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Brent Glass, Eureka College
A Federally Funded Restructuring: The Automobile Industry's
Journey from Worldwide Acclaim to Bankruptcy
A devastating financial crisis struck the United States - and most of the world - in 2008. The automobile industry, which accounts for a large percentage of the nation’s economic output, was especially affected by the turmoil that followed. The economic crisis, coupled with internal managerial issues and the ever-increasing presence of foreign automobiles in the United States, led to a financial crisis within the domestic automakers. The “Big Three” automakers that include Chrysler, Ford, and General Motors were in financial trouble and faced filing bankruptcy, possibly threatening the jobs and therefore the livelihoods of hundreds of thousands of people. In an effort to prevent the complete collapse of the automobile industry Congress moved to enact the Auto Industry Financing and Restructuring Act, which passed the House of Representatives in December of 2008 but failed to pass the Senate. However, the Emergency Economic Stabilization Act of 2008 (EESA) was passed in an effort to protect good investments that financial institutions still held and help purchase poor assets to relieve the financial burden. The Troubled Asset Relief Program (TARP), established in EESA, included funds for the two car companies that required them: Chrysler and General Motors. Ford took many steps prior to the economic crisis of 2008 – such as securing loans against its blue oval logo – that enabled the company to remain financially viable and avoid the necessity of government funding. The heads of these American automakers appeared before Congress together on two separate occasions, pleading for cash in order to keep their business going. This eventually led to the failed attempt to pass the Auto Industry Financing and Restructuring Act and the decision of then-President Bush to use TARP funds to fund the two failing automakers until they could provide a viability plan and receive more financial support from the government. This ultimately led to the “bailing out” of the two companies by President Obama’s administration. This essay will briefly describe the reason for passing EESA and the path that it carved for supplying the American car companies with taxpayer money. It will also briefly explore the decline of the auto industry in America and the eventual visit of the CEO s of the Big Three to Congress. The actual process of the bailout will be analyzed – drawing substantially from Steven Rattner’s first-hand account in Overhaul – as well as the effects of the government intervention. Lastly, the paper will attempt to determine whether the infusion of government funds actually worked and determine whether – if GM or Chrysler went bankrupt again – it would be wise of the government to supply the companies with money once again.
Before one can begin to examine the automobile industry bailout one must consider the history of the automobile industry itself. Many Americans know the common story of how prolific individuals such as Henry Ford were instrumental to the accessibility of automobiles in America. The brands Chrysler, Ford, and General Motors have become a staple in American culture, dating back to the early twentieth century. The recognition of these brands is still widespread but the actual reach of the companies has dwindled since the industry's peak around 1960.
During the 1960s, GM alone accounted for nearly fifty percent of American market share, with Ford ranging from 22 – 26 percent and Chrysler from 12 – 16 percent (Kenworthy, Macaulay, & Rogers, 1996). This was the era when American cars were celebrated as a source of pride and a symbol of status. Foreign competitors virtually had no market share, save a few very small car companies. Slowly but surely, however, American automakers' market share began to steadily decline. Up until the mid-1970s, the Big Three automakers enjoyed a virtually impenetrable market share.
Around the mid-1970s foreign vehicles began to make a much larger scale emergence into the American car market. This was a result of many factors, mostly because of the change in consumer demand. American car companies, especially during the 1960s, prided themselves on their big American muscle cars that came to define them. Smaller vehicles, however, were becoming more prominent. This, combined with rising fuel prices due to the scarcity of fuel, and the instability of the economy in general, caused a decline in their American automobile market share (Kenworthy, Macaulay, & Rogers, 1996).
The market share of Chrysler – which had always been a distant third in the American automakers – took a formidable hit during the 1970s, leaving it in a financially dangerous situation; so much so that the company faced bankruptcy and asked the government for a $1.5 billion loan (Ingrassia, 2010). The federal government acquiesced and supplied the company with its loan, which was paid back early, in 1983. The loan amply allowed the company to rebound, essentially due to the leadership of their then-new CEO Lee Iacocca, who successfully introduced a new automobile design, the minivan. The minivan helped Chrysler return to profitability and escape bankruptcy because of its fresh design and ability to transport many people at once.
Ford and GM were not entirely immune to the financial devastation, however. They were also submerged in red ink, only they were large enough to avoid imminent of bankruptcy. German and Japanese vehicles were the main cause of the financial woes the Big Three faced. While the first half of the 1980s were not kind to the American automakers, Chrysler and Ford were able to claw their way to profitability. Chrysler – with its introduction of the minivan – and Ford with the introduction of its Taurus model, which eventually became the best-selling car in America, displacing the Honda Accord. The Ford Taurus was considered to be a breakthrough in automobile design. These successes by Chrysler and Ford secured the companies’ record-breaking profits and sky-rocketing stocks; Ford's stock price rose 1,500 percent between 1981 and 1987 (Rattner, 2010).
Paul Ingrassia narrated the events that followed the late eighties in his book Crash Course. While the American automakers thwarted foreign competition through the late eighties, they found themselves recording record losses with the first two years of the 1990s (Ingrassia, 2010). The American automakers constantly found themselves competing against foreign automakers. During the late eighties and early nineties, GM (and Chrysler and Ford on a lesser scale) focused on integrating more technological advances to reduce costs and usher the companies into the 21st century (Ingrassia, 2010). Most of GM’s efforts, however, were in vain. While the overall quality had improved, many of General Motors’ projects and initiatives turned out to be dead ends, which left the company even further behind its Japanese rivals, who managed to build cars in America more efficiently than the domestic car companies. This led to a GM loss of $4.5 billion in 1991, the highest loss of any corporation at that time.
