Troubled Asset Relief Program
Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM
Gao ID: GAO-10-151 November 2, 2009
The Department of the Treasury (Treasury) provided $81.1 billion in Troubled Asset Relief Program (TARP) aid to the U.S. auto industry, including $62 billion in restructuring loans to Chrysler Group LLC (Chrysler) and General Motors Company (GM). In return, Treasury received 9.85 percent equity in Chrysler, 60.8 percent equity and $2.1 billion in preferred stock in GM, and $13.8 billion in debt obligations between the two companies. As part of Government Accountability Office's (GAO) statutory responsibilities for providing oversight of TARP, this report addresses (1) steps Chrysler and GM have taken since December 2008 to reorganize, (2) Treasury's oversight of its financial interest in the companies, and (3) considerations for Treasury in monitoring and selling its equity in the companies. GAO reviewed documents on the auto companies' restructuring and spoke with officials at Treasury, Chrysler, and GM, and individuals with expertise in finance and the auto industry.
Chrysler and GM have made changes since December 2008 to address key challenges to achieving viability, but the ultimate effect of these changes remains to be seen. The companies have eliminated a substantial amount of their long-term debt, reduced the number of brands and models of vehicles they sell, rationalized their dealership networks, and lowered production costs and capacities by reducing the number of factories and employees. It is difficult to fully assess the impact of these changes because of the short amount of time that has passed since reorganization and the low level of new vehicle sales. Moreover, Chrysler and GM are revaluing their assets and liabilities based on their reorganizations in 2009 and expect to prepare financial statements based on this effort in the coming months. Treasury does not plan to be involved in the day-to-day management of Chrysler and GM, but it plans to monitor the companies' performance. Treasury developed several principles to guide its role as a shareholder, including the commitment that although Treasury reserves the right to set up-front conditions to protect taxpayers and promote financial stability, Treasury will oversee its financial interests in a hands-off, commercial manner. The conditions that Treasury set for the companies include requiring that a portion of their vehicles be manufactured in the United States and that they report to Treasury on the use of the TARP funding provided. Treasury officials told us that they are also requiring that Chrysler and GM submit financial information on a regular basis and that they plan to meet with the companies' top management on a regular basis to discuss the companies' financial condition. Treasury should make certain that its current approach for monitoring and selling its equity in Chrysler and GM fully addresses all important considerations financial and industry experts identified. For example, Treasury initially hired or consulted with a number of individuals with experience in investment banking or equity analysis to help assess Chrysler's and GM's financial condition and develop financing packages for the companies. Many of these individuals have recently left as the restructuring phase of Treasury's work has been completed. Treasury will need to ensure these staff and any staff that depart in the future are replaced as needed with similarly qualified personnel. Also, Treasury does not currently contract with or employ outside firms with specialty expertise for its work with the auto industry but may need to do so in the future, to make sure sufficient expertise is available to oversee the government's significant financial interests in Chrysler and GM. In addition, although Treasury officials told us they are considering all options for divesting the government's ownership interests, including an initial public offering or private sale, they have focused primarily on a series of public offerings for GM and have not identified criteria for determining the optimal time and method to sell. Regardless of the option pursued, however, Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially above what they have been in the past.
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GAO-10-151, Troubled Asset Relief Program: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
November 2009:
Troubled Asset Relief Program:
Continued Stewardship Needed as Treasury Develops Strategies for
Monitoring and Divesting Financial Interests in Chrysler and GM:
GAO-10-151:
GAO Highlights:
Highlights of GAO-10-151, a report to congressional committees.
Why GAO Did This Study:
The Department of the Treasury (Treasury) provided $81.1 billion in
Troubled Asset Relief Program (TARP) aid to the U.S. auto industry,
including $62 billion in restructuring loans to Chrysler Group LLC
(Chrysler) and General Motors Company (GM). In return, Treasury
received 9.85 percent equity in Chrysler, 60.8 percent equity and $2.1
billion in preferred stock in GM, and $13.8 billion in debt obligations
between the two companies.
As part of GAO‘s statutory responsibilities for providing oversight of
TARP, this report addresses (1) steps Chrysler and GM have taken since
December 2008 to reorganize, (2) Treasury‘s oversight of its financial
interest in the companies, and (3) considerations for Treasury in
monitoring and selling its equity in the companies. GAO reviewed
documents on the auto companies‘ restructuring and spoke with officials
at Treasury, Chrysler, and GM, and individuals with expertise in
finance and the auto industry.
What GAO Found:
Chrysler and GM have made changes since December 2008 to address key
challenges to achieving viability, but the ultimate effect of these
changes remains to be seen. The companies have eliminated a substantial
amount of their long-term debt, reduced the number of brands and models
of vehicles they sell, rationalized their dealership networks, and
lowered production costs and capacities by reducing the number of
factories and employees. It is difficult to fully assess the impact of
these changes because of the short amount of time that has passed since
reorganization and the low level of new vehicle sales. Moreover,
Chrysler and GM are revaluing their assets and liabilities based on
their reorganizations in 2009 and expect to prepare financial
statements based on this effort in the coming months.
Treasury does not plan to be involved in the day-to-day management of
Chrysler and GM, but it plans to monitor the companies‘ performance.
Treasury developed several principles to guide its role as a
shareholder, including the commitment that although Treasury reserves
the right to set up-front conditions to protect taxpayers and promote
financial stability, Treasury will oversee its financial interests in a
hands-off, commercial manner. The conditions that Treasury set for the
companies include requiring that a portion of their vehicles be
manufactured in the United States and that they report to Treasury on
the use of the TARP funding provided. Treasury officials told us that
they are also requiring that Chrysler and GM submit financial
information on a regular basis and that they plan to meet with the
companies‘ top management on a regular basis to discuss the companies‘
financial condition.
Treasury should make certain that its current approach for monitoring
and selling its equity in Chrysler and GM fully addresses all important
considerations financial and industry experts identified. For example,
Treasury initially hired or consulted with a number of individuals with
experience in investment banking or equity analysis to help assess
Chrysler‘s and GM‘s financial condition and develop financing packages
for the companies. Many of these individuals have recently left as the
restructuring phase of Treasury‘s work has been completed. Treasury
will need to ensure these staff and any staff that depart in the future
are replaced as needed with similarly qualified personnel. Also,
Treasury does not currently contract with or employ outside firms with
specialty expertise for its work with the auto industry but may need to
do so in the future, to make sure sufficient expertise is available to
oversee the government‘s significant financial interests in Chrysler
and GM. In addition, although Treasury officials told us they are
considering all options for divesting the government‘s ownership
interests, including an initial public offering or private sale, they
have focused primarily on a series of public offerings for GM and have
not identified criteria for determining the optimal time and method to
sell. Regardless of the option pursued, however, Treasury is unlikely
to recover the entirety of its investment in Chrysler or GM, given that
the companies‘ values would have to grow substantially above what they
have been in the past.
What GAO Recommends:
GAO recommends that the Secretary of the Treasury ensure the expertise
needed to monitor Treasury‘s investment in Chrysler and GM remains in
place, report to Congress on its general approach for monitoring the
companies‘ performance, and have a plan for evaluating the optimal
method and timing for divesting Treasury‘s equity. Treasury generally
agreed with GAO‘s findings, conclusions, and recommendations.
View [hyperlink, http://www.gao.gov/products/GAO-10-151] or key
components. For more information, contact Katherine A. Siggerud
(sigguerdk@gao.gov) or A. Nicole Clowers (clowersa@gao.gov) at 202-512-
2834.
[End of section]
Contents:
Letter:
Scope and Methodology:
Background:
Chrysler and GM Have Addressed Some Challenges Important to Achieving
Viability, but the Effect of These Actions Remains to Be Seen:
Treasury Does Not Plan to Be Involved in Chrysler's or GM's Day-to-Day
Operations or Management, but It Plans to Closely Monitor the
Companies' Performance:
Treasury's Approach for Monitoring and Selling Its Ownership Interest
in Chrysler and GM Does Not Fully Address All Important Considerations
Experts Identified:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Financial and Industry Experts GAO Interviewed:
Appendix II: Comments from the Department of the Treasury:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: TARP Funding Provided to the Auto Industry, as of September
20, 2009:
Table 2: Changes to Chrysler's and GM's U.S. Production Costs and
Capacity:
Table 3: Chrysler's Financial Reporting Requirements:
Table 4: GM's Financial Reporting Requirements:
Table 5: Value of Chrysler and GM Equity Required for Treasury to
Recoup Its Investment:
Figure:
Figure 1: Key Events in Treasury's Assistance to the Auto Industry and
Chrysler's and GM's Restructuring:
Abbreviations:
AIFP: Automotive Industry Financing Program:
COP: Congressional Oversight Panel:
EESA: Emergency Economic Stabilization Act:
GM: General Motors Company:
NAS: National Academy of Sciences:
OFS: Office of Financial Stability:
SEC: Securities and Exchange Commission:
TARP: Troubled Asset Relief Program:
UAW: International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 2, 2009:
Congressional Committees:
After authorizing more than $80 billion in financial assistance to the
ailing domestic automotive industry since December 2008, the Department
of the Treasury (Treasury) is in the unprecedented position of having
ownership stakes in two of the nation's three largest auto
manufacturers--Chrysler Group LLC (Chrysler) and General Motors Company
(GM).[Footnote 1] Although most automakers experienced declining sales
in the last couple of years as the economy slipped into a recession,
the current economic conditions have particularly hurt the sales of
Chrysler and GM, resulting in significant financial losses and
necessitating the use of billions of dollars of borrowed money or cash
reserves to keep operating. In December 2008, the chief executive
officers of Chrysler and GM testified before Congress that without
federal assistance, their companies would likely run out of the cash
needed to keep operating.
Concerned that the collapse of one, or both, of these companies could
pose a systemic risk to the nation's economy, the previous
Administration established the Automotive Industry Financing Program
(AIFP) under the Troubled Asset Relief Program (TARP) in December 2008.
