(By Tim – iStockAnalyst Writer)
One of the recent major news items has been the government bailout of the major players in the U.S. auto industry. I thought it would be interesting to go back and look at some of the details of that first auto company bailout, Chrysler in 1979. I was just out of college then and remember some of the details, but searching the Internet for news from that era brought back some interesting memories.
Then, as now, there was vigorous discussion on whether the U.S. government should bail out a investor owned company. There is one article written at that time hypothesizing that it was not the bailout that saved Chrysler. I think the original was by the Heritage Foundation in 1983, but I found it republished verbatim on at least a dozen websites. I am not really interested in whether that bailout (or the current ones) were good policy or bad. They are, and will be, history and I am interested in the investment related aspects of these government actions.
In December 1979 the U.S. Congress passed the Chrysler Loan Guarantee Act that was signed by President Carter in January of 1980. The act gave a U.S. government guarantee to $1.5 billion in loans to Chrysler to help them stay open until they could bring some new vehicles to market. The loans carried an interest rate of about 10%, which was below market at that time and the U.S. government received warrants for 14.4 million shares of Chrysler stock. Lee Iacocca was brought in as CEO of Chrysler to manage the rebuilding.
With the loan money in hand, Chrysler came out with a new line of front wheel drive cars know as the K-cars. These models did well and were soon followed by what would become a home run product for Chrysler: minivans. Following a $1.2 billion loss in 1979, the company lost $1.7 billion in 1980. By 1982 the company was able to generate a small profit. In 1983 Chrysler paid off the bailout out loan 7 years early and bought back the warrants given to the U.S. Treasury.
For investors, the bailout and turn around were very profitable. Detailed stock price data from that era is very hard to find online but I was able to dig up some interesting figures. This data coincides with my memories of those days.
- During the worst times the stock of Chrysler fell to under $2.00 per share. I found one account that said it went as low as $1.50.
- By December of 1982 Chrysler stock was $15 per share.
- In 1983 Chrysler bought back the warrants issued to the Treasury at about $21.50 per share, a $300 million plus profit for the government.
- On August 11, 1983 the stock price closed at $26.75.
In March of 1987 Chrysler declared at 3 for 2 stock split. At that time the stock was over $52 per share.
So the lucky or smart investor who bought Chrysler at $2.00 sometime in 1979 had a 2,500% gain on his holdings 8 years later. As we look at current events we can ask ourselves: Can history repeat itself? Is the Chevy Volt the new K-minivan? Or probably most important, as my wife pointed out: Who is the modern Lee Iacocca?