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entitled 'TARP: Treasury's Exit from GM and Chrysler Highlights
Competing Goals, and Results of Support to Auto Communities Are
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United States Government Accountability Office:
GAO:
Report to Congressional Committees:
May 2011:
TARP:
Treasury's Exit from GM and Chrysler Highlights Competing Goals, and
Results of Support to Auto Communities Are Unclear:
GAO-11-471:
GAO Highlights:
Highlights of GAO-11-471, a report to congressional committees.
Why GAO Did This Study:
Since December 2008, the Department of the Treasury (Treasury) has
committed $62 billion in Troubled Asset Relief Program (TARP) funding
to General Motors (GM) and Chrysler. Under GAO’s mandate to oversee
TARP, this report addresses (1) how restructuring with federal
assistance has affected GM’s and Chrysler’s financial condition,
(2) what Treasury has done to ensure that it disinvests in GM and
Chrysler so as to protect taxpayers’ interests and what risks remain
in recouping its investments, and (3) how restructuring has affected
auto communities and what the White House Council on Auto Communities
and Workers (Council) and its staff in the Department of Labor’s
Office of Recovery for Auto Communities and Workers (Auto Recovery
Office) have done to mitigate these effects. GAO reviewed documents on
the companies’ financial performance and federal assistance to auto
communities and interviewed company, Treasury, and community officials.
What GAO Found:
Substantial federal assistance allowed GM and Chrysler to restructure
their costs and improve their financial condition. Through federally-
funded restructuring, GM and Chrysler reported lowering production
costs and capacities by closing or idling factories, laying off
employees, and reducing their debt and number of vehicle brands and
models. These changes enabled both companies to report operating
profits and reduce costs enough to be profitable at much lower sales
levels than ever before. Nevertheless, to remain profitable, both
companies must manage challenges affecting both their costs, including
debt levels, and vehicle demand, such as launching products that are
attractive to consumers amid rising fuel prices.
Treasury has recouped roughly 40 percent of its investments in GM and
Chrysler, but the extent to which it will further recoup its
investments depends on how it balances two potentially competing goals
for divestment-—to maximize taxpayers’ return and to exit the
companies as soon as practicable. By participating in GM’s November
2010 initial public offering (IPO), Treasury tried to fulfill both
goals, selling almost half of its shares at an early opportunity. In
preparation for the IPO, Treasury took steps to protect taxpayers’
interest, such as hiring an adviser to provide analysis and support,
as GAO previously recommended. Treasury received $13.5 billion through
the IPO; yet, for Treasury to fully recoup its investment, GM’s share
price will have to increase from the $33 Treasury received in the IPO
to an average of over $54-—a higher price than industry analysts
estimate over roughly a 6 to 18 month period. Chrysler’s value would
have to grow above historic levels for Treasury to recoup its
investment. In divesting from the companies, Treasury may find its
interest in exiting as soon as practicable at odds with the potential
to increase taxpayers’ return by waiting for the remaining shares to
rise in value.
While federally-funded restructuring allowed GM and Chrysler to remain
in business, and therefore benefited communities where auto work
continued, communities where plants were idled or closed experienced
economic challenges beyond those they already faced. The Council and
the Auto Recovery Office, which were established to help auto
communities navigate federal programs, have brought federal attention
to auto communities. However, communities that GAO visited had mixed
views on the results of these efforts. Furthermore, the Council has
not completed two of the four functions set forth in the executive
order establishing it, and neither the Council nor its staff have
demonstrated the results of their efforts. Although the Council is set
to expire in June 2011 unless renewed by the President, fiscal year
2012 funding has been requested for the Auto Recovery Office to
continue its efforts.
What GAO Recommends:
GAO recommends that the Secretary of Labor report to Congress how the
Auto Recovery Office has helped auto communities and its future plans,
and that Congress consider not funding the office unless this
information is provided. The Department of Labor agreed with parts of
the recommendation, provided additional information on the office’s
activities, and stated that it would identify the office’s future
plans in the next 60 days.
View [hyperlink, http://www.gao.gov/products/GAO-11-471] or key
components. For more information, contact A.
Nicole Clowers (clowersa@gao.gov) at 202-512-8678.
[End of section]
Contents:
Letter:
Background:
Federal Assistance Allowed GM and Chrysler to Restructure Their Costs
and Improve Their Financial Condition:
Treasury's Timing of Its Exit from GM and Chrysler and Return on
Investment Will Depend on How It Balances Its Competing Goals:
Council Established to Help Auto Communities Has Not Demonstrated the
Results of Its Efforts:
Conclusions:
Recommendation for Executive Action:
Matter for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendix I: Comments from the United States Department of Labor:
Appendix II: Comments from the Department of the Treasury:
Appendix III: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: GM's Employees, Plants, Dealers, Brands, Models, and Debt As
of Year End for 2007, 2008, and 2010 and Related Restructuring Targets:
Table 2: Chrysler's Employees, Plants, Dealers, Brands, Models, and
Debt, 2007, 2008, and 2010 and Available Restructuring Targets:
Table 3: Changes in GM's and Chrysler's Net Income, Operating Income,
and Cash Flow:
Table 4: Status of AIFP Assistance to GM and Chrysler, as of April 28,
2011:
Table 5: Unemployment Rate before and after Restructuring in Case
Study Communities, States, and the Nation:
Table 6: Percentage Change in Housing Price Index (HPI) Compared with
the Third Quarter of the Previous Year for the Years before, during,
and after Restructuring in the Metropolitan Areas of the Case Study
Communities and States:
Figures:
Figure 1: GM Operating Income and Worldwide Sales, 2005 through 2010:
Figure 2: GM Share Price for November 18, 2010, through April 26,
2011, and the Pre-and Post-IPO GM Share Price Needed to Fully Recoup
Treasury's Investment:
Figure 3: GM and Chrysler Plants Closed or Idled in 2008-2010
Restructuring:
Abbreviations:
AIFP: Automobile Industry Financing Program:
CBO: Congressional Budget Office:
EESA: Emergency Economic Stabilization Act of 2008:
EPA: Environmental Protection Agency:
GDP: gross national product:
GM: General Motors:
HPI: Housing Price Index:
IPO: initial public offering:
SEC: Securities and Exchange Commission:
TARP: Troubled Asset Relief Program:
UAW: United Automobile, Aerospace and Agricultural Implement Workers
of America:
VEBA: Voluntary Employee Beneficiary Association:
WIA: Workforce Investment Act:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
May 10, 2011:
Congressional Committees:
In late 2008 and early 2009, the Department of the Treasury (Treasury)
provided unprecedented support to two of the nation's three largest
auto manufacturers--General Motors (GM) and Chrysler--after
deteriorating economic conditions resulted in a dramatic decline in
auto sales and significant financial losses to these companies.
