TARP auditor criticizes Obama administration's push to close auto dealerships

An East Brunswick, N.J., General Motors dealership sat closed in late 2008. Bankruptcy and more closings would come in 2009.
An East Brunswick, N.J., General Motors dealership sat closed in late 2008. Bankruptcy and more closings would come in 2009. (Mel Evans/associated Press)
By John Hughes and Catherine Larkin
Monday, July 19, 2010

The Obama administration's request that General Motors and Chrysler Group accelerate the closing of U.S. dealerships probably was unnecessary and may have added to unemployment, a government watchdog said.

The United States "should have at least considered" whether the benefits of speeding up the closings outweighed costs from a potential loss of tens of thousands of jobs, according to the report by Neil Barofsky, , special inspector general for the Troubled Assets Relief Program. The Treasury Department rejected the automakers' reorganization plans in March 2009, in part citing GM's "slow pace" in scaling back its dealer network.

"Such dramatic and accelerated dealership closings may not have been necessary and underscores the need for Treasury to tread very carefully when considering such decisions in the future," Barofsky said.

Treasury, which has committed $80.7 billion to the two carmakers under the TARP program, criticized the report and said that without the government assistance both companies faced failure and liquidation.

"We strongly disagree with many of your statements, your conclusions and the lessons learned," said Herbert M. Allison Jr., assistant Treasury secretary for financial stability.

The report prompted further criticism from Republicans in Congress, who faulted the government's role in making decisions about the business plans for Detroit-based GM and Auburn Hills, Mich.-based Chrysler.

"This sobering report should serve as a wake-up call as to the implications of politically orchestrated bailouts and how putting decisions about private enterprise in the hands of political appointees and bureaucrats can lead to costly and unintended consequences," said Rep. Darrell Issa (Calif.), ranking Republican on the House Committee on Oversight and Government Reform.

The report found that Chrysler, which made decisions on a case-by-case basis, followed the criteria for targeting dealers for termination. GM was inconsistent and retained more than 1,300 dealers that would have been shut based on sales, consumer satisfaction and profitability, according to the report.

Congress members had been complaining that the terminations were unfair and will cost jobs in their districts.

"There is substantial confusion, even among dealers themselves, as to how GM and Chrysler selected dealerships for termination," Sen. John D. Rockefeller IV (D-W.Va.), head of the Commerce, Science and Transportation Committee, said in the letter to Barofsky.

General Motors Co. was formed last year out of bankruptcy from the best-performing assets of General Motors Corp., while a group led by Fiat bought most of the bankrupt Chrysler assets, forming Chrysler Group. Taxpayers contributed a net of $49.9 billion for GM and $14.3 billion for Chrysler as of September, according to the Congressional Oversight Panel.

In the weeks before the audit was begun, the two automakers had announced they were shutting down about 2,100 dealerships to save costs and become more competitive. President Obama signed a law in December that required the automakers to offer binding arbitration to dealers whose outlets were being closed.

GM said in March that it planned to reinstate 661 dealers after the company began reevaluating the closing of 1,100 retailers.

Chrysler that same month said it was offering new franchises to 50 dealers who applied for arbitration, in addition to 36 previous offers or new agreements. Chrysler terminated 789 dealers last year and said in January that 409 had applied for arbitration.

-- Bloomberg News

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