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The original documents are located in Box B13, folder "Chrysler Corporation" of the
Arthur F. Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Arthur Burns donated to the
United States of America his copyrights in all of his unpublished writings in National Archives
collections. Works prepared by U.S. Government employees as part of their official duties are in
the public domain. The copyrights to materials written by other individuals or organizations are
presumed to remain with them. If you think any of the information displayed in the PDF is subject
to a valid copyright claim, please contact the Gerald R. Ford Presidential Library.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYS
1
BOARD
Office Correspondence
Date November 22, 1974
To
Chairman Burns
Subject: Economic Position 22 of CHEYSLEY YSTEM
From
Capital Markets Section
(Mr. Puckett)
OFFICE PM 5:30
RECEIVED CHAIRMAN
This memorandum examines the present condition of Chrysler
Corporation, its vulnerability to failure, and possible implications
should failure occur.
Over-all, it would appear that Chrysler today is in a
financial condition somewhat analogous to that in late 1969
and 1970. The substantive difference between the situation then
and now seems to be that industry automobile sales in the first
half of 1975 may be lower than in any period in 12 years, if the
staff's projections of domestic auto sales materialize. Therefore,
Chrysler's financial difficulties are likely to deepen.
Whether or not the Company fails, severe effects on
stockholders, employees, and suppliers will continue to be felt
by the plunge in Chrysler stock prices, lay offs, and cutbacks
in production. If the firm should fail, the "shock" effect would
at least be cushioned by the previous widespread recognition of
its financial troubles.
Sales and Inventory Position
Chrysler is working in an unfavorable environment--one
in which automobile sales have plunged in recent months and dealer
stocks have soared. (Charts 1 and 2) Third quarter auto sales
FORD & LIBRARY GERALD
-2-
were at a seasonally adjusted annual rate of 8.5 million units,
and sales in the fourth quarter as projected in the most recent
Greenbook are expected to be 6.8 million units (SAAR) the lowest
since the fourth quarter of 1970, when there was a long strike at
General Motors. But there are indications even that low rate may
be revised downward in the light of the weakening over-all economic
picture and indications of a continued decline in auto sales. Data
for October show sales of 6.4 million units, while data for the
first 10 days of November indicate sales of only 5.5 million units
(SAAR).
In this environment, Chrysler's relative position also has
deteriorated as its share of the passenger car market has fallen by
about four percentage points since the first of the year. In part,
this may be viewed as a return to a somewhat more normal situation
since Chrysler's position around the beginning of the year was
unusually strong. Nonetheless, the erosion of its market share
plus a general deterioration in over-all industry sales has resulted
in significant difficulties for Chrysler, which have been exacerbated
by its reluctance to cut output sufficiently to match the reduced
level of consumer demand. As of the end of October, Chrysler was
holding a 108 day supply of cars in inventory (not seasonally
adjusted), given its rate of sales for October, versus a 62 day
supply for the rest of the industry, excluding Chrysler. Chrysler's
FORD & LIBRARY GERALD
-3-
inventories, moreover, contained inordinately large amounts of 1974
models. Recently, Chrysler has responded to this large build-up in
stocks by shutting down all but one of its six domestic assembly plants
and announcing plans for laying off nearly 44,000 workers, which will
bring the total layoffs to 70,500 in December--a significant portion
of the nearly 154,000 workers it employed on average during 1973.
Reports, in addition, have been published of plans for even more
layoffs, but as yet without official confirmation from the Company.
Chrysler's Financial Position
All of these difficulties are compounded by the fact that
Chrysler, as is well known, is one of the weakest firms in the
industry. This is amply borne out by Table 1, showing data as of
mid-year, when detailed information was last available. Perhaps
the most surprising thing about the data, however, is the degree
of Chrysler's weakness relative to other firms in the industry,
including American Motors. Chrysler's leverage, as measured by
its debt-equity ratio is substantially higher than any other firm,
as is its ratio of short-term to long-term debt. Not surprisingly,
its coverage of interest and fixed charges is also very thin.
Indicative of Chrysler's slow sales, large inventories,
and high fixed charges is its performance for the first nine months
of the year, showing an after-tax profit of only $21 million--the
GERALD FORD LIBRARY
-4-
smallest since 1970. (Table 2) Further evidence of Chrysler's
weakening position is its after-tax loss of $8 million in the third
quarter, versus small profits in the first two quarters of the year.
(Tables 3 and 4) Though this 1974 third quarter performance was
better than that for the third quarter of 1973, in the sense that
losses were smaller, 1973 results were plagued by parts shortages
and strikes.