[Footnote 1] Through the Automotive Industry Financing Program (AIFP)
under the Troubled Asset Relief Program (TARP), Treasury committed $62
billion to help GM and Chrysler continue operating while restructuring
into more viable companies.[Footnote 2] As we previously reported, the
companies' restructuring efforts addressed some of their key
challenges, including reducing their reported debt and labor costs,
consolidating production, and rationalizing their dealership networks.
[Footnote 3] While Treasury has begun to recoup its investment in
these companies--most notably, through GM's initial public offering
(IPO) in November 2010--more than $34 billion of Treasury's assistance
to GM and Chrysler remains to be recovered.
As GM and Chrysler restructured, many communities that relied heavily
on these companies and their suppliers for employment and economic
investment faced plant closures and workforce reductions, among other
effects, while facing already precarious economic conditions.
Anticipating the possible effects of the companies' restructuring, in
June 2009, the Administration created the White House Council on
Automotive Communities and Workers (Council)--made up of
representatives from over 20 federal agencies and councils--to
coordinate a federal response to issues affecting communities that
rely on GM, Chrysler, or other auto companies and suppliers and
demonstrate the Administration's commitment to providing these
communities with support in recovering from changes in the auto
industry. The staff for the Council is housed within the Department of
Labor's Office of Recovery of Auto Communities and Workers (Auto
Recovery Office).
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 the effect of restructuring
on communities that rely on the auto industry.[Footnote 4] This report
will explore: (1) how restructuring with federal assistance has
affected GM's and Chrysler's reported financial condition; (2) steps
that Treasury has taken to ensure that the disposition of its
investments in GM and Chrysler is designed and timed to protect
taxpayers' interests and the risks that remain in recouping Treasury's
investments; and (3) the effects of GM's and Chrysler's restructuring
on communities that rely on the auto industry as their economic base
and the assistance that the Council and the Auto Recovery Office
provided to mitigate those effects.
To determine how restructuring with federal assistance has affected
GM's and Chrysler's financial condition, we reviewed the companies'
audited and unaudited financial statements filed with the Securities
and Exchange Commission (SEC), selected documents from their
bankruptcy proceedings, and company-provided data. We interviewed
representatives of the companies and industry analysts and experts. To
identify the steps that Treasury has taken to ensure that the
disposition of its investments in GM and Chrysler is designed and
timed to protect taxpayers' interests and the risks that remain in
recouping Treasury's investments, we reviewed available documents from
Treasury related to its oversight of and plans to divest itself from
its auto company investments, including Treasury's press releases and
guidance. We interviewed officials from Treasury's Office of Financial
Stability--the office created to administer TARP--about their
continuing efforts to monitor and divest the government's financial
interests in the auto companies. We also interviewed officials with
Lazard Frères & Co. LLC (Lazard), Treasury's financial adviser for its
auto company investments, to discuss the analyses and support Lazard
provided on the disposition of Treasury's investments in GM and
Chrysler. We also reviewed analysis prepared by Lazard for Treasury as
the department prepared for GM's IPO.
To examine the effects of GM's and Chrysler's restructuring on
communities that rely on the auto industry as their economic base, we
used data from the Council, Brookings Institution, GM, and Chrysler to
select six case study communities in which a GM or Chrysler plant was
closed or idled between 2008 and 2010 and the auto industry employment
base was more than twice the national average. Our case study
communities include (1) Detroit, Michigan; (2) Flint, Michigan; (3)
Dayton/Moraine, Ohio; (4) Mansfield, Ohio; (5) Wilmington, Delaware;
and (6) Nashville/Spring Hill, Tennessee.[Footnote 5] To identify the
assistance provided by the Council to these communities to help
mitigate the effects of restructuring, we reviewed the executive order
establishing the Council and the Council's 2010 annual report. We
interviewed officials from the Council and each case study community,
including the city mayor's office and economic development, chamber of
commerce, and community college officials. To assess the reliability
of GM's and Chrysler's financial information, as well as the Bureau of
Labor Statistics' unemployment data and the Federal Housing and
Finance Agency's housing price index data, we (1) reviewed existing
documentation related to the data sources and (2) tested for missing
data, outliers, and obvious errors in the data. We determined that the
data were sufficiently reliable for the purposes of our report.
We conducted this performance audit from May 2010 to May 2011 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:
TARP Assistance for Restructuring GM and Chrysler:
Through AIFP under TARP, Treasury committed $62 billion to GM ($49.5
billion) and Chrysler ($12.5 billion) to support the companies during
their restructurings as they attempted to return to profitability.
[Footnote 6] As a condition of receiving this federal assistance, the
companies were required to submit plans to Treasury that would, among
other things, identify how the companies intended to achieve and
sustain long-term financial viability. These plans established targets
for addressing some of the companies' key challenges to achieving
viability, including reducing debt, reducing numbers of brands and
models, rationalizing dealership networks, and reducing production
costs and capacity. 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 under a sale pursuant to Section
363 of the bankruptcy code. After the respective sales in June 2009
and July 2009, the new Chrysler and new GM began operating with
substantially less debt and with streamlined operations.[Footnote 7]
The bankruptcy courts signed orders approving old Chrysler's plan of
liquidation on April 23, 2010, and old GM's amended bankruptcy plan on
March 29, 2011, and the companies' assets and liabilities were
transferred to liquidating trusts.
