Chrysler Case

Chrysler’s Warrants: September 1983

We quietly asked the government to surrender the warrants to us at little or no cost. What a mistake! There was a huge uproar over our request.... I was furious....

—Lee Iacocca

There is no justification for forgoing one penny. Any profit the government could earn would be a reasonable reward for taking on the risk of saving Chrysler.[1]

—Rep. William S. Green

At the bottom of its financial distress in 1980, Chrysler Corporation arranged with the U.S. government for guarantees of Chrysler’s debt up to $1.5 billion in return for cash fees and common stock warrants.[2] The fees, to be paid annually, would be equal to 1% of the loans guaranteed. The warrants were for 14.4 million shares exercisable at $13 per share until 1990. The government also had a first lien on Chrysler’s assets, which were estimated to have a liquidation value of $2.5 billion. Participating banks were also given warrants on the same terms for 13.286 million shares. During the period when the loan guarantee was negotiated, the price of Chrysler’s shares was about $7.50. (See Exhibit 1 for a history of Chrysler’s share price during the period of the guarantee negotiations.)

Eventually only $1.2 billion of the guarantee was used. In June 1980, $500 million in notes were issued at 10.35%. Another $300 million were issued in July at 11.40%. And in February 1981, $400 million were issued at 14.90%.

By the summer of 1983, Chrysler was plainly recovering. Exhibit 2 presents the share-price history during the period of recovery. In the spring, an offering of 26 million new shares at $16.625 was sold out within an hour, and in the following weeks, the price per share rose to $35.00. Then on July 13, Lee Iacocca, the chief executive officer, presented a check repaying the guaranteed loans in their entirety.[3]...