Lesson From 1979: Politics Prevail Over Accounting Data In Federal Bailout Decisions

UNIVERSITY PARK, PA (September 29, 2008)—With lawmakers on both sides of the aisle blaming each other for the country's current financial woes, it's possible that the politics of job loss, election concerns, and philosophical ideas about American economics are weighing more heavily than hard accounting data on the decision to bail out Wall Street banks. Such was the case in the 1979 bailout of Chrysler, according to research from Penn State's Smeal College of Business.

In the 2005 paper "Saving Chrysler: The Use and Nonuse of Accounting Information by the U.S. Congress," Mark Dirsmith, Deloitte Professor of Accounting at Smeal, and Timothy J. Fogarty of Case Western Reserve University examine the federal government's Chrysler bailout. They find that when accounting is used as evidence in politics, it is often employed as a rationalization for a decision or as ammunition for an argument—both applications for which it is not typically best suited.

In the Chrysler case, arguments over the changing face of capitalism and whether the federal government should interfere at all in the free market were piled on to the financial evidence presented to Congress. The same talk is reverberating on Capitol Hill today.

In 1979, Chrysler's role as a major employer and auto and auto-parts provider crowded out economic analysis. Actual accounting data were used mainly as ammunition for different sides of the argument and as a rationalization for those on the fence—both of which are happening in the current crisis. Today, distress over the U.S. economy and individual retirement savings may be weighing more heavily on the minds of Congressional leaders than hard financial facts.

"The marketplace is not the court of final appeal as long as government-intervention powers exist," Dirsmith and Fogarty write. "If anything, accounting information enters into the fray as a powerful part of the rhetoric." There is room for accounting data to play a larger role, however the political and philosophical arguments ultimately prove too powerful for true financial numbers to be consequential, according to the authors.

In the end, despite the huge risk, the bailout saved Chrysler from bankruptcy. And the current plan under consideration in Washington may have the same success. However, Dirsmith and Fogarty speculate that had more of the accounting analysis been considered in the Chrysler case, Congress may have been dissuaded from making such a leap-of-faith decision. But, as they put it, "That might be why we have politics."