As for the balance sheet, information as of September 30,
indicates the current ratio (current assets/current liabilities) is
the lowest for any third quarter since 1969, despite the swollen
inventories of the Corporation. (Table 5) The quick ratio (current
assets excluding inventories/current liabilities) is essentially the
same as in 1973 and is only a modest amount above that for 1970. But
the liquidity position of the firm has been weakened by payment of
dividends that were not earned--$57 million paid versus only $21
million earned after taxes in the nine months ending September 30,
and in the third quarter, $19 million paid versus a loss of $8
million after taxes.
This payment of dividends in excess of earnings was one
of the reasons cited by Moody's in its recent downgrading (from P-1
to P-2) of the commercial paper of Chrysler's financing subsidiary,
FORD is LIBRARY GERALD
-5-
Chrysler Financial Other reasons cited were Chrysler Corporation's
poor performance, primarily with respect to profits, and also the
erosion of Chrysler's working capital position throughout the year.
The downgrading of Chrysler Financial's commercial paper
and the information circulating about the condition of Chrysler has
made it difficult for the financing subsidiary to sell its paper,
except in very short maturities. (Table 6) Since October 31 the
outstanding commercial paper of Chrysler Financial has fallen by
$220 million, which is being replaced by bank loans. Adequate
bank credit probably is available to Chrysler Financial since at
the end of October, back-up lines of credit approximately matched
outstanding commercial paper. Thus, the main effects of the shift
from commercial paper to bank credit, besides foreclosing an
alternative source of finance, seem to be a significant increase
in the cost of funds. Sources at Chrysler Financial estimate that
at recent rates the Company would have to replace commercial paper
at 9-3/4 per cent with bank loans at 10-1/2 to 11-1/2 per cent,
plus 10 per cent compensating balances As a result, a signifi-
cant conversion of commercial paper to bank credit could appreciably
1/ Standard and Poor's, for quite some time, has rated the
commercial paper as of medium quality (A-2).
2/ Apparently, no balances have been required to support unused
lines of credit.
FORD is LIBRARY 938470
-6-
lower Chrysler Financial's net income and hence further weaken the
position of the parent corporation.
Over-all the position of Chrysler seems then to be some
cause for concern. In some ways, its situation today is analogous
to that in late 1969 and on into early 1970 when it had a narrow
margin of liquidity and poor profits. Gradually, after the first
quarter of 1970 the company recovered until it, along with the
rest of the industry, was adversely affected by the Arab oil
embargo last year.
However, there are important differences between the
situation today and that in late 1969 and early 1970. Industry
auto sales subsequent to and during Chrysler's earlier financial
weakness never dipped below 7.5 million units (SAAR), except
during the interval covered by the General Motors strike. Yet if
the Greenbook projections concerning domestic auto sales materialize,
industry sales will be at a rate of 7.0 million units during the
first half of 1975-the lowest rate in twelve years. Some recovery
is expected in the second half of the year to around 7.5 million
units. But, in the light of recent events, these projections, both
for the first and second half, may be revised downward. Therefore,
Chrysler may be facing a significantly more austere marketing
picture than in the periods when it was previously in financial
FORDO & LIBRARY 939470
-7-
difficulties, while probably being burdened with a higher break-even
point.
Some Implications of a Chrysler Failure
If Chrysler were to fail the resulting "shock" effects
would be cushioned by the fact that its financial problems have been
well-publicized. News of its plant closings, sluggish sales, large
inventories, weak profits, and inadequate liquidity are widely known.
Partly as a result of such adverse information, Chrysler
stock on November 20 closed at $8.75, down from a high for the year
of $20.12. The Company's bond ratings are already relatively low
(Standard and Poor's and Moody's A), and the recent Moody's down-
grading of Chrysler Financial's commercial paper only ratified
adverse news about the parent company.
Purchasers of commercial paper, already sensitive to the
position of Chrysler Financial, have, as noted previously, been
reluctant to continue to lend except on a very short-term basis.
Bank loans to Chrysler Financial secured by the Company's receivables
have increased as a replacement for commercial paper run-offs. Such
loans totaled $638 million as of November 12. The total amount of
bank debt owęd by Chrysler and its subsidiaries, however, is not
known.