In exchange for Treasury's financial assistance, Treasury received
60.8 percent common equity and $2.1 billion of preferred shares in new
GM, 9.85 percent equity in new Chrysler, and $11.8 billion in debt
obligations between the companies.[Footnote 8] These funds, along with
loans from the Canadian government and concessions from nearly every
stakeholder, including the companies' primary labor union--the
International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America (UAW)--were intended to give the
companies time to restructure to improve their competitiveness and
long-term viability.
Treasury's Stewardship of Its Ownership Stake in GM and Chrysler:
Treasury's equity in GM and Chrysler gives Treasury an ownership stake
in both companies. The Administration has stated that the government
is a "reluctant shareholder" in GM and Chrysler, but that it would be
irresponsible to "[give] away the equity stake to which taxpayers were
rightly entitled." In July 2009, Treasury outlined guiding principles
for its involvement in the auto industry, including:
* exiting its investments as soon as practicable;
* maximizing the return on its investment;
* improving the strength and viability of GM and Chrysler; and:
* managing its ownership stake in a hands-off, commercial manner,
including voting its shares only on core governance issues, such as
the selection of a company's board of directors and major corporate
events or transactions.[Footnote 9]
Treasury has an internal working group within the Office of Financial
Stability--referred to as the auto team--to oversee AIFP, including
Treasury's investment in GM and Chrysler. The auto team monitors the
companies' performance, including reviewing the companies' progress
against their restructuring plans and analyzing financial and market
indicators to determine options for divesting Treasury's investments.
We previously reported that Treasury should have a plan for ending its
financial involvement in GM and Chrysler that would indicate how it
would both sell its equity and ensure adequate repayment for the
financial assistance it provided[Footnote 10]. In November 2009, we
recommended improvements to Treasury's approach for monitoring and
divesting its investment in GM and Chrysler, including retaining
expertise to advise Treasury on the sale and oversight of its equity,
communicating to Congress its plans to assess and monitor the
companies' performance, and developing criteria for evaluating the
optimal method and timing for divesting the government's ownership
stake in GM and Chrysler.[Footnote 11] We discuss the status of these
recommendations later in the report.
White House Council on Automotive Communities and Workers:
As part of its efforts to help communities affected by changes in the
auto industry, in early 2009, the President designated a Director of
Recovery for Auto Communities and Workers, and the Department of Labor
established the Auto Recovery Office, headed by the director, to focus
on the economic recovery of auto communities and workers. In June
2009, the President issued an executive order establishing the Council
to "establish a coordinated Federal response to issues that
particularly impact automotive communities and workers and to ensure
that Federal programs and policies address and take into account these
concerns."[Footnote 12] The Secretary of Labor and the Director of the
National Economic Council and Assistant to the President for Economic
Policy co-chair the Council, which is composed of over 20 members,
including the heads of all domestic cabinet agencies and key White
House offices.[Footnote 13] As established in the executive order, the
executive director of the Auto Recovery Office also serves as the
executive director of the Council and coordinates the Council's
activities.
The Council's functions, as outlined in the executive order, are to:
* provide leadership and coordinate the development of policies and
programs across executive departments and agencies to ensure a
coordinated federal response to issues that have a distinct impact on
automotive communities and workers,
* advise the President on the effects of pending legislation and
executive branch policy proposals on auto communities and workers,
* provide recommendations to the President on changes to federal
policies and programs to address issues of special importance to
automotive communities and workers, and:
* help ensure that officials across the executive branch advance the
President's agenda for auto communities.
The Auto Recovery Office, funded through the Department of Labor,
serves as the working staff for the Council. The office works directly
with state and local officials in affected communities to help them
receive federal support through existing federal programs to improve
the communities' economic condition. The office's budget--$2.35
million in fiscal year 2010 and $2.42 million and $2.36 million
requested for fiscal years 2011 and 2012, respectively--covers Council
staff salaries and benefits and a contract for a report on issues
related to auto communities.[Footnote 14] Under the executive order,
the Council is set to expire on June 23, 2011, unless extended by the
President.
Federal Assistance Allowed GM and Chrysler to Restructure Their Costs
and Improve Their Financial Condition:
Federal Assistance Enabled GM and Chrysler to Restructure and Reduce
Costs through Bankruptcy:
As we previously reported, substantial government assistance allowed
GM and Chrysler to restructure their balance sheets and obligations
through the bankruptcy code and tackle key challenges to achieving
viability. In December 2008, the chief executive officers of GM and
Chrysler testified before Congress that, without federal assistance,
their companies would likely run out of the cash needed to continue
operating, which could have resulted in a disorderly liquidation. With
federal assistance, the companies avoided these outcomes, and,
although bankruptcies can be drawn-out processes that take years to
complete, both old GM and old Chrysler entered bankruptcy and
completed sales of their assets to new GM and new Chrysler within
about a month. Without federal assistance from Treasury, the companies
may not have been able to finance their restructuring and may have had
to liquidate.
As tables 1 and 2 show, through restructuring, GM and Chrysler
reported lower fixed costs and capacities by reducing their numbers of
factories, employees, and dealerships. In addition, GM eliminated a
substantial amount of its long-term debt and reduced the number of
vehicle brands and models it sells. As table 1 shows, GM identified
targets for these operational metrics in its restructuring plan, and
as of December 31, 2010, reported that it had met its brand and model
targets along with significantly reducing its debt. In addition, GM
reported making progress toward meeting its targets for number of
plants and U.S. employees, set for 2012 and 2014, respectively. GM
officials said that the company did not meet its restructuring target
for the number of dealers because of decisions--made by the company or
resulting from statutorily mandated arbitration--to reinstate some of
the dealerships originally selected in the plan for closure.[Footnote
15]
Table 1: GM's Employees, Plants, Dealers, Brands, Models, and Debt As
of Year End for 2007, 2008, and 2010 and Related Restructuring Targets:
GM: U.S. employees[B];
2007: 109,859;
2008: 91,176;
2010: 76,562;
Restructuring targets[A]: 63,000 in 2014.
