going to be lost. If the Big Three doesn’t have the business, they can’t employ the workers. Finally, “bailouts” can absolutely be effective when done correctly.

This isn’t a Republican versus Democrat thing.  Both have been convinced in the past of the need to step forward in times of economic upheaval to save a business that is really worth saving.  Hopefully, as our elected representatives are looking forward at the banking and auto industries’ woes, they are looking backwards as well. All you have to do is go to 1979.



  1. Stacey Derbinshire  •  Dec 5, 2008 @11:45 am

    Just wanted to say HI. I found your blog a few days ago on Technorati and have been reading it over the past few days.

  2. engineer  •  Dec 6, 2008 @5:11 pm

    Thanks Stacey! I hope you enjoy our efforts.