A Summary of the 2008 Auto Industry Bailout: a Merge Chrysler With Fiat

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The automotive industry bailout of 2008 was a very important event that prevented the US auto industry and economy from collapsing. Almost 3 million jobs were at stake, including positions at the auto makers and their suppliers. On December 19, 2008, just weeks before the end of his presidency, President George W. Bush declared his plan to provide $17.4 billion of loans to bail out General Motors and Chrysler. At the time of the announcement, Ford was not included in the plans for the bailout. $13.4 billion of the money was to be paid out immediately in December and January of 2009.

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The remaining $4 billion was dependent on additional financing from TARP (Troubled Asset Relief Program) and was to be paid out in February 2009.

TARP was initially designed to stabilize the nation’s banks that needed a bailout to continue operations throughout the 2008 financial crisis. Vehicle sales had taken a downtown because of several factors, including rising fuel costs and the limited obtainability of credit from those banks and other financial institutions who were facing their own issues.

This time period would later be called the Great Recession of 2008. It was the worst period of economic activity since the Great Depression of the 1930s. Not only did the United States’ economy suffer greatly but so did many other countries worldwide. Many Americans were simply not looking to buy and lease new cars. The economy was shrinking, major mortgage companies went bankrupt, and the stock market crashed.

Trouble had been brewing for the US automotive industry for years. Before the bailout was announced, the “Big Three” was already cutting jobs, selling divisions, and reporting billion-dollar losses.

In June 2006, 40,000 hourly employees (a quarter of it hourly workforce) accepted buyout and early retirement packages from General Motors and Delphi, so that they could replace them with lower cost workers. Delphi, formerly an auto part maker owned by General Motors, had previously filed a chapter 11 bankruptcy in October of 2005. General Motors reported a total loss of $38.7 billion for 2007, which at the time was the biggest lost ever for an auto manufacturer. For the second time in under two years, General Motors also offered 75,000 current hourly workers the option to take a buyout or early retirement. By the time August 2008 came, General Motors reported its monthly sales had dropped by 20 percent in the United States. Shortly after, the company announced the it would no longer sponsor the Academy and Emmy awards, nor would they purchase their usual advertisement slots during the Super Bowl. In addition, General Motors would no longer host their celebrity pre-North American International Auto Show style event. Costs were being cut in every sector.

Chrysler had also been experiencing problems before the Great Recession of 2008. Daimler-Benz, who executed a $37 billion merger with Chrysler in 1998, ended that merger in the negative by selling 80 percent of its share in the company to Cerberus Capital Management in May 2007. Between February and November 2007, Chrysler would reduce its workers by 30 percent, eliminating salary and hourly positions in both the United States and Canada. All their assembly plants in Michigan had their third shifts purged in order to cut more costs. However, outside of the US, Chrysler seemed to be doing well, as they reported new records that showed increases in overseas sales by 7 percent from March 2007 to March 2008. In July 2008, both Ford and General Motors claimed spots on Fortune’s Global 500 List while Chrysler did not. Later that same month, Chrysler announced its plan to stop offering leases in the US through its financing branch, Chrysler Capital. This was during the time of America’s “credit crunch” and many consumers were either turning away from leasing or having trouble maintaining their payments due to the Great Recession of 2008. In August, Chrysler released current figures comparing their sales from August 2007, which had dropped a staggering 34 percent.

Out of the three US auto manufacturers, it looked as though Ford was doing the best. That’s not to say that Ford was not experiencing troubles of their own. The company made cuts, just as General Motors and Chrysler had to. In September 2006, Ford extended buyouts and/or early retirements to all their current US hourly employees, in addition to eliminating 10,000 salaried positions. They also announced plans to close 16 plants across the nation by 2012. In the following January, Ford reported a $12.7 billion loss, the largest since opening in 1903. Between March 2007 and 2008, the company sold Aston Martin, Land Rover, and Jaguar all at a loss in profit. By July 2008, Ford lost another $8.7 billion and reported plans to decrease SUV and truck production. The next month, Ford’s total US sales dropped 26 percent.

In November of 2008, executives of the “Big Three” Rick Wagoner of General Motors, Alan Mullaly of Ford, and Robert Nardelli of Chrysler took a trip to from Detroit to Washington DC to discuss the future of the auto brands and request loans totaling $25 billion. Criticism rose from lawmakers, as the three executives flew in private jets possibly costing $20,000 each to charter but asking for financial assistance from the government. At the next meeting showcasing survival plans for the companies during the first week of December, the CEOs decided to show efforts in cutting travel costs by driving to Washington DC in hybrid vehicles produced by their respective brands.

A bill was created and placed in front of the US Senate, so they could vote on whether they would provide funds to the companies. 60 votes were necessary to get the funds needed disbursed, but the bill did not pass. Remarkably, soon after the bill’s failure, President Bush declared his approval for the bailout funds to be dispersed to General Motors and Chrysler under very strict terms and conditions including a condition that. Although Alan Mullaly of Ford attended bailout hearings, in February 2009 the company announced that it would not need to accept emergency bailout monies from the government. Also in February, both General Motors and Chrysler returned to the government asking for an additional $21.6 billion on top of the 17.4 billion they already received. General Motors requested 16.6 billion while Chrysler requested $5 billion. It appeared the restructuring plans presented to the Senate and President Bush were not working as planned.

