Various Means of Financing a Hypothetical Loan of $1 Billion to the Chrysler Corporation

GAO was requested to furnish answers to four questions regarding possible risk exposure and budget impact from a proposed government loan of $1 billion to the Chrysler Corporation. The government exposure would be the same under a federal direct loan as with a federal guarantee unless there were differences in financing terms. With a loan guarantee, a measure of coinsurance can be required from the primary lending institution, reducing government exposure but also raising the interest rate. The priority to be given the government's claims against Chrysler's assets in the event of default would also affect exposure. If an off-budget federal agency were to make such a direct loan, the full amount would count as budget outlays upon disbursement, with repayment and interest counted as negative outlays when received. The situation would be complicated if the loan were made by, or sold to, an off-budget agency such as the Federal Financing Bank, where the outlays might never appear in the budget. In that case, outlays would be recorded only if the loan were defaulted. If the government charged .75 percent, the interest income would be $7.5 million; whereas at the projected commercial interest of the prime lending rate plus 2 percent (14 percent), a bank's income would be $140 million. However, the prime rate plus 2 percent would be unreasonably high interest on a risk-free, government-guaranteed loan. Finally, there are a variety of available, alternative financing formulas which would yield the government between $96.5 and $127.5 million annually, although net interest income would account for only a portion of those totals.