[Footnote 2] Through AIFP, Treasury provided loans to help Chrysler and
GM continue operating as the companies restructured. In exchange for
the funding it provided, Treasury received 9.85 percent equity in the
new Chrysler,[Footnote 3] 60.8 percent equity and $2.1 billion in
preferred stock in the new GM, and about $13.8 billion in debt
obligations between the two companies.[Footnote 4] The companies still
struggle to remain competitive with other automakers and to regain
market share.
We have previously reported that in a market economy the federal role
in aiding industrial sectors should generally be of limited duration
and establish clear limits on the extent of government involvement.
Regarding assistance to the auto industry, we have noted that Treasury
should have a plan for ending its financial involvement with Chrysler
and GM that indicates how it will both sell its equity and ensure
adequate repayment for the financial assistance it provided.[Footnote
5] The current Administration has stated that it is a "reluctant
shareholder" in Chrysler and GM, but that it would be irresponsible to
"[give] away the equity stake to which taxpayers were rightly
entitled."[Footnote 6] As such, Treasury has said that in managing its
equity it will seek to exit as soon as practicable, maximize return on
investment, and foster strong companies that can be independently
viable.
As part of our statutorily mandated responsibilities for providing
timely oversight of TARP, we are continuing to monitor Treasury's
assistance to the auto industry, including how Treasury is managing its
equity in Chrysler and GM and how it plans to sell this equity.
[Footnote 7] This report will explore the following issues related to
Treasury's ownership of Chrysler and GM: (1) steps Chrysler and GM have
taken since December 2008 to reorganize, (2) Treasury's oversight of
its financial interests in Chrysler and GM, and (3) important
considerations for Treasury in monitoring and selling its equity in the
companies.
Scope and Methodology:
To identify steps Chrysler and GM have taken since December 2008 to
reorganize, we reviewed information on the companies' finances and
operations, including financial statements, select documents from their
bankruptcy proceedings, and company-provided data, and interviewed
representatives of the companies.
To determine how Treasury will monitor its financial interests in
Chrysler and GM, we reviewed transaction documents related to the
restructuring of Chrysler and GM that Treasury was a party to, such as
the secured credit agreements and shareholders' agreements, which set
forth Treasury's rights with regard to the companies and certain
requirements the companies must comply with. We also reviewed
information on Treasury's plans for overseeing its ownership interests
in the companies, including White House and Treasury press releases,
and testimony statements. In addition, we interviewed officials from
Treasury's Office of Financial Stability (OFS), which was established
to administer TARP, about their plans to monitor the government's
financial interests, including Treasury's enforcement of the reporting
requirements that were established for Chrysler and GM. We did not,
however, independently verify the processes and procedures Treasury has
established to monitor and enforce the reporting requirements.[Footnote
8]
To identify important considerations for Treasury in monitoring and
determining how and when to sell its equity in Chrysler and GM, we
conducted a review of the academic literature on government ownership
of private entities, including both domestic and international cases of
private equity investments, privatization, and nationalization, and
reviewed analyses of the potential future value of Chrysler and GM and
Treasury's equity stake. We also interviewed individuals with expertise
in the financial condition of domestic automakers, principles of
corporate restructuring, and government ownership of private entities.
The financial and business experts whose opinions are represented in
this report were selected from a list of experts identified for us by
the National Academy of Sciences (NAS) for our earlier report on
challenges facing Chrysler and GM.[Footnote 9] Of the panel of experts
we interviewed for that report, we contacted a subset whose expertise
was particularly relevant to structuring an exit strategy. In addition
to individuals identified by NAS, we spoke with individuals NAS experts
themselves identified as being knowledgeable in this area. We also
added two experts with investment experience specifically in the auto
industry. We chose experts in government management of investments in
private companies by identifying former federal government officials
who were involved in well-known cases of government assistance to
private entities, such as the federal assistance provided to Chrysler
in 1979. We conducted individual semistructured interviews with these
individuals, both in person and by telephone. Once this review was
completed, we analyzed the content of the literature and the interviews
for recurring themes and summarized these common results. A list of the
individuals we spoke with is provided in appendix I.
We conducted this performance audit from August 2009 to November 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background:
Treasury's decision to provide substantial amounts of funding to the
auto industry--more than 12 percent of the TARP funds authorized to
date--and to accept equity in the companies as a form of repayment for
a portion of the assistance reflects Treasury's view of the importance
of the industry to the financial health of the United States as a
whole. The auto industry--including automakers, dealerships, and
automotive parts suppliers--contributes substantially to the U.S.
economy by, for example, directly employing about 1.7 million people,
according to industry and government data.[Footnote 10] To help
stabilize this industry and avoid economic disruptions, Treasury
authorized $81.1 billion through AIFP from December 2008 through June
2009 for the following purposes.
* Funding to support automakers during restructuring. Treasury has
provided financial assistance to Chrysler and GM to support their
restructuring as they attempt to return to profitability. This
assistance was provided in loans and equity investments in the
companies.
* Auto Supplier Support Program. Under this program, Chrysler and GM
received funding for the purpose of ensuring payment to suppliers. The
program was designed to ensure that automakers receive the parts and
components they need to manufacture vehicles and that suppliers have
access to liquidity on their receivables.
* Warranty Commitment Program. This program was designed to mitigate
consumer uncertainty about purchasing vehicles from the restructuring
automakers by providing funding to guarantee the warranties on new
vehicles purchased from them. Funds were provided to Chrysler and GM
under this program but have been repaid in full because both were able
to continue to honor consumer warranties.
* Funding to support automotive finance companies. Treasury has
provided funding to support Chrysler Financial and GMAC LLC, financial
services companies whose businesses include providing consumer
financing for vehicle purchases and dealer financing for inventory.
Chrysler Financial is following Treasury's directive to liquidate its
business and is planning to wind down its operations by the end of
2011. GMAC has agreed to provide Chrysler customers and dealers with
financing for retail and wholesale purchases.
Table 1 provides information on the funding levels Treasury authorized
under AIFP, the amounts Chrysler, GM, and the finance companies have
repaid, and Treasury's plans to be repaid or otherwise compensated for
the outstanding funds. Treasury officials have said the agency does not
intend to provide more funding to Chrysler or GM.
Table 1: TARP Funding Provided to the Auto Industry, as of September
20, 2009 (Dollars in billions):
Company: Chrysler;
Description of funding: Loans to Chrysler for general business purposes
and restructuring;
Authorized amount: $12.5;
Repayments of principal: 0;
Interest and dividend payments: $0.052;
Amount and form of future repayments: A total of up to $7.1 billion
will be repaid as a term loan, including $5.1 billion to be repaid
within 8 years and $2 billion to be repaid within 2.5 years. Treasury
also received a 9.85 percent equity share in the new Chrysler. Treasury
also has $5.4 billion of debt in the old Chrysler, but it is not clear
at this time whether this amount will be repaid[A].
Company: Chrysler;
Description of funding: Supplier Support Program loan;
Authorized amount: $1.0;
Repayments of principal: 0;
Interest and dividend payments: $0.002;
Amount and form of future repayments: Amounts provided are due to be
repaid by April 2010.
Company: Chrysler;
Description of funding: Warranty Commitment Program loan;
Authorized amount: Company: $0.28;
Repayments of principal: $0.28;
Interest and dividend payments: $0.003;
Amount and form of future repayments: Company: All funds have been
repaid.
Company: Chrysler;
Description of funding: Total;
Authorized amount: $13.8;
Repayments of principal: $0.28;
Interest and dividend payments: $0.06.
Company: General Motors;
Description of funding: Loans to GM for general business purposes and
restructuring;
Authorized amount: $49.5;
Repayments of principal: 0;
Interest and dividend payments: $0.168;
Amount and form of future repayments: A total of $6.7 billion will be
repaid as a term loan. Treasury also received $2.1 billion in preferred
stock, and 60.8 percent equity in the new GM. Treasury also has $986
million debt in the old GM, which it does not expect to be repaid.
Company: General Motors;
Description of funding: Supplier Support Program loan;
Authorized amount: $2.5;
Repayments of principal: 0;
Interest and dividend payments: $0.004;
Amount and form of future repayments: Amounts provided are due to be
repaid by April 2010.
Company: General Motors;
Description of funding: Warranty Commitment Program loan;
Authorized amount: Company: $0.361;
Repayments of principal: $0.361;
Interest and dividend payments: 0;
Amount and form of future repayments: All funds have been repaid.
Company: General Motors;
Description of funding: Loan to participate in GMAC rights offering;
Authorized amount: $0.884;
Repayments of principal: 0;
Interest and dividend payments: $0.009;
Amount and form of future repayments: Treasury exchanged this loan for
a portion of GM's equity in GMAC. As a result, Treasury holds a 35.4
percent common equity interest in GMAC. The GM loan was terminated but
GM paid $9 million in interest on the loan to participate in GMAC
rights offering before the loan was terminated.
Company: General Motors;
Description of funding: Total;
Authorized amount: $53.24;
Repayments of principal: $0.36;
Interest and dividend payments: $0.18.
Company: Chrysler Financial;
Description of funding: Loan funded through Chrysler LB Receivables
Trust;
Authorized amount: $1.5;
Repayments of principal: $1.5;
Interest and dividend payments: $0.007;
Amount and form of future repayments: Loan repaid in full plus about $7
million in interest[B].
Company: GMAC;
Description of funding: Preferred stock and convertible preferred
stock;
Authorized amount: $12.5;
Repayments of principal: Not applicable;
Interest and dividend payments: $0.43;
Amount and form of future repayments: Treasury may convert $7.5 billion
of its preferred shares to common shares upon specific events such as
public offerings.
Company: Total;
Authorized amount: $81.1;
Repayments of principal: $2.1;
Interest and dividend payments: $0.68.
Source: GAO analysis of Treasury information.
