The Treasury Department encouraged automakers seeking TARP funds to rapidly close their dealerships, even though the plan contributed no specific savings to the companies and caused job losses at a time of mounting unemployment, according to a scathing new audit published Monday.
The report focuses on the plans by Chrysler LLC and General Motors Corp. to rapidly reduce their number of dealerships by about 25 percent each, and the role that Treasury played in encouraging the automakers to do so quickly instead of over the course of five years.
The audit was prepared by Neil Barofsky, a former federal prosecutor who now serves as special inspector general for the $700 billion Troubled Asset Relief Program.
Chrysler eliminated 789 dealerships in June 2009, and GM plans to wind down 1,454 dealerships by October of this year. The rationale behind those moves was that the old dealership network was too big, and that by closing some of the dealerships, the remaining ones would be more profitable and better positioned to re-invest in their businesses.
Chrysler and GM , part of the $81 billion auto industry bailout, were told by Treasury that their plans to spread out those closures was not acceptable, largely because the agency thought that the companies should take advantage of their bankruptcies and close their dealerships as quickly as possible, to avoid state franchise laws that would have made the gradual closing more difficult and more costly.
But Barofsky's report said that Treasury should have taken further steps to ensure that the speedy closures were truly necessary to save the automakers. It added that the agency should have considered whether the benefits to Chrysler and GM outweighed the cost to the economy of potentially tens of thousands of job losses.
One estimate by the National Automobile Dealers Association indicated that each dealership closing would cost 50 jobs. According to Barofksy's report, the Treasury Department did not consider the impact the closing would have on job losses until after the decision was made to speed up the closings.
The report noted that the decision to encourage companies to accelerate the closings came during "the worst unemployment crisis in a generation and during the same period in which the government was spending hundreds of billions of dollars on a stimulus package to spur job growth."
The companies were required to submit restructuring plans as a condition of accepting TARP funds. GM's plan originally called for eliminating 1,650 dealerships over five years; Chrysler's didn't contain a specific figure, but would have led to around 1,181 dealerships closings over five years.
Treasury's auto team rejected both plans. Barofksy's report said that GM was told to submit a more "aggressive" plan for the closings, while Chrysler's decision to accelerate the closings was based on verbal input from Treasury's auto team. Ultimately, both companies sped up their plans once they filed for bankruptcy later in 2009.
Treasury's role in encouraging quicker closures is particularly concerning, SIGTARP wrote, since one of the stated goals of the auto bailout was to "preserve and promote jobs of American workers employed directly by the automakers and subsidiaries in related industries." The closures, SIGTARP wrote, were "based on a theory and without sufficient considerations of the decisions' broader impact."
In March, responding to mounting political pressure, GM offered reinstatement to 666 dealers that had sought arbitration and Chrysler offered reinstatement to 50 dealers. Barofsky's report said that those reversals indicate that some of the closings may not have been necessary in the first place.
The report said the accelerated closures were encouraged even though they afforded no particular cost savings to the automakers and instead provided "amorphous" benefits, such as reduced incentive payments to dealerships and better customer service at the surviving sales outlets. Estimates of how much the closing would save the automakers were only developed after the decision to close them had been made.
The report also reveals that there wasn't widespread agreement on the plan. Some experts consulted by Treasury's auto team noted that the strategy of having fewer dealerships and concentrating on metro areas - the so-called "Toyota model" - wouldn't work for Chrysler and GM, which appeal to customers in rural areas where foreign cars are less popular.
Others said that Chrysler's method of closing so many dealerships over a span of just 22 days would likely have caused a larger dent in sales than the alternative method of delayed closures.
"Although the restructuring of GM and Chrysler inevitably required an overall reduction in their own workforces... it is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our nation's history was either necessary for the sake of the companies' economic survival or prudent for the sake of the nation's economy recovery," the report said.
The report acknowledged that Treasury is in a difficult position because it is an investor in the companies. Treasury was given a 9.9 percent ownership stake in Chrysler and a 61 percent ownership stake in GM as a result of its investment of public money through TARP. But, the report stated, "the fact that Treasury is acting in part as an investor in GM and Chrysler does not insulate Treasury from its responsibility to the broader economy."
Treasury should have done more to monitor the closings to ensure that they were "carried out in a fair and transparent manner," according to the report, which says GM's closings were not based on consistent and objective criteria, and that Chrysler didn't allow closed dealers to have an appeals process.
Treasury's TARP chief, Herb Allison, wrote that he "strongly disagrees" with many parts of the SIGTARP report. He said that without the government's assistance, GM and Chrysler faced near-certain failure, and the companies fared better under the restructuring plan that they would have without government support.
But Barofsk accused Allison of presenting a "false dilemma" between accelerated terminations and letting the companies fail. "No one from Treasury, the manufacturers, or from anywhere else indicated that implementing a smaller or more gradual dealership termination plan would have resulted in the cataclysmic scenario spelled out in Treasury's response," the report said.
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