Blogs & Comment

A contrarian take on Chrysler's U.S. bankruptcy

Headed to an appointment in midtown today, I found myself walking along 42nd Street, which is graced on its east end by the Chrysler building, one of the most beautiful structures in all Manhattan. Constructed during the Great Depression, the Art Deco masterpiece remains a symbol of the sky’s-the-limit promise of American capitalismbuilt, no less, during a time of great economic strife.
Now, of course, the Chrysler building is no longer owned by the troubled company. And a good thing too for the building’s tenants: Chrysler’s U.S. operations just declared bankruptcy.
In midday remarks, President Barack Obamasaid the Chrysler bankruptcy process will be “quick” and designed not to disrupt Chrysler’s operations. Thanks to sacrifices by the company, employees and big debtholders, not to mention the alliance with Fiat, “the necessary steps have been taken” to give Chrysler “a new lease on life,” he said. He also announced that GMAChas agreed to finance Chrysler sales.
If ever there was a moment of symbolism designed to gauge the health of American capitalism, this would seem to be it. Chrysler has been to the brink before, and surviveda government bailout in the 1970s kept the company from going under. But according to the Wall Street Journal this morning, talks stalled after a group of creditors refused to accept the Obama administration’s deal: US$2.25 billion in cash in return for an agreement by creditors to forgive US$6.9 billion of Chrysler’s debt. Soon afterwards, the company declared itself bankrupt.
Speaking in the foyer of the White House, President Obama was clear as to whom he blamed. “While many stakeholders made sacrifices and worked constructively, I have to tell you that some did not. A group of hedge funds and investment funds decided to hold out for an unjustified taxpayer bailout.”
Obama said it was “unacceptable” for a “small group of speculators” to endanger Chrysler’s future. But he expressed optimism that Chrysler, which makes brands including Jeep and Dodge, can be restructured through a bankruptcy filing: “This is not a sign of weakness but rather one more step on a clearly charted path towards Chrysler’s revival.”
This news casts a cloud of uncertainty over the future of the 54,000 people Chrysler directly employs. Tens of thousands more work for parts companies and in motor dealerships that depend on the firm for business. About 115,000 retired Chrysler workers depend on the company for healthcare and benefits.
Coming on the heels of months of job losses, the Chrysler news bodes ill for the recession-weary U.S. economy. But underneath the vaulting symbolism and dire prognostications of what this might mean is more prosaic reality. And in Chrysler’s case, the economic impact measured in numbers of jobs lost may be less dire than currently anticipated.
A report put out by the Center for Automotive Research(CAR) last December to bolster the companies’ first request for bailout money indicated the total number of jobs lost if all three Detroit auto companies went bankrupt would be 3.3 million. It assumed all these jobs would be lost in the same year as the company shutdowns.
But break out Chrysler’s share54,000, plus several thousand more in indirect employmentthen compare to the overall employment figures in the U.S. economy133.6 million, according to the Bureau of Labor Statistics’ March statement, and we start to understand why the Obama administration did not push harder for a bailout.
This is not meant to dismiss or in any way downplay the very real economic pain that this news represents. But it’s not hard to see why the administration opted for bankruptcy as the best option for taxpayers. In addition, a report put out in December in response to the initial CAR report by the right-leaning Heritage Foundation, based in Washington, D.C., shows the CAR analysis did not account for those workers likely to bounce back.
“When workers lose their jobs, they don’t just shrivel up and die,” said that report’s author, policy analyst Karen Campbell, in a phone interview today. “Some will find new jobs servicing parts or retrofitting older cars. Others will find jobs in other industries. Those numbers, and that dynamic economic reality, isn’t reflected in the CAR study.
Campbell’s study makes a couple of other interesting points:

The assumptions employed by CAR … assume that the Big Three simultaneously declare bankruptcy and shut down in 2009 and cease operations for a year. This assumption is divorced from bankruptcy reality. The usual practice in large-scale bankruptcies is for the petitioners to continue operations but at a reduced level. Because the automakers have suggested that they are at least 30 percent short of needed cash flow, a more reasonable assumption would be to reduce Detroit production levels by that percentage in 2009, 2010, and 2011 (the three years covered by the CAR study).

When the more realistic assumption is made, the estimate of employment loss plummets to 453,000 jobs in the first year, a figure 86 percent lower than CAR’s estimate. In other words, the CAR report inflates estimated job loss by a factor of more than seven.

In Campbell’s view, and clearly in the Obama administration’s also, bankruptcy makes sense as the company’s fastest ticket to solvency.”Chrysler is the smallest of the Big Three, so it’s going to have the smallest impact,” Campbell said. “And everyone involved has an interest in seeing Chrysler emerge stronger, so the hope is those aligned interests will help speed the bankrutpcy process.”
Unfortunately, this logic echoes a lot of the thinking that dominated government and Wall Street players’ mindsets just before Lehman Brothersdeclared bankruptcy. We all know how that supposedly logical, sensible decision played out. How markets and individuals react to news of a major bankruptcy at a time of economic strife is unpredictableand the optics of this particular bankruptcy are harsh. It’s going to be an interesting ride.
One important distinction for Canadian readers: Chrysler Canadais a separate entity, and it is still a going concern. What’s more, the Canadian federal and Ontario governments seem determined to keep it that way. Both made midday announcements of fresh loans totalling CAD$3.77 billion designed to keep the company afloat.
This, says Campbell, is likely to work in the Canadian company’s favour in a couple of ways. First, there will be minimal economic dislocation. Second, provided the bankruptcy is as speedy as the Administration claims, the Canadian company will be in a good position to benefit from new business generated by a stronger, solvent Chrysler.