Note: Numbers are affected by rounding.
[A] The $5.4 billion is composed of the original remaining loan and
additional amounts provided as bankruptcy financing. Payment of this
amount is contingent on receipt of distributions from Chrysler
Financial in an amount equal to the greater of $1.375 billion or 40
percent of distributions.
[B] In lieu of warrants, Treasury received an additional note from
Chrysler Financial. The initial aggregate principal amount of the note
was $15 million, which Chrysler Financial has repaid.
[End of table]
As a condition of the initial federal financial assistance provided in
December 2008 and January 2009, the Bush Administration required that
Chrysler and GM develop restructuring plans that would, among other
things, identify how the companies plan to achieve and sustain long-
term financial viability. President Obama rejected the restructuring
plans that Chrysler and GM submitted in February 2009, and required the
companies to develop more aggressive plans. After reviewing the revised
plans, the President announced in April 2009 and June 2009 that the
government would provide additional financial assistance to support
Chrysler's and GM's restructuring efforts, respectively. To effectuate
the restructuring plans, both companies filed voluntary petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Through
the bankruptcy process, the newly organized Chrysler and GM purchased
substantially all of the operating assets of the old companies. In June
2009 and July 2009, respectively, the new Chrysler and new GM emerged
from the bankruptcy process with substantially less debt and with
streamlined operations. The old companies, which retained very few
assets but most of the liabilities, remain in bankruptcy, where their
remaining liabilities are being dealt with. These liabilities include a
portion of the loans Treasury provided to the companies prior to
bankruptcy in the amounts of $5.4 billion for Chrysler and $986 million
for GM. As noted, Treasury has stated that it has no plans to provide
additional assistance to Chrysler and GM. Figure 1 describes other key
events in the funding and restructuring of the auto companies.
Figure 1: Key Events in Treasury's Assistance to the Auto Industry and
Chrysler's and GM's Restructuring:
[Refer to PDF for image: timeline]
Date: December 2008;
Chrysler actions/GM Actions: Chrysler and GM chief executive officers
testify before Congress that without federal assistance, their
companies will not have the cash necessary to continue operations.
Date: December 19, 2008;
Chrysler actions/GM Actions: Treasury announces it will use TARP funds
to establish the Auto Industry Financing Program to stabilize the U.S.
automotive industry and avoid disruptions that would pose systemic risk
to the nation‘s economy.
Date: December 31, 2008;
GM Actions: Treasury agrees to provide $13.4 billion in AIFP funding to
GM.
Date: January 2, 2009;
Chrysler actions: Treasury lends $4.0 billion in AIFP funding to
Chrysler.
Date: February 17, 2009;
Chrysler actions/GM Actions: Chrysler and GM submit restructuring plans
to Treasury as required by their loan agreements.
Date: March 19, 2009;
Chrysler actions/GM Actions: Treasury announces the Auto Supplier
Support Program.
Date: March 30, 2009;
Chrysler actions/GM Actions: White House announces that Chrysler and GM‘
s restructuring plans do not establish a credible path to viability and
do not merit additional government investment. The companies are given
additional time to show greater progress. White House announces the
Warranty Commitment Program.
Date: April 3, 2009;
GM Actions: GM and Treasury execute a credit agreement to lend up to
$3.5 billion to GM for the Auto Supplier Support Program.[A]
Date: April 7, 2009;
Chrysler actions: Chrysler and Treasury execute a credit agreement to
lend up to $1.5 billion to Chrysler for the Auto Supplier Support
Program.[B]
Date: April 22, 2009;
GM Actions: Treasury lends $2 billion in additional funding to GM.
Date: April 29, 2009;
Chrysler actions: Treasury lends $280 million to Chrysler under the
Warranty Commitment Program.
Date: April 30, 2009;
Chrysler actions: Chrysler files voluntary petitions under Chapter 11
of the U.S. Bankruptcy Code. White House announces it will provide $8.5
billion through loans and equity investments in the company to support
Chrysler‘s restructuring.
Date: May 20, 2009;
GM Actions: Treasury lends $4 billion in additional funding to GM.
Date: May 27, 2009;
GM Actions: Treasury lends $361 million to GM under the Warranty
Commitment Program.
Date: June 1, 2009;
Chrysler actions: Bankruptcy judge approves Chrysler‘s restructuring
proposal.
GM Actions: GM files voluntary petitions under Chapter 11 of the U.S.
Bankruptcy Code. Treasury announces it will provide up to $30.1 billion
to GM through loans and equity investments to support a bankruptcy
proceeding and to transition GM through restructuring.
Date: June 10, 2009;
Chrysler actions: New Chrysler purchases substantially all of old
Chrysler‘s assets. Treasury executes a $7.1 billion credit agreement
with new Chrysler.
Date: July 5, 2009;
GM Actions: Bankruptcy judge approves GM‘s restructuring proposal.
Date: July 20, 1009;
GM Actions: New GM acquires substantially all of old GM‘s assets.
Source: GAO analysis of Treasury information.
[A] This amount was subsequently reduced to $2.5 billion.
[B] This amount was subsequently reduced to $1 billion.
[End of figure]
Chrysler and GM Have Addressed Some Challenges Important to Achieving
Viability, but the Effect of These Actions Remains to Be Seen:
Since the condition of the domestic auto industry first came to the
forefront of national attention in December 2008, Chrysler and GM have
made changes to address key challenges to achieving viability, but the
effect that these actions will have on the companies remains to be
seen. As we previously reported, a number of operational and financial
challenges stand in the way of Chrysler's and GM's return to
profitability.[Footnote 11] Some of these challenges are beyond the
companies' control, such as current economic conditions and limited
credit availability. However, other factors the companies can exert
more control over include the companies' debt levels, dealership
networks, and production costs and capacity. Aided by substantial
government assistance and bankruptcy reorganization, they have begun to
address a number of these challenges. Although the companies'
restructuring efforts started before receiving government assistance
under TARP, our analysis focuses on the period between first receiving
TARP assistance (around the end of 2008) and after bankruptcy
reorganization (June 2009 and July 2009 for Chrysler and GM,
respectively). The following are some key challenges that Chrysler and
GM have begun to address.
* Reducing debt. Through the bankruptcy process, Chrysler and GM
eliminated a substantial amount of their long-term financial
liabilities, including debt owed to bank lenders and bondholders. In
our previous work, we discussed the importance of reducing debt for
companies to achieve long-term viability. By reducing the amount the
companies pay in interest expense, cash flow is improved, freeing up
more money for research and development and other activities that can
help the businesses prosper. The precise amount of the companies' total
debt reduction is not known because the value of some debts will not be
determined until the companies' post-reorganization accounting is
complete. However, some reduced or eliminated debts whose values are
known include $6.9 billion of secured bank debt owed by old Chrysler,
of which $2 billion was repaid and none carried forward to new
Chrysler; $5.9 billion of secured bank debt owed by old GM,
substantially all of which was repaid by old GM, leaving new GM with
none of this debt; substantial reductions of the companies' monetary
obligations to the trusts established to provide health care benefits
to retirees of the International Union, United Automobile, Aerospace
and Agricultural Implement Workers of America (UAW); and about $27
billion in unsecured GM bondholder debt and $2 billion in unsecured
Chrysler obligations, which stayed as a liability of the old GM and old
Chrysler, leaving new GM and new Chrysler with none of this debt.
* Reducing the number of brands and models. GM is reducing its North
American brands from eight to four.[Footnote 12] In November 2007,
Chrysler announced it would eliminate four models within its three
primary brands--Chrysler, Dodge, and Jeep--and in October 2009 it
announced that it would create a fourth brand by splitting the Ram
brand out of the Dodge brand. As we have previously reported,
advantages of reducing brands and models include eliminating costs such
as factory tooling and product development, reducing intracompany
competition for sales of similar models, and allowing more focus and
resources on the remaining models' quality, image, and performance.
* Rationalizing dealership networks to align with sales volumes. Both
Chrysler and GM have made cuts to their dealership networks since year-
end 2008. As we reported in April, the companies' dealer networks were
too large to be supported by recent sales levels. As of April 2009,
Chrysler, Ford, and GM dealerships--most of which are independently
owned and operated--were more numerous and, in general, sold half or
fewer vehicles per dealership than dealerships selling vehicles from
foreign automakers. Higher sales per store allow for a greater return
on the dealer's fixed costs of running the business, allowing for more
investment in facilities and advertising--which ultimately benefits the
automaker by improving the price for which its cars are sold. As of
June 30, 2009, shortly after the new Chrysler emerged from bankruptcy,
Chrysler had reduced its U.S. dealerships to 2,382, a reduction of
about 28 percent from the year-end 2008 level of 3,298.[Footnote 13] As
of July 2009, when the new GM emerged from bankruptcy, its number of
dealers had declined to 6,039 through normal attrition, down from 6,375
at year-end 2008. GM is executing "wind-down" agreements with another
approximately 1,300 dealerships and expects another 600 Saturn, Saab,
or Hummer dealerships to be transferred to another manufacturer or be
phased out. With additional normal attrition, GM expects to have
between 3,600 and 3,800 dealerships by the end of 2010, which will
represent a 44 percent reduction from 2008 year-end numbers.