GM: U.S. plants;
2007: 51;
2008: 47;
2010: 40;
Restructuring targets[A]: 31 in 2012.
GM: U.S. dealers;
2007: 6,776;
2008: 6,246;
2010: 4,458;
Restructuring targets[A]: 3,605 in 2010.
GM: U.S. brands;
2007: 8;
2008: 8;
2010: 4;
Restructuring targets[A]: 4 in 2010.
GM: U.S. models;
2007: 49;
2008: 48;
2010: 34;
Restructuring targets[A]: 34 in 2010.
GM: Long-and short-term debt;
2007: $39.4 billion;
2008: $45.3 billion;
2010: $4.6 billion;
Restructuring targets[A]: [C].
Source: GM SEC filings and viability plan and company-provided data.
Note: GM dramatically reduced production while in bankruptcy in the
summer of 2009, therefore, data for 2009 are not comparable to data
for previous or subsequent years and are not included in this table.
Also, the debt amounts do not include pension or other postretirement
benefit liabilities.
[A] According to GM, these restructuring targets are as of May 31,
2009.
[B] U.S. employee numbers are approximate.
[C] GM's restructuring plan includes a $14.9 billion target for
secured and unsecured debt in 2010, but GM does not report comparable
debt numbers in its financial statements.
[End of table]
Chrysler identified changes in two operational metrics--brands and
models--and established select financial targets, including a debt
reduction target in its November 4, 2009, restructuring plan. In 2009,
Chrysler increased the number of brands from three to four by dividing
the Dodge/Ram brand into two separate brands--Dodge and Ram. The
company's reported debt, however, has increased because the company
issued debt to independent health care trusts, resulting in a
reduction of other liabilities on its balance sheet related to post-
employment health care benefits. Chrysler reduced its numbers of U.S.
plants, dealerships, and employees (see table 2).
Table 2: Chrysler's Employees, Plants, Dealers, Brands, Models, and
Debt, 2007, 2008, and 2010 and Available Restructuring Targets:
Chrysler: U.S. employees[B];
2007: 55,100;
2008: 36,500;
2010: 34,200;
Restructuring targets[A]: Not established.
Chrysler: U.S. plants;
2007: 23;
2008: 21;
2010: 17;
Restructuring targets[A]: Not established.
Chrysler: U.S. dealers;
2007: 3,585;
2008: 3,298;
2010: 2,311;
Restructuring targets[A]: Not established.
Chrysler: Brands;
2007: 3;
2008: 3;
2010: 4;
Restructuring targets[A]: 4 in 2010.
Chrysler: Models;
2007: 28;
2008: 27;
2010: 23;
Restructuring targets[A]: 24 in 2010.
Chrysler: Industrial debt[C];
2007: $8.2 billion;
2008: $11.3 billion;
2010: $13.1 billion[D];
Restructuring targets[A]: $8 billion in 2014.
Source: Chrysler.
Note: Chrysler reduced production while in bankruptcy in the spring of
2009; therefore, data for 2009 are not comparable to data for previous
or subsequent years and are not included in this table.
[A] According to Chrysler officials, the company did not establish non-
financial targets in its November 4, 2009, restructuring plan so the
brand and model numbers included in that plan do not represent
restructuring targets for the company.
[B] U.S. employee numbers are approximate and as of the end of the
year.
[C] Chrysler reports its industrial debt, which includes only the
liabilities related to its automotive business and excludes its Gold
Key Lease self-liquidating debt.
[D] As of December 31, 2010, the largest components of Chrysler's debt
were its loans from Treasury, the Canadian governments, and the
Voluntary Employee Beneficiary Association (VEBA) trust, which was
established to provide for Chrysler retiree health benefits under an
agreement with the UAW.
[End of table]
Through Restructuring, Both GM and Chrysler Have Improved Their
Reported Financial Condition:
As company officials and auto industry analysts pointed out, the key
result of restructuring was that the companies reduced their fixed
costs levels, allowing them to be profitable at much lower sales
levels than before, thereby decreasing their "break even" levels. For
example, in the third quarter of 2007, GM indicated that it needed to
sell 3.9 million vehicles in the United States annually (assuming a 25
percent share of the total 15.5 million U.S. vehicle sales market) in
order to break even. Now, after restructuring, GM indicates that it
needs to sell roughly half as many vehicles in the United States--
around 2 million annually--in order to cover its fixed costs. As noted
in its November 4, 2009, business plan, Chrysler, at that time, had to
ship roughly 1.65 million vehicles worldwide annually to break even on
its operating income. Chrysler's reported worldwide shipments reached
1.6 million vehicles in 2010.[Footnote 16] According to Chrysler, the
company has since reduced its operating break even to roughly 1.5
million vehicles worldwide (assuming a U.S. vehicle sales market level
between 10 million to 11 million vehicles) due to operating
efficiencies and other cost reduction actions.
These reductions in the break-even level have been particularly
important, as total reported auto sales in the United States in 2010
were around 11.8 million--down from 13.5 million in 2008, just before
the economic recession pushed sales down to 10.6 million in 2009.
Assuming that the companies maintain this competitive cost structure,
they are positioned to be profitable at any U.S. industry sales market
above their reported break-even levels--between 10.5 million and 11
million in total industry sales for GM[Footnote 17] and between 10
million and 11 million in total industry sales for Chrysler--assuming
that the companies maintain their current market share. GM officials
told us that lowering GM's U.S. break-even point has been one of the
most significant outcomes of restructuring because it allows the
company to break even at or near the "bottom of the cycle." IHS Global
Insight, a private-sector firm that provides economic and financial
forecasts and industry analysis, estimates that total U.S. vehicle
sales will rebound to 13.3 million in 2011 and 16 million in 2013,
which would be above the companies' break-even points.
