The meltdown of Iceland — a cautionary tale

5 comments November 16th, 2008

Ah, the wonders of FINANCIAL DEREGULATION!

POSTSCRIPT: When you’re done reading the material about Iceland (and be sure you follow all the links), you should check out THIS STUFF about Republican efforts to blame the U.S. financial crisis on Democrats. It’s almost funny.

The Rockford banker and the Chrysler bailout

1 comment November 16th, 2008

 

 All the buzz of late about a possible federal bailout of the auto industry brings to mind this story from “Rockford — Big Town/Little City,” a book I wrote nine years ago.

In the late 1970s, the American automobile industry was losing lots of money, and Chrysler Corp. found itself on the brink of bankruptcy.  In desperation, new Chrysler President Lee Iacocca went to Washington, hat in hand, looking for a government bailout.

At first, most politicians and much of the public were opposed. An attitude of economic Darwinism prevailed: If Chrysler couldn’t cut it, it deserved to fail. But Iacocca made a persuasive case that bankruptcy would cause hardships for hundreds of thousands of families and would end up costing the government more than a bailout would.

Lawmakers did the arithmetic, noticed a shift in public sentiment and gave Iacocca what he wanted. In January 1980, President Jimmy Carter signed the Chrysler Loan Guarantee Act.

The legislation amounted to what Iacocca called “the most complicated financial transaction in the history of American business.” Among the myriad details was a requirement that Chrysler get loan concessions from banks to which it already owed money. If even one bank balked, the whole deal was off.

“The most dramatic conflict of all,” Iacocca wrote in his autobiography, “came in Rockford, Illinois, with the American National Bank and Trust Co. [which later became AMCORE]. David Knapp, the bank president, was convinced that even with federal loan guarantees, Chrysler was about to go broke. He didn’t want any part of it. His bank had sued to recover its loan of $650,000, and he was determined to hold out to the bitter end.”

It was fortunate for Chrysler that its most stubborn creditor was in an area where the company had an assembly plant, in Belvidere, and where subsidiary businesses depended on it for their own survival.

Steve Miller, Chrysler’s chief financial officer, considered going to the Register Star and telling them that Knapp was going to put 5,000 people in the Rockford area out of work. Instead, Miller met with Knapp in Mayor Robert McGaw’s office and presented his case, but the banker wouldn’t budge.

“I’m sorry,” Knapp told Miller, “but if you take a loan, you’ve got to pay it back.”

Then Chrysler and its friends ratcheted up the pressure, and American National finally gave in.

“David Knapp had received a number of phone calls from companies that depended on Chrysler’s survival,” wrote Iacocca. “He had heard from politicians at every level. Thousands of UAW members had threatened to withdraw their money from his bank. There had even been a bomb threat from somebody in town, which he was sure had come from us.”

A month later, Chrysler got the first installment of its federally backed loans, and the company was back on its feet. The loans were all paid back ahead of schedule, and by the end of the century, Chrysler was making record profits.