* Reducing production costs and capacity. Both companies have made
reductions in their production costs and capacity since year-end 2008,
according to company-provided information. In our April report, we
noted such reductions are important because the companies' pre-
reorganization cost structures were not sustainable given the decline
in their sales and market shares in recent years.[Footnote 14] Table 2
shows the reductions the companies made between year-end 2008 and the
dates they emerged from bankruptcy. In addition to the reductions made
during these time periods, the companies implemented restructuring
efforts prior to 2008 and plan additional reductions in the future. For
instance, Chrysler closed two factories, reduced a number of shifts,
and cut nearly 29,000 hourly, salaried, and supplemental employees
between year-end 2006 and year-end 2008. GM announced in September 2009
that it will add a third shift at three U.S. assembly plants as part of
a plan to close other plants to increase the efficiency of its
manufacturing operations. Chrysler and GM have also reached agreements
with the UAW, in accordance with the terms of the companies'
prebankruptcy loans from Treasury, which will result in further
reductions in production costs. Under these terms, the companies were
required to use their best efforts to reduce total compensation paid to
U.S. employees, including wages and benefits, to be comparable with the
total compensation Honda, Nissan, or Toyota pays to employees at their
U.S. facilities. The companies were also required to use their best
efforts to make changes to work rules to be comparable with the work
rules of Honda's, Nissan's, or Toyota's U.S. facilities. Changes the
UAW agreed to as part of restructuring included cancellation of cost-
of-living adjustments for current workers and restructuring of skilled
trade classifications, among other things.
Table 2: Changes to Chrysler's and GM's U.S. Production Costs and
Capacity:
Production capacity[A]: Factories;
Chrysler: Year-end 2008: 21;
Chrysler: After reorganization: 20[B];
Chrysler: Percent reduction: 4.8%;
GM: Year-end 2008: 47;
GM: After reorganization: 34;
GM: Percent reduction: 27.7%.
Production capacity[A]: Hourly employees;
Chrysler: Year-end 2008: 24,135;
Chrysler: After reorganization: 21,082;
Chrysler: Percent reduction: 12.6%;
GM: Year-end 2008: 61,999; GM:
After reorganization: 54,391;
GM: Percent reduction: 12.3%.
Production capacity[A]: Salaried employees;
Chrysler: Year-end 2008: 10,691;
Chrysler: After reorganization: 10,307;
Chrysler: Percent reduction: 3.6%;
GM: Year-end 2008: 29,655;
GM: After reorganization: 27,091;
GM: Percent reduction: 8.6%.
Source: GAO presentation of Chrysler and GM data.
[A] According to Treasury, these numbers will likely continue to change
in the future, since the companies' restructuring efforts are not
complete.
[B] Four additional factories that remain with old Chrysler are planned
for future closure.
[End of table]
Whether and to what extent these changes will improve Chrysler's and
GM's profitability and long-term viability remains to be seen. Many
elements of a company's financial statements are also used in measures
of financial health, but neither Chrysler nor GM has finalized new
financial statements based on their reorganization. Chrysler and GM
have agreed to provide certain financial information, as outlined in
agreements between Chrysler and its shareholders, including Treasury,
and between GM and the Securities and Exchange Commission (SEC).
Consistent with the agreements, Chrysler and GM plan to complete the
process of determining the fair value of the assets and liabilities
transferred to the new companies for their audited 2009 year-end
financial statements, which they expect to complete by April 2010 and
March 2010, respectively.[Footnote 15] Chrysler will provide its 2009
audited annual financial statement to Treasury and its other
shareholders, and GM will provide its 2009 audited annual financial
statement to SEC, where it will also be available to the public.
Chrysler will begin filing quarterly and annual financial reports with
SEC beginning with its 2010 audited annual financial statements, which
will be publicly available through SEC. Before audited annual financial
statements are filed with SEC, Chrysler and GM will make other select
information publicly available.
Moreover, whether enough time has passed for the impact of the
structural changes to be seen is unlikely, especially given that the
automakers have not completed restructuring, the economy is still
recovering, and new vehicle purchases remain at low levels. For
instance, although the federal Car Allowance Rebate System program
resulted in a sales spike in August,[Footnote 16] September sales
returned to historically low levels. These and other challenges are
likely to delay the companies' recovery beyond what it would be under
more favorable economic circumstances.
Treasury Does Not Plan to Be Involved in Chrysler's or GM's Day-to-Day
Operations or Management, but It Plans to Closely Monitor the
Companies' Performance:
Treasury, which has a sizable financial stake in Chrysler and GM, does
not plan to be involved in the day-to-day management of the companies,
but it has established certain requirements that will be in effect as
long as it holds debt or equity in the companies.[Footnote 17] Treasury
has distinct rights as both a creditor and an equity owner. Its rights
as a creditor are documented in the secured credit agreements, which
set forth the terms and provisions of the loans Treasury provided to
new Chrysler and new GM. Its rights as an equity owner are documented
in a number of transactional documents related to the formation of the
new Chrysler and the new GM, including shareholders' agreements, equity
registration rights agreements, and organizational documents.
Treasury's role as an equity owner focuses on monitoring the financial
health of the companies in order to protect the value of Treasury's
equity stake.[Footnote 18] Treasury developed several principles to
guide its role as an equity owner, including the commitment that,
although Treasury reserves the right to set up-front conditions to
protect taxpayers and promote financial stability, Treasury plans to
oversee its financial interests in a commercial manner, in which it
will focus primarily on maximizing its return and take a hands-off
approach to day-to-day management. Treasury plans to reserve its
involvement for major transactions such as the sale of a controlling
share of the companies. Treasury's role as a creditor is not as clearly
delineated, but much like in its role as equity owner, Treasury has
said it will focus on monitoring the companies' financial health.
Conditions set by Treasury in the credit agreements include requiring
that the companies comply with provisions applicable to companies
receiving TARP assistance, in accordance with the Emergency Economic
Stabilization Act (EESA), as well as other requirements that are
specific to Chrysler and GM.[Footnote 19] According to the agreements,
Chrysler and GM must do the following:
* Produce a portion of their vehicles in the United States. Chrysler
must either manufacture 40 percent of its U.S. sales volume in the
United States or its U.S. production volume must be at least 90 percent
of its 2008 U.S. production volume. GM agrees to use its commercially
reasonable best efforts to ensure that the volume of manufacturing
conducted in the United States is consistent with at least 90 percent
of the level envisioned in GM's business plan.
* Comply with the executive compensation requirements of EESA.[Footnote
20] These requirements state that bonuses or incentive compensation
paid to any of the senior executive officers or the next 20 most highly
compensated employees based on materially inaccurate earnings must be
repaid, no golden parachute payments may be made to a senior executive
officer or any of the next five most highly compensated employees,
compensation in excess of $500,000 per executive may not be deducted
for tax purposes, and the companies must establish a compensation
committee of independent directors to review employee compensation
plans and the risks posed by these plans.
* Have an expense policy that is in compliance with TARP standards for
compensation and corporate governance. The policy must govern hosting
and sponsoring for conferences and events, travel accommodations and
expenditures, office or facility renovations and relocations, and
entertainment and holiday parties, among other things.
* Report to Treasury on the use of government funds. The companies are
to provide Treasury with a report each quarter setting forth in
reasonable detail the actual use of the TARP funding they received upon
exiting from bankruptcy.
* Have internal controls to ensure compliance with the requirements.
The companies are to promptly establish internal controls to provide
reasonable assurance of compliance in all material respects with each
of the credit agreement's requirements for executive privileges and
compensation, aircraft, expenses, and the Employ American Workers Act.
[Footnote 21] The companies must also have documentation of these
controls and the companies' compliance with them.
* Report on events related to pension plans. The companies must report
to Treasury if actions occur that could result in the companies failing
to meet the minimum funding requirements for their pension plans, or if
the companies plan to terminate any of their plans.[Footnote 22]
To protect the value of its equity share and the likelihood of loan
repayment, Treasury has also established requirements under which the
companies must report financial information, and it intends to use this
information to closely monitor the financial condition of Chrysler and
GM. The financial reporting requirements are set forth in Treasury's
credit agreements with the companies and other agreements that specify
the rights of the companies and their shareholders, which include
Treasury and other parties.[Footnote 23] GM is also subject to
additional reporting requirements related to the reserve portion of its
loan from Treasury that is being held in escrow.[Footnote 24] Treasury
has agreed with the companies on additional financial, managerial, and
operating information, which the companies will provide in monthly
reporting packages, along with items specified in the agreements.
Tables 3 and 4 provide details on Chrysler's and GM's reporting
requirements.
Table 3: Chrysler's Financial Reporting Requirements:
Requirements Treasury established as creditor:
Until repayment of the loan, Chrysler must provide to Treasury;
* its consolidated balance sheet and the related consolidated
statements of income and cash flow, on a quarterly and annual basis,
and;
* updates to its schedules of real property, mortgaged property,
pledged equity and notes, subsidiaries, and mortgage filing offices
(beginning in 2010).
Requirements Treasury established as equity owner:
As long as Treasury holds its initial membership shares in Chrysler,
Chrysler must provide;
* public reports containing quarterly and annual financial information,
and;
* quarterly and annual financial reports to the Securities and Exchange
Commission (beginning with its 2010 audited annual financial
statements).
As long as Treasury holds more than 5 percent equity, Chrysler must
provide to Treasury;
* monthly, quarterly, and annual management financial reports
summarizing results of the company for the period and comparing these
results with the annual budget, and;
* unaudited quarterly and audited annual balance sheets and related
statements of income and cash flow.
Source: GAO presentation of Treasury information.
[End of table]
Table 4: GM's Financial Reporting Requirements:
Requirements Treasury established as creditor:
Until repayment of the loan, GM must provide to Treasury:
* its consolidated balance sheet and the related consolidated
statements of income and cash flow, on an annual (audited) and
quarterly basis (unaudited);
* copies of any financial statements or reports GM is required to file
with the Securities and Exchange Commission, and;
* other information that Treasury might periodically request.
Until the balance of GM's escrow account reaches zero or the escrow
account's expiration on June 30, 2010, GM must provide to Treasury:
* biweekly 13-week forecasts;
* monthly liquidity status reports, and;
* monthly budgets covering a 5-year period.
Requirements Treasury established as equity owner:
As long as Treasury owns at least 10 percent of GM's common stock, GM
must provide to Treasury:
* all financial statements, budgets, reports, liquidity statements,
materials, data, and other information pursuant to Section 5 of the
credit agreement, and;
* a monthly report, the format and content of which Treasury has the
right to specify.