The next savior for the American automakers – as introduced by Lee Iacocca again – was the Sports Utility Vehicle (SUV). Iacocca bought American Motors in the late eighties primarily because of the Jeep brand which, he believed would appeal to many Americans, who were family-oriented during the week and liked to have adventures come the weekend. To Iacocca, the Jeep satisfied this American personality and he was right; Americans took the bait and fell in love with SUVs, despite their gas guzzling nature. It is important to note that fuel was cheap during the nineties and Americans had no reason to believe it would not remain so. As a result the American automakers were able to turn around their sales.
Once again the American automakers excelled, fulfilling consumer demand. A prime example was Chrysler's rebound from an $800 million loss in 1991 to a record profit of $3.7 billion in 1994 (Ingrassia, 2010). Ford and GM also developed their own SUVs but primarily relied on their trucks to bring themselves into the black. The two domestic rivals had a reason to compete with one another again; whose truck was better? Japanese car companies failed to recognize the growing trend of trucks and SUV s, brushing it off as insignificant. Consequently, the American Big Three enjoyed market dominance and near record profits throughout the 1990s and into the 2000s. GM, confident in the most recent surge of American motor vehicles, announced the 2000 North American Auto Show would be the biggest in history (Ingrassia, 2010). While the “good times” lasted a couple more years, soon the American automotive industry found itself in trouble again.
A savvy businessman today would look at the Big Three's business model and deduce that a car company that is primarily concerned about only trucks and SUV s is destined to run into problems. The American car companies did not have the benefit of hindsight, however. During the years of surging truck and SUV sales gas prices were low and consumers were willing to purchase the larger vehicles and spend a little extra on gas (Kenworthy, Macaulay, & Rogers, 1996). The soaring fuel prices became the Achilles' heel of the American automaker. Consumers immediately switched their demand to smaller, more fuel-efficient vehicles, leaving most American car companies behind Japanese automakers who were patiently waiting to fill the gap. This lack of foresight, coupled with the financially crippling legacy costs and poor management, led to a consistent decline of profit margins.
Since the mid-2000s the American car companies have been playing a game of catch up with Usain Bolt, the Jamaican Gold medalist sprinter, if Bolt represented Japanese automakers. Soaring fuel prices in the United States have decreased the demand for trucks and SUV s; so much so Ford eliminated the once-highly-profitable Expedition in 2005 and switched the production to mid-size and compact cars (Ingrassia, 2010). While all of these factors played a direct role in the final result of Chrysler and GM receiving large sums of money from the federal government, the final straw for these corporations was the financial crisis of 2008.
The financial crisis of 2008 is often regarded as the worst U.S. financial crisis since the Great Depression and had a devastating effect on all sectors of the economy, particularly within the manufacturing realm. Both U.S. political parties were quick to point at the policies of their opponent as the sole cause of the crisis. There are many contributing factors, however, to consider when discussing possible causes of the 2008 financial crisis. While the causes of the crisis are not vital to the examination of the bailout of the automotive industry, the aftershocks are noteworthy.
The Financial Inquiry Commission was created when the Fraud Enforcement and Recovery Act of 2009 became law. The commission was composed of ten members, six of which were chosen by the majority party, Democrats at the time, and four by the minority party, the Republicans. Of the six, three were chosen by the Nancy Pelosi, Speaker of the House, and three by the Senate majority leader. Of the four Republican choices, two were chosen by the House of Representatives minority leader and two by the Senate minority leader.
The Commission, or Financial Crisis Inquiry Commission (FCIC), as it will be referred to from this point forward, was similar to the Pecora Commission which investigated the causes of the Great Depression. Similarly the FCIC's charge was to investigate the causes of the financial crisis of 2008. An important fact to consider is that the FCIC had the ability to subpoena documents and witnesses for testimony. Therefore, the FCIC had a similar authority to that granted in Congressional committees, which often call in individuals to testify about a certain subject or topic. Overall, the FCIC spent more than a year examining the causes of the crisis. It held nineteen days of public hearings, interviewed more than 700 witnesses and reviewed thousands of documents.
The FCIC published their findings in the Financial Crisis Inquiry Report (2011). This essay will primarily examine Part V of the report, which compiled a comprehensive list of aftershocks endured by major businesses. The objective of this examination will be to determine some of the causes that pushed Chrysler and GM over the edge into financial oblivion. The section begins, “Panic and uncertainty in the financial system plunged the nation into the longest and deepest recession in generations” (Financial Crisis Inquiry Commission, 2011). This statement is the overarching cause of Chrysler and GM's breaking point. While there were many contributing factors, the primary problem was the deep recession.
In testifying to Congress, Bank of America CEO Brian Moynihan stated, “Over the course of the crisis, we, as an industry, caused a lot of damage. Never has it been clearer how poor business judgments we have made affected Main Street” (Financial Crisis Inquiry Commission, 2011). This statement held much truth. It was estimated that $17 trillion in household wealth disappeared within 21 months and unemployment reached 10.1 percent in October 2009 (Financial Crisis Inquiry Commission, 2011). Additionally, when the panic hit in September 2008, business financing dried up.
Large firms were forced to exhaust their cash balances. Overall, businesses took a serious toll. In 2006, roughly 20,000 American companies filed for bankruptcy protection while that number jumped to nearly 61,000 in 2009 (Financial Crisis Inquiry Commission, 2011). The trend for these businesses would ultimately be that of Chrysler and GM as well. The threat of bankruptcy forced companies to reevaluate their long-term plans and, in most cases, contract rather than expand.