Chrysler Corp. LLC: Here We Go Again – 1979 Revisited!
The rumors are swirling once again – Chrysler Corp LLC may be headed for Chapter 11 Bankruptcy. Currently there are official denials of any problems with liquidity and Chrysler spokesman Dave Elshoff said “The rumor is without merit”. However, let’s take a moment and reflect back about 30 years ago when Chrysler had similar woes.
It’s 1979 and the Chrysler Corporation had petitioned the US Government for $1.5 billion in guaranteed loans to stave off bankruptcy. Congress reluctantly agrees and then President Jimmy Carter signs the loan into law. What caused all of Chrysler’s problems? It was two-fold: 1) the 1970’s oil crisis which triggered unbelievable price increases in gasoline and long lines at the pump. Americans turned to the more economical Japanese auto makers while US manufacturers were left holding the bag with their big, overbearing, gas guzzling behemoths; and 2) Chrysler Corporation was so far behind on updating their factories that they we unable to even retool in order to catch up with the Japanese. Fortunately, Chrysler had the foresight to hire Lee Iaccoca away from Ford Motor Company and the rest is history. The K-Car saved the company and Chrysler was able to repay their debt in record time.
Today, the picture is a little different; the Chrysler Corp. LLC is run by Cerberus Capital Management, one of the largest private equity investment firms in the United States. The company was formed in 1992, some 67 years after Chrysler was established. The business of CCM is to make money for its investors through choosing solid companies to purchase. Now, while this is nothing new in the world of big business, it does seem odd for CCM to purchase a company that even the world renowned Daimler AG could not keep afloat. Although CCM does seem to have a penchant for buying barely treading water companies like Target and GMAC, but retail and finance are very different animals compared to auto manufacturing.
Consider this; earlier this week, Chrysler Corp. LLC drew on a $2.0 billion line of credit from Daimler AG and Cerberus at an interest rate of 7% over the London interbank rate. Chrysler lost more than $1.6 billion in 2007 and sales are down over 23% so far this year. So what does all this mean? If Cerberus and Daimler AG, who still has a 19% stake in the company, decide to dismantle Chrysler, the economic ramifications will reverberate through the US and the world. Chrysler employs more than 100,000 people and many more thousand worker jobs depend upon the company purchasing the products designed and/or manufactured at their company. The blow to the US economy would certainly be catastrophic considering the seesaw slide we are on right now. A company with good liquidity does not tap their $2 billion line of credit unless something is wrong. Let’s hope it is just a rumor, otherwise we are in for a huge wallop.