Source: GAO presentation of Treasury information.
[End of table]
According to Treasury officials, they plan to review and analyze the
reports they receive under creditor and equity owner requirements to
identify areas of concern, such as actual market share lagging behind
the projected market share, an excess of inventory, or other signs that
business is foundering. Treasury does not have authority to direct the
companies to take specific actions to address such findings, but
Treasury said it plans to notify the companies' management and the
Secretary of the Treasury if it sees any cause for concern in the
financial reports. In addition to reviewing financial information,
Treasury's team of staff responsible for overseeing AIFP (subsequently
referred to as the auto team) plans to meet monthly via teleconference
and quarterly in person with the companies' top management to discuss
the companies' progress against their restructuring plans. Important
findings that result from the review of financial reports or management
meetings will also be conveyed to key staff in OFS and other Treasury
offices with responsibilities for managing TARP investments. Treasury
also intends to use financial reports as a basis for decisions on how
and when to sell its equity in the companies, as discussed below.
While Treasury has stated that it plans to manage its investments in
Chrysler and GM in a hands-off manner and will not interfere in day-to-
day operations of the companies, Chrysler and GM will be subject to
requirements regarding compensation, expenses, and reporting that other
auto companies are not. For example, as discussed above, each company
is subject to certain requirements about the vehicles it is to produce,
such as the requirement to produce a portion of its vehicles in the
United States. In addition, Chrysler's shareholders, including
Treasury, have agreed that Fiat's equity stake in Chrysler will
increase if Chrysler meets certain benchmarks, such as producing a
vehicle that achieves a fuel economy of 40 miles per gallon or
producing a new engine in the United States.[Footnote 25] Treasury
officials stated that they established such up-front conditions not
solely to protect Treasury's financial interests as a creditor and
equity owner but also to reflect the Administration's views on
responsibly utilizing taxpayer resources for these companies. While
Treasury has stated it does not plan to manage its stake in Chrysler or
GM to achieve social policy goals, these requirements and covenants to
which the companies are subject indicate the challenges Treasury has
faced and likely will face in balancing its roles.
Treasury's Approach for Monitoring and Selling Its Ownership Interest
in Chrysler and GM Does Not Fully Address All Important Considerations
Experts Identified:
Treasury's general goals of exiting as soon as practicable, maximizing
return on investment, and improving the strength and viability of
Chrysler and GM are reasonable but possibly competing, according to the
group of financial and industry experts we spoke with. For example, if
Treasury sells its stake as soon as practicable, it may not maximize
its return because too little time may have elapsed to demonstrate to
investors the companies' potential for future profitability. Similarly,
maximizing return on investment might require actions that do not
contribute to making the companies strong and viable--for example, if
Chrysler or GM does not return to profitability, Treasury may need to
act to liquidate the companies, with the proceeds divided among its
shareholders and creditors, to maximize its return on investment.
Treasury will ultimately have to address these inherent trade-offs,
decide which goal is most important, and then manage its interest in a
way that prioritizes that goal over others. Treasury officials told us
that they have considered these trade-offs and scenarios, including the
worst-case scenario of Chrysler and GM not attaining long-term
viability, and that they intend to balance these competing goals when
deciding when and how to exit.
Treasury's current approach for monitoring its equity in Chrysler and
GM does not fully address the considerations that our group of experts
identified as important. In particular:
* Retain necessary expertise. Experts stressed that it is critical for
Treasury to employ or contract with individuals with experience
managing and selling equity in private companies. Individuals with
investment, equity, and capital market backgrounds should be available
to provide advice and expertise on the oversight and sale of Treasury's
equity. This is crucial because prior to TARP, Treasury did not
typically buy and sell stakes in private companies, so it has needed to
employ appropriate personnel and to retain consultants, such as
investment bankers and private equity analysts and firms, who are
knowledgeable about such investment decisions. One expert we
interviewed noted that housing such individuals in a program office
created specifically and solely to oversee the government's investment
in the companies could be beneficial. Program staff would be devoted
solely to this purpose, and staff turnover would be low so that
institutional knowledge would be preserved over the life of the
program. The literature also stressed the importance of designating
staff to oversee equity sales.
In assessing Chrysler's and GM's financial condition and future
prospects and putting together financing packages for the companies,
Treasury hired or consulted with a number of individuals with
experience in investment banking, equity analysis, and the auto
industry, but it has not established a program office to oversee its
investment in the auto companies. As with the rest of the TARP
programs, OFS oversees the investment in the auto companies. Some OFS
employees work exclusively on the automotive companies, while others
divide their time among multiple TARP programs. While the auto team has
experienced a significant decline in its number of staff, and presently
has limited engagements with outside firms with specialty expertise
such as investment banking or equity analysis to assist in its
management of its investment in the auto companies, Treasury officials
stated that the rest of OFS is available to "backfill" as necessary and
acts as a program office for Treasury's investment in the auto
industry. However, OFS is not a dedicated program office for overseeing
Treasury's investment in Chrysler and GM, in that it has
responsibilities for Treasury's investments in other companies.
Treasury officials also stated that the reduction in the number of
staff on the auto team has been a reflection of the team's reduced
workload now that the intensive process of restructuring the companies
is over and that the size of the team required for monitoring the
government's investment is smaller than for a restructuring process.
Because of the particular needs of the auto companies and the
unprecedented nature of providing such assistance, Treasury hired or
contracted with a number of individuals with expertise in the auto
industry, equity investment, and relevant areas of law throughout the
first half of calendar year 2009 as Treasury assessed Chrysler's and
GM's financial condition, assembled financing packages for the
companies, and helped with restructuring efforts. When Treasury was
heavily involved in the restructuring of the companies, Treasury's auto
team consisted of 12 professional staff and 4 administrative staff, and
it used the services of investment banking, consulting, and law firms.
Since those agreements have been finalized and the workload has
declined, two-thirds of the original professional staff has left,
leaving Treasury with 4 of the original professional staff dedicated to
auto issues, other OFS staff who have also helped monitor these
investments, and limited use of investment or industry consultants. The
leader of the auto team, who also serves as a senior adviser to the
President on the auto industry, was recently appointed Senior Counselor
for Manufacturing Policy, requiring him to split his time between the
auto team and his new role. Moreover, Treasury officials told us that
there will likely be additional staff reductions in the future because
they plan to disband the auto team over time as other OFS staff assume
the role of monitoring the financial condition of the companies. In
commenting on a draft of this report, Treasury officials stated that in
light of recent and expected staff turnover, they are prepared to hire
personnel from within Treasury or externally to fill Treasury's
monitoring function. Nonetheless, given the wind-down of the auto team--
and the associated loss of dedicated staff with industry-and company-
specific knowledge and expertise--we are concerned that Treasury may
not have sufficient expertise to actively oversee and protect the
government's ownership interests, including determining when and how to
divest these interests.
In general, Treasury has faced challenges hiring the full complement of
staff necessary to administer the TARP programs, in part because
qualified candidates can often find a more competitive salary with a
financial regulator, which has the authority to establish its own
compensation programs without regard to certain requirements applicable
to executive branch agencies. We have reported on the importance of
Treasury documenting the skills and competencies it needs to administer
the program and continuing to expeditiously hire personnel.[Footnote
26] The quality of human capital policies and practices including, but
not limited to, hiring affects the control environment. A strong
control environment will depend, in part, on the managerial and other
staff hired.[Footnote 27] Treasury has made progress in hiring staff to
administer TARP duties, but Treasury officials have not formally
evaluated whether the staffing level to oversee AIFP is appropriate for
their current and projected needs. Officials said that they had
considered future needs and determined that Treasury's monitoring role
could be achieved with fewer staff. In response to a request for
documentation of their evaluation of staffing needs, Treasury provided
us with a document showing the current and projected number of staff
working on AIFP, but this document did not show how Treasury determined
the appropriate number of staff or areas of expertise that would be
needed for future workloads. In commenting on a draft of this report,
Treasury officials stated that they had not had difficulty hiring
qualified professionals to work on the auto team and did not anticipate
having difficulties finding qualified staff in the future should the
need arise for additional hiring.
* Monitor and communicate company, industry, and economic indicators.
All of the experts we spoke with emphasized the importance of
monitoring company indicators such as financial and operating
performance, automotive industry-wide indicators such as vehicle sales,
and broader economic indicators such as interest rates and consumer
spending. Monitoring these indicators allows investors, including
Treasury, to determine how well the companies, and in turn the
investment, are performing in relation to the rest of the industry. It
also allows an investor to determine how receptive the market would be
to an equity sale, something that contributes to the price at which the
investor can sell. Some experts also noted that Treasury should assign
an individual with expertise in investment banking or private equity to
be in charge of monitoring these metrics, which Treasury officials told
us they had done. In addition to monitoring the investment,
communicating a clearly articulated vision for TARP programs is
important, as we have previously reported. Understanding the different
TARP programs and the distinct rationale for each can be difficult for
Congress, the markets, and the public, because many of the programs
address specific developments and have similar guidelines and terms.
Specifically for AIFP, what Treasury's goals are for its investment in
Chrysler and GM, and in turn, which indicators and metrics are
necessary to determine progress in achieving these goals, is important
information for Congress and the public to have. Although Treasury
provides public information on activities in the TARP programs,
including AIFP, through its legally mandated monthly reports to
Congress, transaction reports, and others, these reports do not provide
information on the indicators Treasury plans to use in assessing its
goals for its auto investments. Identifying these indicators for
Congress, and sharing as much of this information as possible, while
still respecting the need for certain business sensitive information
not to be released, could help Congress and the public better
understand whether the investment in the auto companies has been
successful.
Treasury's auto team plans to closely monitor the performance of
Chrysler and GM by way of financial reports from the companies such as
balance sheets and liquidity statements, which, in general, measure the
financial health of a company at the time of the statement. It also
plans to monitor industry and broader economic indicators. The auto
team plans to use this information to alert Chrysler and GM management
to any problematic areas in the companies, and to help determine the
best time and strategy for divesting the government's interest.