Since reducing their costs through restructuring, GM and Chrysler have
reported dramatically improving their financial performance. As table
3 shows, both companies reported improvements in their net income,
operating income, and cash flow metrics between 2008 and 2010. As
table 3 shows, GM reported a net income of about $4.7 billion in 2010,
which is the company's first annual profit since 2004. GM also
reported a Chrysler reported a modified operating income of $763
million in 2010, up from a modified operating loss of about $3 billion
in 2008 prior to restructuring.[Footnote 18] Chrysler's net losses
generally declined in 2010--from $197 million in the first quarter of
2010 to $172 million in the second quarter and down to $84 million in
the third quarter. But in the fourth quarter of 2010, its reported
losses increased to $199 million. According to Chrysler officials, the
company continued to report net losses in 2010 primarily due to the
approximately $1.3 billion in interest charges on its debt. Chrysler
set a net income target of $0.2 billion to $0.5 billion in 2011, and
in the first quarter of 2011, reported a net income of $116 million--
its first quarterly net profit since the new company began operations
in 2009.
Table 3: Changes in GM's and Chrysler's Net Income, Operating Income,
and Cash Flow:
GM: Net income (loss) to common stockholders;
2007: ($38.54 billion);
2008: ($30.94 billion);
2010: $4.67 billion.
GM: Operating income (loss);
2007: ($4.31 billion);
2008: ($21.23 billion);
2010: $5.08 billion.
GM: Operating cash flow;
2007: $7.73 billion;
2008: ($12.07 billion);
2010: $6.78 billion.
Chrysler: Net income (loss);
2007: Not available[A];
2008: ($16.8 billion)[B];
2010: ($0.65 billion).
Chrysler: Modified operating income (loss)[C];
2007: Not available;
2008: ($3.0 billion);
2010: $0.76 billion.
Chrysler: Operating cash flow;
2007: Not available;
2008: ($5.3 billion);
2010: $4.2 billion.
Source: GM and Chrysler SEC filings.
Note: We did not include 2009 data because new GM and new Chrysler
began operating in the summer of 2009. Consequently, 2009 annual data
are not comparable to data for other years.
[A] Chrysler officials noted that the company's 2007 financial data
are not meaningful because Daimler sold Chrysler to Cerberus in that
year, resulting in purchase accounting adjustments.
[B] According to Chrysler officials, the net loss for year-end 2008
includes impairment charges for goodwill and brand name intangible
assets of $10.4 billion and restructuring charges of $1.3 billion.
[C] Chrysler uses modified operating income (loss), a non-GAAP
financial measure to monitor operating results. Chrysler notes that
this financial measure may not be comparable to other similarly titled
measures of other companies, such as GM.
[End of table]
Figure 1 illustrates that GM has improved its reported operating
income despite a decline in its worldwide sales. Specifically, while
GM's reported worldwide sales dropped from roughly 9.2 million in 2005
to 8.4 million in 2010, GM's operating income increased during this
period--from a $16 billion loss in 2005 and a $21 billion loss in 2008
before restructuring and then to a profit of roughly $5 billion in
2010. Since, according to Chrysler officials, 2007 data are not
meaningful because of the change in ownership, we are not able to
provide a similar historical trend and comparison for Chrysler.
Figure 1: GM Operating Income and Worldwide Sales, 2005 through 2010:
[Refer to PDF for image: combined vertical bar and line graph]
Year: 2005;
Operating income or loss: -$16.04 billion;
GM worldwide sales: 9.2 million.
Year: 2006;
Operating income or loss: -$5.82 billion;
GM worldwide sales: 9.1 million.
Year: 2007;
Operating income or loss: -$4.31 billion;
GM worldwide sales: 9.4 million.
Year: 2008;
Operating income or loss: -$21.23 billion;
GM worldwide sales: 8.4 million.
Year: 2009;
Operating income or loss: [Empty];
GM worldwide sales: [Empty].
Year: 2010[A];
Operating income or loss: $5 billion;
GM worldwide sales: 8.4 million.
Source: GM SEC filings.
[A] As previously noted, GM dramatically reduced production in the
summer of 2009; therefore, data for 2009 are not comparable to data
for previous or subsequent years and are not included in this figure.
[End of figure]
Further Improvement in the Companies' Financial Condition Will Depend
on Their Ability to Continue to Contain Costs While Mitigating
Challenges Affecting Vehicle Demand:
While GM and Chrysler have taken steps to improve their financial
condition, they face additional challenges that could affect their
future profitability. Both companies must work to manage challenges
affecting their costs, such as funding pension obligations and pending
labor negotiations, and vehicle demand, such as the fragility of the
economy and fuel price volatility.
Cost Containment Will Depend on the Extent to Which the Companies Can
Fund Pension Plans, Reduce Debt, and Negotiate Favorable Labor
Contracts in 2011:
* Funding pension obligations and reducing U.S. government debt: GM
and Chrysler are working to fund their pension plans and reduce their
debt levels. As of December 31, 2010, GM reported that its U.S.
pension plans were underfunded (i.e., the value of plan assets was
less than the value of plan liabilities) by $12.4 billion, down from
$17.1 billion at the end of 2009. This reduction is to some extent the
result of GM's voluntary contribution of $4 billion in cash to its
defined benefit pension plans in December 2010. Additionally, in
January 2011, GM contributed approximately $2 billion in common stock
to the plans, and GM's former chief financial officer publicly stated
that the contribution was part of GM's goal to fully fund the pension
plans and minimize debt. We previously reported that GM has large
"credit balances" based on contributions made in prior years that may
be used to offset contributions that may otherwise be required.
[Footnote 19] While projections of funding requirements are inherently
sensitive to underlying assumptions, GM currently projects that
required contributions will amount to no more than $3.5 billion
through 2016. Thus, while the company's recent, voluntary
contributions may help reduce a portion of the underfunding among its
plans, the plans may continue to be underfunded for several years or
more unless, among other things, GM makes additional voluntary
contributions or the plans' asset performance improves. Additionally,
company executives told us that they are working to try to reduce the
company's debt and rely on cash generated from its business to fund
capital expenditures. For example, in April 2010, the company repaid
its loan from Treasury, and in January 2011, GM withdrew its
application for a $14.4 billion loan through the Department of
Energy's Advanced Technology Vehicles Manufacturing Loan Program.