FORD & LIBRARY GERALD
thart 1
Domestic New Car Sales
(monthly, seasonally adjusted)
millions of autos
11.0
11.0
10.0
10.0
9.0
9.0
8.0
8.0
7.0
7.0
FORD VIBRARA
6.0
6.0
5.0
5.0
1968
1969
1970
1971
1972
1973
1974
Chart 2
Dealers' Inventories
Domestic New Car Stocks
(monthly, seasonally adjusted)
millions of autos
2.0
2.0
1.8
1.8
1.6
1.6
1.4
1.4
1.2
1.2
1.0
1.0
1968
1969
1970
1971
1972
1973
1974
& LIBRARY
Table 1
Selected Balance Sheet Ratios for Major Motor Manufacturers
($ millions)
General
American
Chrysler
Motors
Ford
Motors
Total debt ($ millions)
6/30/74
1,426
1,192
1,915
80
Debt as per cent of equity
6/30/74
52
10
30
20
Avg. debt as per cent of equity
1964-73
38
7
18
28
Short-term as per cent total debt
6/30/74
42.4
36.5
36.7
0
Avg. short-term as per cent total debt 1964-73
29.9
40.2
49.5
54.0
Coverage ratios:
Interest cover. ratio pretax
6/30/74
3.1
44.0
10.3²/
10.4
Total fixed charge cover. ratio
6/30/74
3.0
35.7
10.1
10.4
1/ Interest expense reported net of interest income by company in some periods.
2/ As of December 31, 1973.
Definitions:
Total debt
Long-term plus short-term debt.
Debt
as
per
cent
of
equity Total long- and short-term debt as a per cent of
common equity, which includes common stock, capital
surplus, retained earnings.
Interest coverage ratio
Pretax income plus total interest expense divided
by total interest expense.
Total fixed charge
Net income plus total interest expense (adjusted
coverage ratio
by tax rate) divided by fixed charges (adjusted by
tax rate) plus preferred dividends paid.
Source: Business Week: October 12, 1974.
FORD & LIBRARY GERALD
Table 2
Chrysler Corporation and Consolidated Subsidiaries
Income Statement for Nine Months Ending September 30
($ millions)
1968
1969
1970
1971
1972
1973
1974
Income:
Net sales
5,298
5,240
5,147
5,855
7,054
8,364
8,506
Equity earnings
10
5
-7
2
10
9
8
Other income
26
19
-9
5
8
11
-1
Total income
5,334
5,264
5,131
5,862
7,073
8,384
8,514
Expenses:
Costs
4,579
4,692
4,786
5,330
6,346
7,592
7,961
Depreciation
122
129
135
132
132
137
145
Amortization
129
147
128
130
145
139
107
Pension plans
100
85
88
124
137
152
199
Incentive comp.
14
1
--
--
9
12
--
Interest expense net
19
23
34
54
45
19
68
Total expenses
4,963
5,077
5,171
5,770
6,814
8,051
8,480
Profits before taxes
371
187
-40
92
259
333
34
Income taxes
196
94
-21
41
122
150
11
Minority interest
-2
-1
-5
3
2
2
1
Net income
179
93
-15
48
136
181
21
Note:
Details may not add to totals due to rounding.
Data for 1968-1970 may not be strictly comparable to current classifications.
GERALD FORD LIBRARY
Table 3
Chrysler Corporation and Consolidated Subsidiaries
Income Statement for Quarter Ending September 30
($ millions)
1968
1969
1970
1971
1972
1973
1974
Income:
Net sales
1,561
1,560
1,687
1,893
2,314
2,309
2,801
Equity earnings
4
1
3
3
7
5
8
Other income
8
6
-4
2
0
3
-10
Total income
1,573
1,567
1,686
1,898
2,321
2,317
2,799
Expenses:
Costs
1,401
1,447
1,564
1,743
2,107
2,219
2,643
Depreciation
42
41
44
45
44
45
48
Amortization
37
42
35
38
47
36
27
Pension plans
27
24
27
42
45
52
64
Incentive comp.
--
-3
--
--
2
-3
--
Interest expense net
7
8
12
17
13
7
28
Total expenses
1,513
1,560
1,682
1,885
2,258
2,356
2,810
Profits before taxes
60
7
4
13
63
-39
-11
Income taxes
33
2
1
5
30
-21
-3
Minority interest
-2
0
0
1
1
0
0
Net income
30
4
2
6
32
-17
-8
Note: Details may not add to totals due to rounding.
Data for 1968-1970 may not be strictly comparable to current classifications.
FORD i LIBRARY 938870
Table 4
Chrysler Corp. and Consolidated Subsidiaries
Net Income After Taxes
($ millions)
1968
1969
1970
1971
1972
1973
1974
QI
64
48
-27
11
36
90
2
QII
85
41
10
31
68
109
28
QIII
30
4
2
6
32
-17
-8
QIV
111
-4
7
36
84
73
--
Year
290
89
-8
84
220
255
--
Note: Data for 1968-70 may not be strictly comparable to current
classifications.