Finally, Treasury officials have not informed Congress which components
of the reporting package will be shared or how they plan to use the
information contained in these packages to assess and monitor the
companies' performance. In commenting on a draft of this report,
Treasury noted that it will not make the components of these reports
public because the release of certain information could put Chrysler
and GM at a competitive disadvantage, thereby harming the potential
recovery of taxpayer funds. Treasury further noted that the companies
will publicly report on certain financial information--similar to what
publicly traded companies report--in the future.
* To the extent possible, determine the optimal time and method to
divest. One of the key components of an exit strategy is determining
how and when to sell the investment. Given the many different ways to
dispose of equity--through public sales, private negotiated sales, all
at once, or in batches--experts noted that the seller's needs should
inform decisions on which approach is most appropriate. For example, if
an investor is interested in selling quickly but the company has not
demonstrated the level of performance necessary for a successful
initial public offering (IPO), in which the company first sells stock
to the public, the investor should consider other sale options, such as
a private sale. According to experts, a successful IPO requires that
the companies show signs of earnings growth and future profitability,
something that will take a considerable amount of time for Chrysler and
GM, as they only recently emerged from bankruptcy. Attracting investors
to the market is essential because lack of sufficient investor interest
may result in depressed value of shares. Experts noted that a
convergence of factors related both to financial markets and to the
company itself create an ideal window for an IPO; this window can
quickly open and close and cannot easily be predicted. This requires
constant monitoring of up-to-date company, industry, and economic
indicators when an investor is considering when and how to sell. As
Treasury evaluates these indicators, considering all possible sale
strategies is important.
Members of the auto team said that they plan to consider indicators
such as profitability and prospects, cash flow, market share, and
market conditions to determine the optimal time and method of sale. The
ultimate decision on when and how to sell will be made by the Secretary
of the Treasury, but auto team staff will be in charge of monitoring
these indicators and recommending a strategy to the Secretary and
Assistant Secretary for Financial Stability. Although Treasury
officials said they plan to consider all options for selling the
government's ownership stakes in Chrysler and GM, they noted that they
believe the most likely scenario for GM is to dispose of Treasury's
equity in the company through a series of public offerings. Treasury
has publicly discussed the possibility of selling part of its equity in
the company through an IPO that would occur sometime in 2010. However,
by publicly discussing a method and a time for a sale of GM shares now,
the extent to which Treasury is using the indicators to inform method
and timing decisions is unclear. Moreover, two of the experts we spoke
with said GM might not be ready for a successful IPO by 2010, because
it may be too early for the company to have demonstrated sufficient
progress to attract investor interest, and two other experts noted that
2010 would be the earliest possible time for an IPO. For Chrysler,
Treasury officials noted that the department is more likely to consider
a private sale because its equity stake is smaller, and several of the
experts we interviewed noted that non-IPO options could be possible for
Chrysler, given the relatively smaller stake Treasury has in the
company (9.85 percent, versus its 60.8 percent stake in GM) and the
relative affordability of the company. In commenting on a draft of this
report, Treasury officials stated that they were aware of the diversity
of opinions on divesting the government's interest in the auto
companies and would make an appropriate determination to maximize the
taxpayers' return. To achieve the maximum return for taxpayers,
Treasury also said it plans not to disclose more information about its
strategy to divest its ownership interests than is necessary.
Treasury officials said that on the basis of their analysis of the
companies' future profitability, they believe that Chrysler and GM will
be able to attract sufficient investor interest for Treasury to sell
its equity. With regard to the possibility that there may not be
sufficient investor interest, Treasury officials said they would
monitor the financial markets and the companies' operations in order to
identify any issues that could affect profitability, and work with the
companies' boards of directors and management to address them. In the
event that the companies do not return to profitability in the time
frame Treasury has projected, Treasury officials said that they will
consider all commercial options for disposing of Treasury's equity,
including liquidation.
* Manage investments in a commercial manner. Experts emphasized the
importance of Treasury resisting external pressures to focus on public
policy goals over focusing on its role as a commercial investor. For
example, some experts said that Treasury should not let public policy
goals such as job retention interfere with its goals of maximizing its
return on investment and making Chrysler and GM strong and viable
companies. They said that this is especially important because making
the companies financially strong and competitive may require reducing
the number of employees. Nevertheless, one expert suggested that
Treasury should consider public policy goals and include the value of
jobs saved and other economic benefits from its investment when
calculating its return, since these goals, though not important to a
private investor, are critical to the economy.
As long as Treasury maintains ownership interests in Chrysler and GM,
it will likely be pressured to influence the companies' business
decisions. Treasury has said that it plans to manage its investment in
Chrysler and GM in a commercial way. Yet Treasury faces external
pressures, such as to prioritize jobs over maximizing its return. For
example, Congress is currently considering a number of bills to restore
automotive dealers' contracts terminated in restructuring, and Treasury
officials noted that they receive frequent calls from Members of
Congress expressing concern about dealership closings. To protect
Treasury's investment from these external pressures, a recent
Congressional Oversight Panel report recommended that Treasury hold its
equity interests in the auto companies in a trust managed by an
independent trustee.[Footnote 28] Treasury officials told us they
cannot currently establish a trust managed by independent trustees
because of a requirement in EESA that states that troubled assets are
subject to the supervision of the Secretary of the Treasury.[Footnote
29] The officials stated that if Treasury created a trust with the
assets managed by independent trustees, the Secretary would not be able
to exercise his authority over the assets as required by law. Congress
is considering legislation that would authorize and require the
Secretary to transfer to a limited liability company all equity in TARP
recipients in which the government has a certain equity interest as a
result of TARP assistance. The bills further provide that the equity is
to be managed in trust for the benefit of taxpayers.[Footnote 30]
Treasury officials told us they believe their planned approach for
managing Treasury's equity in Chrysler and GM is sufficient for now.
Regardless of the sales strategies used, the companies will have to
grow substantially in order to reach values at which Treasury would
recover the entirety of its equity investment upon sale of its equity,
which Treasury and others consider to be unlikely. On the basis of our
analysis, shown in table 5, we estimate that Chrysler and GM would need
to have a market capitalization of $54.8 billion and $66.9 billion,
respectively, for Treasury to earn enough on the sale of its equity to
break even.[Footnote 31] A recent Congressional Oversight Panel report
reached similar conclusions on what the companies would have to be
worth.[Footnote 32] As a point of reference for these values, in 1997,
the last year Chrysler was a publicly traded company, its market
capitalization value ranged between $23.1 billion and $31.7 billion,
and in 1998, when it merged with Daimler, it was valued at an estimated
$37 billion. GM, at its peak in 2000, had a market capitalization of
$57 billion.[Footnote 33] In commenting on a draft of this report,
Treasury officials noted that the companies' past equity values are not
comparable to today's equity values because the companies have
substantially restructured their balance sheets through bankruptcy.
Although we recognize the changes the companies have experienced in
recent years, we believe this information provides a sense of the
magnitude of growth that will be required of the companies.
Treasury's own analysis suggests that the circumstances necessary for
the companies to reach market capitalizations high enough for Treasury
to fully recover its equity investment are unlikely. Treasury officials
also noted that considering the companies' enterprise values--a measure
of a business's total value, including the value of equity and debt--in
addition to equity value is important, because enterprise value takes
into account the likelihood of repayment of loans and other obligations
extended to the companies as well as the value of equity stakes.
[Footnote 34]
Table 5: Value of Chrysler and GM Equity Required for Treasury to
Recoup Its Investment (Dollars in billions):
Description of funding: Total loans to Chrysler;
Treasury investment: $12.5;
Amount in term loans and preferred stock: $7.1;
Equity stake (percent): 9.85;
Amount equity stake must be worth to recoup equity investment
(investment-loans and preferred stock): $5.4[A];
Equity value of company necessary to recoup investment (amount equity
must be worth/60.8 percent for GM and 9.85 percent for Chrysler):
$54.8.
Description of funding: Loans to Chrysler prior to bankruptcy;
Treasury investment: $4.0.
Description of funding: Loans to Chrysler after bankruptcy;
Treasury investment: $8.5.
Description of funding: Total loans to GM;
Treasury investment: $49.5;
Amount in term loans and preferred stock: $8.8;
Equity stake (percent): 60.8;
Amount equity stake must be worth to recoup equity investment
(investment-loans and preferred stock): $40.7;
Equity value of company necessary to recoup investment (amount equity
must be worth/60.8 percent for GM and 9.85 percent for Chrysler):
$66.9.
Description of funding: Loans GM prior to bankruptcy;
Treasury investment: $19.4.
Description of funding: Loans to GM after bankruptcy;
Treasury investment: $30.1.
Source: GAO analysis of Treasury information.
[A] This value does not take into account any repayments Treasury will
receive from the payment-in-kind interest that will accumulate over the
life of the $7.1 billion loan, ($17 million per quarter), the
additional $288 million note, or the value of Treasury's interest in
Chrysler Financial's equity (the greater of $1.375 billion or 40
percent of the equity). These figures together would be worth $833
million, thereby reducing the amount Treasury's equity stake would have
to be worth from $5.4 billion to $4.6 billion, and reducing the equity
value Chrysler would have to attain from $54.8 billion to $46.7
billion.
[End of table]
However, these estimates do not take into account other benefits and
costs that are more difficult to measure, such as the impact of
Treasury's investment on jobs and local and national economies and the
opportunity costs Treasury incurred in providing financial assistance.
The impact on the economy is difficult to measure because, according to
the Council of Economic Advisors, it involves predicting what
employment and economic performance would have been without government
investment. Nevertheless, a more comprehensive analysis that takes
these effects into account would yield a richer picture of the value of
Treasury's net investment and net return, especially given that the
government's goal upon first providing assistance to the auto industry
was to prevent economic disruption.