President Barack Obama took office just as the automotive industry bailout was just beginning. By the end of March 2009, President Obama addressed the nation on the status of both companies, stating the neither had lived up to the terms that had been laid out. “The federal government provided General Motors and Chrysler with emergency loans to prevent their sudden collapse at the end of last year -- only on the condition that they would develop plans to restructure. In keeping with that agreement, each company has submitted a plan to restructure. But after careful analysis, we've determined that neither goes far enough to warrant the substantial new investments that these companies are requesting.” Both companies claimed to be on the brink of bankruptcy. It was at this time that President Obama decided that federal government would take over. The first orders of business were to request that General Motors CEO Rick Wagoner to step down and Chrysler complete a merger with Fiat, an Italian automaker.

Although both companies fought as hard as they possibly could to avoid bankruptcy, their efforts were just not enough. On April 30, 2009 Chrysler filed for federal bankruptcy. A deal was made with Fiat and the United Auto Workers to allow them to take control of the company. “As a result of that deal, the UAW will own 55% of Chrysler. Fiat will own a 20% stake with the option of increasing it to 35%. The U.S. government will own 8% and Canada will have a 2% stake. Administration officials said the Treasury Department will provide Chrysler with about $8 billion in loans on top of the $4 billion in loans it has already received to get it through bankruptcy.” (Isidore, 2009). Shortly after on June 1, 2009, General Motors followed suit and filed for chapter 11 bankruptcy, reporting that the company was carrying $172 billion in debt with only $82 billion in assets. “it wasn't only the largest bankruptcy of the year for the U.S. retail industry, it was also the fourth largest bankruptcy reorganization in the history of United States business.” (FarFan, 2017). Plans included closing more than 2,600 dealerships across the country.

As time went on, the government gave more and more money to both companies. The grand total of the auto industry bailout came to be $80.7 billion. Not only did General Motors the auto manufacturer receive bailout funds, but their financial lending subsidiary General Motors Acceptance Corporation (now called Ally Financial) also received emergency monies. General Motors was loaned a total of $51 billion dollars. GMAC was loaned $17.2 billion which was even more than Chrysler who received $12.5 billion. The bailout lasted six years, from December 2008 until December 2014. Millions of jobs were saved at the auto giants and their suppliers. None of the Big Three were forced to close their doors and the government no longer owns any part of them. All three companies are operational today and have been able to move back to profitability. Funds were paid back to the government with continued car sales and money received from share sold in IPOs when the companies went back public on the stock market. Car brands including Saab, Saturn, Hummer, and Volvo were either sold or discontinued. but the bailout did not turn a profit. In fact, losses totaled $10.2 billion. GMAC was the only company who turned a profit ($2.4 billion) out of the deal. General Motors caused losses of $11.3 billion and Chrysler caused losses of $1.3 billion.

Ford did not receive any money from the TARP fund. Instead Ford requested government loans, because during this “credit crunch” banks were not lending. “On June 23, 2009, Ford received a $5.9 billion loan from the Energy Department's Advanced Technology Vehicles Manufacturing program. In return, it pledged to accelerate development of both hybrid and battery-powered vehicles, close dealerships, and sell Volvo. It upgraded factories in Illinois, Kentucky, Michigan, Missouri, and Ohio to produce hybrid vehicles” (Amadeo, 2018). Ford was able to avoid economic disaster by taking out $23.6 billion in loans back in 2006 to give the company “a cushion to protect for a recession or other unexpected event”. Ford’s CEO Alan Mullaly essentially saved the company from federal control, bankruptcy, and the brink of failure.

In conclusion, I would not necessarily consider the bailout to be successful. It depends on what view you decide to take on what was saved and what was lost. On one hand, the American owned sector of the auto industry was saved, and foreign car makers would not have the chance to takeover. General Motors and Chrysler would have gone bankrupt by the end of 2008, but Ford would have been able to remain strong and sales would have increased just based on the fact that there would have been fewer options for consumers to purchase. The government took billion-dollar losses instead of letting the free market decide which companies would survive.

On the other hand, Michigan’s economy would have taken a huge hit, considering that the auto makers have headquarters here which provided jobs for thousands of salary workers and many plants spread across the state. Flint is a good example of what can happen to a city when a company that provides a large majority of jobs pulls out of the city and moves elsewhere. General Motors is still having financial issues 10 years later, as they are have just recently announced plant closures in Michigan, Ohio, and Canada. The state and federal government would have lost payments towards its transfer programs such as social security and tax revenues. Unemployment rates and benefits would have risen. The government did not recoup the full return on investment of the auto industry bailout however, losses would have been much greater had President Bush not decided to use his authority and overrule the Senate’s decision not to save Detroit and the Big Thr