[Footnote 20] In a press release, the company stated that this
decision was based on its confidence in its overall progress and
performance and was consistent with its goal of carrying minimal debt
on its balance sheet.
As of December 31, 2010, Chrysler reported that its worldwide defined
benefit pension plans were underfunded by approximately $4 billion,
and the company had not committed to making additional, voluntary
contributions to its plans above the minimum amounts required by law.
[Footnote 21] We previously reported that Chrysler, like GM, has
large, available credit balances to offset contributions that may
otherwise be required for some of its defined benefit pension plans.
In its most recent annual financial statement, Chrysler reported that
it expects to use credit balances such that no cash contributions are
projected to be required in 2011. Chrysler did not report dollar
projections of its future contribution requirements beyond 2011.
However, we previously reported that as of February 2010, Chrysler
expected required contributions to increase significantly in 2013 and
would need to make large contributions to its pension plans--about
$3.4 billion between 2009 and 2015--to meet minimum-funding
requirements. The first principal payment on Chrysler's $5 billion
debt to Treasury is scheduled for December 2011, although it had made
about $638 million in interest payments, as of March 31, 2011.
[Footnote 22] However, on April 28, 2011, the company announced that
it planned to repay this loan during the second quarter of 2011.
Chrysler officials reported that this debt, as well as that to the UAW
Voluntary Employee Beneficiary Association (VEBA)--the entity to which
GM and Chrysler transferred their hourly retiree healthcare
obligations--and other financial obligations, could affect the
company's financial performance in the future.
* Negotiating favorable labor costs: As previously mentioned, GM and
Chrysler significantly reduced their reported labor costs by
restructuring, but their ability to maintain these reductions will be
challenged in upcoming labor negotiations. Since 2008, the companies
have reported lowering their labor costs, in part, by reducing the
size of their workforces and making more efficient use of their
workforces by, for instance, closing plants and running additional
shifts at existing plants, thus increasing the production capacity for
some of their plants. These labor cost reductions may be difficult to
maintain, however, as the companies' contracts with their primary U.S.
union, the UAW, are set to expire in September 2011 and negotiation on
the next contracts will soon begin. The UAW made significant
concessions during restructuring, such as agreeing to reductions in
compensation for U.S. workers to levels paid by foreign automakers
like Honda, Nissan, and Toyota to their U.S. workers, as well as the
cancellation of cost-of-living adjustments for current workers.
Industry experts we spoke with noted that the UAW could attempt to
regain some of these concessions in the 2011 negotiations, and the
UAW's president has issued press releases stating that UAW members
should share in the companies' newfound financial improvements.
[Footnote 23] Because of its improved financial condition in 2010, GM
reported that it provided its hourly employees with profit-sharing
payments averaging about $4,300 per hourly employee, based on the
profit sharing plan negotiated with its unions. Chrysler, in
recognition of the performance and results achieved in 2010 by its
hourly employees in the United States and Canada, reported issuing a
performance payment in the amount of $750 per hourly employee.
Vehicle Demand Will Depend on the Overall Health of the Economy, Fuel
Prices, New Product Launches, and Retail Sales:
* Economic improvement: Consumer purchases of new cars are highly
correlated with the overall health of the economy, with consumers
purchasing fewer vehicles during economic downturns. During the recent
recession, total industry light vehicle sales dropped precipitously
from around 16 million in the United States in late 2007 to fewer than
10.6 million in 2009, according to Bureau of Economic Analysis data.
However, as the economy has begun to recover, U.S. sales have risen,
reaching 11.8 million in 2010. The Congressional Budget Office (CBO)
projects the gross domestic product (GDP) will grow about 3.7 percent
and 4.4 percent year over year for 2011 and 2012 (in nominal dollars).
Though these projections are positive, the pace of the economic
recovery--and, consequently, improvements in vehicles sales--is not
yet clear.
* Fuel price volatility: GM and Chrysler continue to rely heavily on
trucks for their profitability. These vehicles are more profitable per
unit but because they generally have lower fuel economy than smaller
vehicles, their popularity among consumers can be affected by fuel
prices. According to the Energy Information Administration, retail
gasoline prices increased 22 percent from February 2010 to February
2011, and an increase in fuel prices such as the one in the first half
of 2008 could depress demand, and therefore sales, for these larger
vehicles. Both companies are working to launch smaller, more fuel-
efficient cars such as the Chevy Cruze for GM and the Fiat 500 for
Chrysler, but it will take time before sales of the companies' product
mix overall are less susceptible to higher fuel prices.
* Product launches: The effective launch of new and refreshed products
is important to attracting consumers and increasing sales and market
share. Both companies have launched or plan to launch new products
this year and next in the United States. GM has launched the Chevy
Volt, which, according to GM, is the industry's first mass-produced
extended range electric vehicle, and the Chevy Cruze, its newest entry
into the compact car market. In 2011, GM officials reported that the
company plans to launch the Chevrolet Sonic and the Buick Verano--new
entries into the subcompact and compact car market. Chrysler launched
production of 16 new and refreshed products in 2010, including the new
Jeep Grand Cherokee, Dodge Durango and Charger, and the new Fiat 500,
a "mini" car that is distributed through Chrysler's North American
dealership network. Industry analysts we spoke with noted that GM and
Chrysler need to overcome negative perceptions of their brands and
quality that have persisted for some consumers, despite the companies'
improvements in quality.[Footnote 24] Both companies will need to
continue to improve the public's overall perception of them as they
market their vehicles to consumers. Chrysler's ability to improve the
public's perception of its products will depend, in part, on its
relationship with Fiat. As part of its reorganization, Chrysler
arranged an alliance with Fiat, whereby Fiat contributed intellectual
property and management services to Chrysler in exchange for 20
percent of Chrysler's equity. As outlined in Chrysler's amended
operating agreement, Fiat can increase its ownership in Chrysler an
additional 15 percent, to 35 percent, in three tranches of 5 percent
each in exchange for meeting three performance metrics--manufacturing
state-of-the-art, next-generation engines at a U.S. Chrysler facility;
introducing a vehicle produced at a Chrysler factory in the United
States that performs at 40 miles per gallon; and providing Chrysler
with a distribution network in numerous foreign jurisdictions. In
January 2011, Fiat achieved the first performance metric when it
announced that Chrysler would begin production of a 1.4-liter engine
based on Fiat's Fully Integrated Robotized Engine (FIRE) technology in
Dundee, Michigan, increasing its ownership from 20 percent to 25
percent. In April 2011, Fiat further raised its ownership to 30
percent by achieving its second performance metric when it provided
Chrysler with a distribution network in Europe and Latin America,
Chrysler achieved sale revenues of $1.5 billion outside of North
America, Chrysler and Fiat pooled their vehicle fleets in Europe for
carbon dioxide emissions ratings, and Fiat agreed to compensate
Chrysler for use of Chrysler technology outside of North America.