Conclusions:
Treasury's substantial investment and other assistance, including loans
from the Canadian government and concessions from the UAW, have
contributed to the current stability of Chrysler and GM. However,
because of the challenges continuing to face the auto industry--
including the still recovering economy and weak demand for new
vehicles--the ultimate impact that the assistance will have on the
companies' profitability and long-term viability is uncertain. Although
the immediate crisis of helping Chrysler and GM maintain solvency has
passed for now and Treasury has no plans for further financial
assistance to the companies, the significant sums of taxpayer dollars
that are invested in these companies warrant continued oversight. It is
critical that Treasury remain focused on protecting the government's
interest in the coming months as Chrysler and GM work to become
profitable. However, most of the original staff on Treasury's auto team
either have left Treasury or may do so in the future. Treasury
officials told us that OFS personnel will continue to provide
oversight. Given the substantial decline in the number of staff and
lack of dedicated staff for this oversight moving forward, however, we
are concerned whether Treasury will continue to have the needed
expertise to provide oversight of the use of government funds, assess
the financial condition of the auto companies, and develop strategies
to divest the government's interests. Monitoring industry conditions
and determining when to divest will require a certain expertise,
including a robust monitoring function through which detailed financial
data from Chrysler and GM are reviewed on a regular basis. Transparency
as to how the companies are being monitored also will be important to
ensuring accountability and providing assurances that the taxpayers'
investment--including both the loans to and equity in the companies--is
being appropriately safeguarded. While we recognize that not all
information that the companies report to Treasury should be made public
because of concerns about disclosing proprietary information in a
competitive market, Treasury's approach for evaluating the success of
the AIFP should be as transparent as possible, given the large taxpayer
investment.
While Treasury has stated that it plans to review all possible options
for divesting itself of its ownership interest in Chrysler and GM,
Treasury officials have focused primarily on an IPO for GM, both in our
discussions with them and in their public statements. However, given
the complexity of the economy and the financial markets, considering
all of the options in the context of the companies' financial progress
and current financial conditions will be important for Treasury. The
past year has indicated the extent to which a company's financial
situation can change within a period as short as a few months. Given
the fluidity of conditions and the number of factors that will need to
be considered when determining how and when to divest, it is important
that Treasury identify the criteria it will use to evaluate the optimal
method and timing for selling the government's ownership stake.
Determining when and how to divest the government's ownership stake
will be one of the most important decisions Treasury will have to make
regarding the federal assistance provided to the domestic automakers,
as this decision will affect the overall return on investment that
taxpayers will realize from aiding these companies. Currently, the
value of the companies would have to grow tremendously for Treasury to
approach breaking even on its investment, requiring that Treasury
temper any desire to exit as quickly as possible with the need to
maintain its ownership interest long enough for the companies to
demonstrate sufficient financial progress. Therefore, it is important
that Treasury be able to explain why and how it decided to divest when
the time arrives, and clearly established criteria will help Treasury
communicate this decision to Congress and the public at the appropriate
time to prevent this disclosure from negatively affecting the full
recovery for taxpayers.
Recommendations for Executive Action:
To improve the stewardship of the federal government's substantial
financial investment in the auto industry, we recommend that the
Secretary of the Treasury take the following three actions:
* Ensure that the department has the expertise needed to adequately
monitor and divest the government's investment in Chrysler and GM, and
obtain needed expertise in areas where gaps are identified. In
addressing any existing or future expertise gaps, Treasury should
consider both in-house and external expertise.
* Report to Congress on how it plans to assess and monitor the
companies' performance to help ensure the companies are on track to
repay their loans and to return to profitability. In reporting to
Congress, Treasury should balance the need for transparency with the
need to protect certain proprietary information that would put the
companies at a competitive disadvantage or negatively affect Treasury's
ability to recover the taxpayers' investments.
* Develop criteria for evaluating the optimal method and timing for
divesting the government's ownership stake in Chrysler and GM. In
applying these criteria, Treasury should evaluate the full range of
available options, such as IPOs or private sales.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of the Treasury
for review and comment. Treasury generally agreed with the report's
findings, conclusions, and recommendations, and provided written
comments, which are reprinted in appendix II. Treasury also provided
technical comments and clarifications via e-mail, which we incorporated
as appropriate. In their technical comments, Treasury officials
emphasized that they believe they have individuals within OFS who can
provide the needed oversight of the government's investments in
Chrysler and GM. We added Treasury's views on its current staffing and
expertise levels to the final report. While we recognize that OFS
employs a number of qualified individuals who have worked on the
government's efforts to stabilize the auto industry, we nevertheless
remain concerned about the loss of industry-and company-specific
knowledge and expertise that Treasury has experienced and will continue
to experience with the wind-down of the auto team. Such knowledge and
expertise will be critical as Treasury monitors the financial health of
Chrysler and GM and develops plans to divest its ownership interests in
these companies. We are pleased that Treasury--in both its written and
technical comments--commits to continue to take steps to assess and
maintain the expertise required to monitor and manage Treasury's
investments in these companies.
In their written and technical comments, Treasury officials also
stressed the need to strike a balance between the goal of transparency
and the need to avoid compromising the competitive positions of
Chrysler and GM or the government's ability to recover its investments.
We recognize the need to strike this balance and added language to the
final report, including one of our recommendations, to acknowledge this
difficult trade-off. We believe our revised recommendation that
Treasury report to Congress on its plans to monitor the performance of
the companies provides Treasury with sufficient flexibility to strike
the appropriate balance.
We also provided relevant portions of a draft of this report to SEC,
Chrysler, and GM for their review and comment. SEC, Chrysler, and GM
provided technical comments and clarifications that we incorporated as
appropriate.
We are sending copies of this report to other interested congressional
committees and members, the Department of the Treasury, and others. The
report also is available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov or A.
Nicole Clowers at (202) 512-2843 or clowersa@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. GAO staff who made major
contributions to this report are listed in appendix III.
Signed by:
Gene L. Dodaro:
Acting Comptroller General of the United States:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Christopher J. Dodd:
Chairman:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
The Honorable Kent Conrad:
Chairman:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable David R. Obey:
Chairman:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable John M. Spratt, Jr.
Chairman:
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Barney Frank:
Chairman:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Charles B. Rangel:
Chairman:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Financial and Industry Experts GAO Interviewed:
Name: John Casesa;
Affiliation: Casesa Shapiro Group.
Name: Justin Mirro;
Affiliation: Moelis & Company.
Name: Thomas Maloney;
Affiliation: Deutsche Bank.
Name: Warren Estey;
Affiliation: Deutsche Bank.
Name: Rod Lache;
Affiliation: Deutsche Bank.
Name: Henry Miller;
Affiliation: Miller Buckfire.
Name: Durc Savini;
Affiliation: Miller Buckfire.
Name: Eric Selle;
Affiliation: J.P.Morgan.
Name: Himanshu Patel;
Affiliation: J.P.Morgan.
Name: Charles Bowsher;
Affiliation: Former Comptroller General of the United States.
Name: William Isaac;
Affiliation: Former Chairman of the Federal Deposit Insurance
Corporation.
Source: GAO.
[End of table]
[End of section]
Appendix II: Comments from the Department of the Treasury:
Department Of The Treasury:
Washington, D.C. 20220:
October 23, 2009:
Thomas J. McCool:
Director, Center for Economics Applied Research and Methods:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. McCool:
The Treasury Department (Treasury) appreciates the opportunity to
review the GAO's latest report on Treasury's Troubled Asset Relief
Program (TARP), entitled Auto Industry: Continued Stewardship Needed as
Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM. Treasury welcomes the recognition by the
GAO that Treasury through TARP investments has "contributed to the
stability of Chrysler and GM." There is important work ahead and the
GAO's recommendations are constructive as Treasury continues to
implement its Auto Industry Financing Program.
Treasury continues to assess and take steps to maintain the expertise
required to adequately monitor and manage Treasury's interests in
Chrysler and GM. In addition, Treasury will continue to monitor and
evaluate the performance of Chrysler and GM with a view toward
determining the appropriate method and timing for divesting Treasury's
interests in the auto companies. Treasury also intends to develop an
approach for reporting on its investments in the auto industry that
strikes an appropriate balance between our goal of transparency and the
need to avoid compromising either the competitive positions of these
companies or Treasury's ability to recover funds for taxpayers.
Once again, Treasury appreciates the opportunity to review this report
and the GAO's thoughtful recommendations. Treasury also appreciates the
GAO's close oversight of TARP as Treasury develops and implements its
policies to stabilize the financial system. We look forward to
continuing this constructive dialogue.
Sincerely,
Signed by:
Duane Morse:
Chief Risk and Compliance Officer:
Office of Financial Stability:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov:
A. Nicole Clowers, (202) 512-2834 or clowersa@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Raymond Sendejas, Assistant
Director; Orice Williams Brown; Sarah Farkas; Timothy Guinane; Heather
Halliwell; Terence Lam; Matthew McDonald; Susan Michal-Smith; Joshua
Ormond; and Susan Sawtelle made important contributions to this report.
[End of section]
Footnotes:
[1] Prior to bankruptcy reorganization, the companies' legal names were
Chrysler LLC and General Motors Corporation. Chrysler Group LLC and
General Motors Company are new legal entities that were created through
the bankruptcy process to purchase the operating assets of the pre-
reorganization companies. The new companies also received some of the
debts of the pre-reorganization companies, including a portion of the
loans Treasury provided to the companies prior to bankruptcy filing.
Throughout this report, in cases where such a distinction is important,
we refer to the pre-reorganization companies as "old Chrysler" and "old
GM," and the post-reorganization companies as "new Chrysler" and "new
GM." The third domestic automaker, Ford Motor Company, has not
requested assistance from Treasury.
[2] The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L.
No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et.
seq., originally authorized Treasury to buy or guarantee up to $700
billion in troubled assets. The Helping Families Save Their Homes Act
of 2009, Pub. L. No. 111-22, Div. A, Title IV, § 402(f), 123 Stat.
