bailout

Case Study Following federal bailouts of Lockheed Corporation (1971) and New York City (1975) earlier in the decade, the U.S. government in 1979 came to the rescue of financially troubled Chrysler Corporation. Although the company's request for a federal bailout was criticized by both conservative and liberal members of Congress, political pressure by President Jimmy Carter and the economic importance of this smallest member of the Big Three resulted in passage of the Chrysler Corporation Loan Guarantee Act of 1979. The federal guarantee of $1.2 billion in loans allowed Chrysler, unable to borrow on its own credit, to obtain the cash it needed to continue operating. In order to obtain the federal loan guarantee, Chrysler was required to gain concessions from existing lenders, who agreed to the conversion of nearly $700 million in debts into a special class of preferred stock that paid no dividends and could only be redeemed several years following issue. Chrysler was also required to pay a loan guarantee fee of 1% per year in addition to granting the government 14.4 million warrants to purchase the firm's stock. Chrysler quickly returned to profitability and was able to repay the guaranteed loans ahead of schedule. Years later it was purchased by Daimler Benz, which in 2007 suffered a huge loss when it sold Chrysler to a private equity firm.