* Increasing retail sales: In recent years, GM and Chrysler have
reported selling over 25 percent of their vehicles to entities such as
rental car companies for their company fleets ("fleet sales") even
though the companies recognize that selling to individual consumers
("retail sales") generally yields a higher profit margin. For example,
in 2010, roughly 30 percent of GM's vehicle sales and 36 percent of
Chrysler's were fleet sales, primarily to rental car companies.
[Footnote 25] Rental cars typically end up on the used car market much
sooner than cars sold to retail customers, which increases the supply
of these vehicles and depresses the sale price for new vehicles. In
order for GM and Chrysler to be successful, it will be important for
them to sell cars that retail consumers want to purchase so that the
companies do not have to rely as heavily on selling large numbers of
fleet vehicles at discounted prices.[Footnote 26]
In addition to these challenges, GM's overseas operations--which have
become increasingly important to the company's profitability--could
pose additional challenges. In 2010, GM reported that, through its
joint ventures in China, it had the largest market share of any
manufacturer in China in 2010, and for the first time in the company's
history, GM's vehicle sales in China exceeded its vehicle sales in the
United States. However, increased competition in the Chinese market
could affect GM's sales and revenue. GM faces increased competition in
China as even more companies enter the market, in addition to the
numerous large and small automakers already competing in the market.
In comparison to its Chinese operations, GM reported that its European
operations are currently operating at a net loss and require
restructuring to become profitable. GM sells vehicles in Western and
Central Europe under the Chevrolet, Opel, and Vauxhall brands. To
reduce costs and increase profitability, GM is restructuring the Opel
and Vauxhall brands brand by consolidating its manufacturing capacity
and reducing labor costs.[Footnote 27] According to the company, this
restructuring will cost $4.2 billion.
Treasury's Timing of Its Exit from GM and Chrysler and Return on
Investment Will Depend on How It Balances Its Competing Goals:
Treasury Has Recouped $24 Billion of Its Investments in GM and
Chrysler through GM's IPO and Other Payments:
As table 4 shows, Treasury has recouped about $24 billion through GM's
IPO, GM's purchase of Treasury's preferred stock, and loan repayments
from GM and Chrysler. The majority of these repayments are from GM,
and in particular, GM's IPO. In total, Treasury sold over 412 million
of its shares, representing 45.2 percent of its total shares, for
which it received $13.5 billion in net proceeds. By selling these
shares, Treasury decreased its ownership stake in GM from 60.8 percent
to 33.3 percent and helped to reduce the outstanding balance of its
investment in GM to about $27 billion.[Footnote 28] As of April 22,
2011, Chrysler had not made any principal payments on its $5 billion
debt to Treasury--with the first payment not due until December 2011--
but Treasury received a $1.9 billion loan repayment as part of a
settlement on one of the loans that it extended to finance old
Chrysler.[Footnote 29] Treasury's current equity stake in the company
is 8.6 percent--down from the original 9.85 percent because, as
previously discussed, Fiat increased its ownership stake by achieving
two of its three performance-related targets, thereby diluting the
other members' overall equity, including Treasury's. On April 21,
2011, Fiat announced that it will exercise its option to acquire an
incremental 16 percent fully diluted equity interest in Chrysler,
conditioned upon the full repayment of Chrysler's debt to Treasury and
the Canadian government and termination of all lending commitments
under each respective loan agreement. On April 28, 2011, Chrysler
announced that it intends to repay its debt to the U.S. and Canadian
governments during the second quarter of 2011 from proceeds of a new
term loan facility and a debt offering along with the proceeds from
Fiat's payment for the additional equity.
Table 4: Status of AIFP Assistance to GM and Chrysler, as of April 28,
2011:
Company: GM;
Total committed: $49.5 billion;
Repayments and write-offs:
* April 2010: $6.7 billion loan repaid[B];
* November and December 2010: $13.5 billion in IPO proceeds[C];
* December 2010: $2.1 billion paid for Treasury's preferred stock;
Total repayment[A]: $22.5 billion;
Percent of investment repaid: 45%;
Outstanding balance: $27.0 billion.
Company: Chrysler;
Total committed: 12.5 billion[D];
Repayments and write-offs:
* May 2010: $1.9 billion loan repayment received and $1.6 billion
written off the loan's face value as part of old Chrysler's settlement
agreement with Treasury;
Total repayment[A]: 1.9 billion;
Percent of investment repaid: 19%;
Outstanding balance: 7.3 billion[E].
Company: Total;
Total committed: $62 billion;
Total repayment[A]: $24.4 billion;
Percent of investment repaid: 41%;
Outstanding balance: $34.3 billion[F].
Source: GAO analysis of Treasury data.
Note: Totals may not add up because of rounding.
[A] The repayment amounts do not include interest and dividends
received from these investments, which totaled $1.3 million, as of
February 28, 2011.
[B] GM made this payment using funds that remained in an escrow
account that was created for the company through the restructuring
process in the summer of 2009. According to Treasury officials, the
funds in this account came from a portion of the proceeds of a loan
made by both Treasury and the Canadian government.
[C] On November 23, 2010, Treasury received $11.7 billion from selling
over 358 million shares of common stock in the initial sale, and
subsequently, on December 2, 2010, it received $1.8 billion for
approximately 54 million shares of common stock when the IPO
underwriters exercised the overallotment option on November, 26, 2010.