1632, 1658 (2009), codified at 12 U.S.C. 5225(a)(3), amended the act
and reduced the maximum allowable amount of outstanding troubled assets
under the act by almost $1.3 billion, from $700 billion to $698.741
billion.
[3] Treasury's share in the company will become 8 percent if Fiat,
another of Chrysler's shareholders, meets fuel efficiency-related
performance targets and is granted additional equity.
[4] Other parties that received equity stakes in the reorganized
companies include the Canadian government, which provided financial
assistance to the companies, and the auto workers union's health care
trust, which agreed to accept equity in the company in exchange for
future monetary contributions.
[5] GAO, Troubled Relief Asset Program: June 2009 Status of Efforts to
Address Transparency and Accountability, [hyperlink,
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17,
2009).
[6] Ron Bloom, Senior Advisor, U. S. Department of the Treasury,
written testimony before the Congressional Oversight Panel, Regarding
Treasury's Automotive Industry Financing Program, July 27, 2009.
[7] See our previous reports on TARP assistance to the auto industry:
GAO, Auto Industry: Summary of Government Efforts and Automakers'
Restructuring to Date, [hyperlink,
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23,
2009); Auto Industry: A Framework for Considering Federal Financial
Assistance, [hyperlink, http://www.gao.gov/products/GAO-09-247T]
(Washington, D.C.: Dec. 5, 2008); Auto Industry: A Framework for
Considering Federal Financial Assistance, [hyperlink,
http://www.gao.gov/products/GAO-09-242T] (Washington, D.C.: Dec. 4,
2008); and [hyperlink, http://www.gao.gov/products/GAO-09-658]. EESA
requires GAO to report at least every 60 days on findings resulting
from, among other things, oversight of TARP's performance in meeting
the purposes of the act, the financial condition and internal controls
of TARP, the characteristics of both asset purchases and the
disposition of assets acquired, TARP's efficiency in using the funds
appropriated for the program's operation, and TARP's compliance with
applicable laws and regulations. This is the ninth report issued in
compliance with that mandate.
[8] We are currently conducting a coordinated review with the Special
Inspector General for TARP on U.S. government oversight of and
interaction with companies in which the government has provided
"exceptional assistance." As part of this review, we will examine the
internal controls Treasury has established to manage its portfolio of
investments and its interaction with the institutions, which include
Chrysler and GM.
[9] [hyperlink, http://www.gao.gov/products/GAO-09-553].
[10] See National Automobile Dealers Association, "NADA Data 2009:
Economic Impact of America's New-Car and New-Truck Dealers" (McLean,
Va.: 2009) and United States Department of Labor, Bureau of Labor
Statistics, Table B-12: Employees on Non-farm Payrolls by Detailed
Industry, August 2009.
[11] [hyperlink, http://www.gao.gov/products/GAO-09-553].
[12] Most recently, in October 2009, GM reached an agreement to sell
its Hummer brand to a Chinese company, which is slated to take over
operations in 2012.
[13] Chrysler began downsizing its operations prior to filing for
bankruptcy. For instance, at year-end 2006, it had 3,749 dealerships.
[14] [hyperlink, http://www.gao.gov/products/GAO-09-553].
[15] Under an agreement between new GM and the Securities and Exchange
Commission (SEC), new GM will file by March 31, 2010, a quarterly
financial report for the third quarter of 2009 and an annual financial
report for 2009. According to SEC, because GM is a newly formed entity
with only five shareholders, it is not required to file periodic or
current reports. Also, according to SEC, it does not have any written
or oral agreements with Chrysler, which was not a public company prior
to its reorganization and is not currently a public company, on future
filing requirements.
[16] The Car Allowance Rebate System is more commonly referred to as
Cash for Clunkers.
[17] Our discussion focuses on the financial assistance Treasury
provided to fund the companies' operations and restructuring because it
represents the most substantial portion of the assistance the companies
received. It does not address the conditions of the smaller amounts
provided under the Supplier Support Program and the Warranty Commitment
Program.
[18] The Congressional Oversight Panel was created as part of TARP to
review the current state of financial markets and the regulatory
system. The panel is empowered to hold hearings, review official data,
and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. The Congressional
Oversight Panel issued a report on federal assistance provided to the
auto industry in September 2009. See Congressional Oversight Panel,
September Oversight Report: The Use of TARP Funds in the Support and
Reorganization of the Domestic Automotive Industry (Washington, D.C.:
Sept. 9, 2009).
[19] As noted, GAO and the Special Inspector General for the Troubled
Asset Relief Program are conducting coordinated work on Treasury's
oversight of Chrysler's and GM's compliance with these requirements.
[20] Section 111 of EESA, as amended by the American Recovery and
Reinvestment Act of 2009, Pub. L. No. 111-5, Div. B, Title VII, 123
Stat. 115, 516-520 (2009), codified at 12 U.S.C § 5221, prescribes
certain standards for executive compensation and corporate governance
for recipients of financial assistance under TARP. Treasury published
an interim final rule setting forth the applicable compensation and
corporate governance standards (74 Fed. Reg. 28,394, June 15, 2009,
codified at 31 C.F.R. Part 30).
[21] The Employ American Workers Act was included in the American
Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, Div. A, Title
XVI, § 1611, 123 Stat. 115, 305 (2009).
[22] GAO has ongoing work reviewing the state of the automakers'
pension plans and the potential liabilities to the federal government
should the plans be terminated. We plan to issue this report in early
2010.
[23] In the case of Chrysler, the corresponding document is the Amended
and Restated Limited Liability Company Operating Agreement of Chrysler
Group LLC, and in the case of GM, the corresponding document is the
Shareholders Agreement by and among General Motors Company, United
States Department of the Treasury, 7176384 Canada Inc., and UAW Retiree
Medical Benefits Trust. Chrysler's and GM's reporting requirements are
not identical because each agreement was negotiated separately and, in
the case of the operating and shareholders' agreements, with the input
of the shareholders.
[24] Of the $30.1 billion that Treasury provided to GM at its
bankruptcy filing, $16.4 billion was held in escrow to be accessed by
GM on an as-needed basis with the consent of Treasury. As of October 5,
2009, GM had requested and received $3 billion from the escrow account.
[25] As part of its reorganization, Chrysler arranged an alliance with
the Italian automaker Fiat, whereby Fiat is contributing intellectual
property and "know-how" to Chrysler in exchange for a 20 percent equity
share in the reorganized company. Fiat will have the right to earn up
to 15 percent in additional equity in three tranches of 5 percent each
in exchange for meeting performance metrics, including introducing a
vehicle produced at a Chrysler factory in the United States that
performs at 40 miles per gallon; providing Chrysler with a distribution
network in numerous foreign jurisdictions; and manufacturing state-of-
the-art, next-generation engines at a U.S. Chrysler facility. Fiat will
also hold an option to acquire up to an additional 16 percent fully
diluted equity interest in the restructured Chrysler. Fiat may exercise
this option and exceed 50 percent ownership in Chrysler once Treasury's
loan has been repaid in full.
[26] GAO, Troubled Asset Relief Program: Status of Efforts to Address
Transparency and Accountability Issues, [hyperlink,
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30,
2009).
[27] GAO, Standards for Internal Control in the Federal Government,
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1]
(Washington, D.C.: November 1999).
[28] Congressional Oversight Panel, September Oversight Report: The Use
of TARP Funds in the Support and Reorganization of the Domestic
Automotive Industry (Washington, D.C.: Sept. 9, 2009).
[29] "In order to provide the Secretary with flexibility to manage
troubled assets in a manner designed to minimize cost to taxpayers, the
Secretary is authorized to establish vehicles, subject to supervision
by the Secretary, to purchase, hold, and sell troubled assets and issue
obligations." Pub. L. No. 110-343, Sec. 101(c)(4), codified at 12
U.S.C. § 5211(c)(4).
[30] In order for a trust to be established, the government would have
to have at least a 15 percent ownership in the company as a result of
TARP assistance in the House bill and at least a 20 percent ownership
interest as a result of TARP assistance in the Senate bill. See H.R.
3594, 111th Cong. (2009) and S. 1280, 111th Cong. (2009).
[31] Our analysis included all funds Treasury has provided to the auto
companies that will be repaid through a combination of debt and equity.
We assume that new Chrysler and new GM will repay all debts, and that
the debts of old Chrysler and old GM will not be repaid, including $5.4
billion to old Chrysler and $986 million to old GM. As a result,
Treasury's equity will have to be worth its total investments minus
projected repayments of principal and preferred stock. This analysis
excludes funds provided for the Supplier Support Program and the
Warranty Commitment Program, since these funds were issued as loans and
will be paid back as such. In addition, this analysis does not take
into account the cost or opportunity cost to Treasury of lending, any
interest Treasury should or could charge to the automakers on the
portion of its investment that has been converted into equity, the
present value of the investment, or the value of any social costs or
benefits resulting from the investment. If Fiat achieves its operating
goals and earns an additional 15 percent equity, Treasury's equity
stake will decline to 8 percent, meaning that Chrysler's total equity
value would need to reach $57 billion for Treasury to recoup its
investment.
[32] Congressional Oversight Panel, September Oversight Report: The Use
of TARP Funds in the Support and Reorganization of the Domestic
Automotive Industry.
[33] Evercore Group, LLC, the financial services company that estimated
GM's future value for the bankruptcy court, concluded that new GM would
be worth between $59 billion and $77 billion in 2012.
[34] In June, the Congressional Budget Office (CBO) estimated that the
federal government would recoup only 27 percent of its initial
investment in the auto industry. CBO's analysis relies on data from the
auto companies prior to bankruptcy to estimate the likelihood of
repayment in the future. Chrysler and GM had poor credit ratings and
significant debts prior to bankruptcy, so the average projected
repayment is only 27 cents on the dollar.
[End of section]
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