Last week, Chrysler Financial turned away a $750 million government loan. Executives said that they had plenty of cash to meet short term financial needs. Now the Washington Post is reporting that the real reason Chrysler Financial turned down the government funding is that executives didn’t want to abide by new federal limits on pay.
The dynamic should be familiar to anyone who is a regular reader here. For executives, pay caps dramatically change the bailout calculus. If they take the bailout, they find their compensation so severly limited it isn’t much better than having the company go bankrupt. If they don’t take the bailout, they may risk their company but they also perserve a potential upside. Obviously, many executives will chose to risk the company to preserve their pay.
This dynamic should mean that only the most desperate companies would reach for a bailout, which is in theory a good thing. We don’t want healthy companies taking subsidies just because they happen to be handing them out on Capitol Hill. Unfortunately, the government has adopted a systemic crisis position that has led it to demand that firms take bailout bucks.
The loans to Chrysler Financial, for instance, were part of the governent’s efforts to bailout the auto industry. Chrysler Financial a vital lender to Chrysler dealerships and customers, while Chrylser is struggling to avoid bankruptcy. When it turned down the government financial, Chrysler Financial was forced to use more expensive financing from private banks. This arguably makes the company less financially stable, given the higher debt burden, and adds to stress at the automaker.
One problem is that Chrysler Financial might be able to have its cake and eat it too. That is, if the government maintains the view that it is systemically important, it will likely wind up bailing it out even if the company goes bankrupt because of the arguably reckless refusal to take TARP funds. So, in this case, the continuing availability of the bailout makes it less likely that the executives will accept financing accompanied by limits until it is all but too late.