FORD & LIBRARY GERALD
Table 5
Chrysler Corp. Consolidated Balance Sheet
Amounts Outstanding September 30
($ millions)
1968
1969
1970
1971
1972
1973
1974
Assets:
Cash & marketable securities
471
376
220
345
639
327
366
Inventories
936
1,122
*1,298
1,339
1,365
1,753
2,058
Other current assets
684
811
607
610
675
822
1,110
Total current assets
2,091
2,310
*2,125
2,294
2,680
2,901
3,534
Other assets
2,185
2,403
2,626
2,603
2,521
2,739
2,954
Total assets
4,277
4,713
*4,751
4,897
5,200
5,640
6,488
Liabilities:
Current liabilities
1,413
1,671
1,509
1,605
1,757
*1,973
2,553
Stockholders' equity
& long-term debt
2,864
3,041
3,242
3,292
3,443
3,667
3,935
Total liabilities
4,277
4,713
4,751
4,897
5,200
5,640
6,488
Net working capital
679
638
*616
689
923
*928
981
Current ratio
1.481
1.382
1.408
1.430
1.525
1.471
1.384
Quick ratio
.817
.710
.548
.595
.748
.582
.578
Sales/Inventory
5.658
4.669
3.964
4.380
5.168
4.772
4.133
Memo:
Sales (9 months ending
5,298
5,240
5,147
5,855
7,054
8,364
8,506
September 30)
* Restated figures
Note: Detail may not add to total due to rounding.
GERALD FORD LIBRARY
Table 6
Chrysler Financial Corporation - End of Month
($ millions)
Commercial Paper
Bank Loans
Outst.
Change
Outst.
Change
1973-Sept.
937
-21
--
--
Oct.
1,025
88
--
--
Nov.
1,072
47
--
--
Dec.
1,184
112
--
--
1974-Jan.
1,155
-29
--
--
Feb.
1,177
22
--
--
Mar.
1,277
100
--
--
April
1,183
-94
100
100
May
1,250
67
102
2
June
1,218
-32
151
49
July
1,341
123
63
-88
Aug.
1,375
34
6
-57
Sept.
1,312
-63
206
200
Oct.
1,255
-57
381
175
Nov. 21
1,035
-220
638
257
Commercial Paper Maturity Schedule
($ millions)
Paper
Paper
Maturing
Sold
1974-Nov. 18
155
95
19
90
90
20
123
90
21
103
67
22
104
--
25
64
--
26
13
--
27
36
--
29
60
--
Dec. 2
35
--
Amount through Dec. 2
783
:
FORD & LIBRARY GERALLY
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date September 19, 1973
Chairman Burns
To
Subject: Proposed Chrysler Settlement
From Murray Wernick MW
The proposed Chrysler contract, covering 117,000 production
workers is expected to serve as a pattern contract with some possible
minor modifications for about 550,000 other workers at GM and Ford.
Both management and labor have indicated it is a liberal settlement and
it appears to be above the Cost of Living Council guidelines. Chrysler
estimates that it will increase labor costs about 7 per cent each year
during the three year contract period. Since it has a cost of living
clause this estimate would seemingly require relatively moderate price
increase over the next three years to be achieved. Data made available
on fringes are still rather limited and impossible to cost out. But
they appear to be fairly extensive and close to unions original demands.
Wage rates will be increased by 3 per cent per year (productivity
increase) with an extra first year supplement of 12 cents. Part of the
first year supplement is an offset for normal cost of living adjustments
that would have been made for the April 1973 to September 1973 period.
Cost-of-living adjustments continue with no ceiling and the
basic formula was liberalized somewhat--1 cent adjustments will now be
given for each 0.35 per cent increase in the CPI each quarter. Under the
old contract workers received 1 cent for each 0.4 per cent increase in
the CPI. During the term of this contract the union has agreed that 1
cent of each quarterly adjustment (a potential total of 10 cents) is to
be used to finance other fringe benefits.
GERALD FORD LIBRARY
-2-
Voluntary overtime was agreed to by the company after nine
hours work per day, for Sundays and for Saturdays if the worker had
worked the two previous Saturdays. This could lead to some increased
costs in periods of high auto output.
Pensions will be increased significantly. Any worker with
thirty years of service can retire, receiving $500 a month the first
year with the total rising $50 in each of the next two years. Other
details of the pension plan revisions have not been spelled out yet.
Health programs are to be expanded to include dental care in
the second year of the program and the company has agreed to pay both
employer and employee taxes provided in any national health insurance
program that may become law during the contract period. Money now used
by the company to pay health benefits would be distributed to the workers
in a manner to be decided if the health insurance program is passed.
Paid holidays will be increased under the new contract with
the day after Thanksgiving included as a paid holiday. Holiday schedules
may be revised somewhat but these details were not available.
FORD & LIBRARY