An overallotment option is an agreement between an issuer and its
underwriters granting the underwriters the option to purchase and then
resell additional shares to the investing public. Usually the
overallotment option is exercised by the underwriters if the demand
before and after pricing is strong.
[D] This amount includes $2.1 billion in undrawn commitments on
Chrysler's $7.1 billion loan.
[E] Since Treasury wrote off $1.6 billion from its loan to Chrysler,
this amount is subtracted from the outstanding balance for Chrysler.
This outstanding balance is also increased by $0.3 billion in
capitalized interest.
[F] Once Chrysler repays its loans to Treasury, the outstanding
balance for Treasury's investment in Chrysler is reduced to $2.2
billion, and the total outstanding balance for Treasury's investment
in both companies is reduced to $29.2 billion.
[End of table]
Treasury Has Taken Steps to Protect the Taxpayer's Interest in
Divesting from GM:
In preparation for participating in GM's IPO, Treasury hired an
adviser to provide analysis and support on the disposition of its
investment, approved the IPO underwriter selection and determined the
related fees, and published IPO guidance. These actions align with
some of our previous recommendations to Treasury on managing and
divesting itself of its investments in GM and Chrysler.[Footnote 30]
Specifically, Treasury took the following actions:
* Hired Lazard to provide support in divesting the government's
interest in GM: We previously recommended that Treasury obtain the
expertise needed to adequately monitor and divest the government's
interests in GM and Chrysler. In May 2010, Treasury hired Lazard to
serve as an adviser on the disposition of Treasury's investment in GM.
Lazard's support to Treasury included participating in due diligence
sessions, working with the underwriters to understand potential
investor demand and price, and analyzing estimates of GM's valuation
and implied share price ranges. Lazard officials noted that much of
their analysis and review for Treasury focused on understanding the
forecasts, accounting assumptions, and sensitivities underlying GM's
business plan and determining whether the company was appropriately
valued in advance of the IPO. For example, Lazard assessed key drivers
of profitability in GM's preliminary business plan, including the
company's expected revenue growth in its international markets and the
company's liquidity, debt levels, and pension obligations compared to
its competitors.
* Approved the underwriter selection and related fees. As noted in
Treasury's June 2010 guidance, GM would select the lead underwriters,
subject to approval by Treasury, and Treasury would determine the
underwriters' fees. According to Lazard officials, they provided
support to Treasury to help Treasury determine the right number of
underwriters, their compensation, and how to use them. The final
underwriting agreement included 35 underwriters consisting of both
large and small firms. Treasury negotiated an underwriting fee of 0.75
percent, which is significantly less than the 2 to 3 percent fee
normally charged for an IPO of comparable size.
* Published guidance on Treasury's participation in the GM IPO. We
previously recommended that Treasury develop criteria for evaluating
the optimal method and timing for divesting the government's ownership
stakes in GM and Chrysler. In June 2010, Treasury issued guidance on
its participation in the IPO. This guidance explained that the timing
of the IPO would be left to GM and would depend on market conditions
and other factors and that Treasury would decide whether and at what
level to participate in the offering. In line with our recommendation,
in September 2010, Treasury issued additional guidance on requiring GM
and the underwriters to use their "commercial best efforts" to provide
access to all investors. Treasury officials noted that guidance was
issued to give the market confidence that Treasury planned to follow
an orderly process for exiting the company, consistent with its
guidance.
Treasury officials emphasized that Treasury would determine whether to
offer shares and the amount of shares in GM's IPO, but that the timing
for the IPO was GM's decision. Nevertheless, Treasury and GM officials
noted that the timing of GM's IPO was primarily driven by the
following factors.
* Window of opportunity: GM and Treasury officials noted that the
window of opportunity for holding an IPO was limited for a number of
reasons, including the holiday season late in the year. Treasury
officials noted that GM first began discussing a potential IPO with
Treasury in April 2010. According to Treasury and GM officials, in
early discussions, November was identified as the time frame for
holding an IPO before the holiday season, which typically sees low-
volume trading and is therefore not a good time to launch an IPO.
* Positive financial results and investor demand for auto industry
shares: GM showed positive financial results in the first 3 quarters
of 2010, despite historically low industry sales, and the stock market
was trending positively, including positive trends in shares for Ford
Motor Company. Treasury officials noted that there was demand for
investing in the auto industry in the fall and that GM was expecting
its fourth quarter 2010 results to be weaker than in previous
quarters. According to an industry expert, scheduling the IPO after
those results were published could have potentially lowered investor
demand, since companies generally want to demonstrate positive trends
when going into an IPO. In advance of the IPO, GM disclosed that, due
to having a different production mix, new vehicles launch costs (in
particular, the Chevrolet Cruze and Volt) and higher engineering
expenses for future products, the company expected to generate
positive earnings in the fourth quarter of 2010, but at a
significantly lower level than that of each of the first 3 quarters.
* Potential effect of new shares offered by old GM bondholders: Under
old GM's bankruptcy plan, bondholders (unsecured creditors) of old GM
are entitled to receive 10 percent of new GM's issued common shares
and warrants that are exercisable for additional common stock. These
shares will be distributed to old GM bondholders pursuant to the plan
of reorganization approved by the bankruptcy court. Treasury and GM
officials noted that they were anticipating the issuance of common
shares of GM to old GM bondholders sometime in early 2011.[Footnote
31] Once these bondholders receive their shares, they could start
trading the shares immediately, potentially affecting pricing of an
IPO. Therefore, there was interest in holding the IPO before shares
were issued to these bondholders.
Treasury's Participation in GM's IPO Highlights Treasury's Competing
Goals as Shareholder and Government Agency:
Treasury's participation in GM's IPO reflects the ongoing challenge of
its competing goals as a shareholder and government agency. As we have
previously reported, 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
potentially competing. Treasury officials said that they worked to
balance a number of factors--including price, the potential
participation of other shareholders, and Treasury's goal to exit its
investment as soon as practicable--in determining how many shares to
offer in GM's IPO. Treasury officials said that they strive to balance
these goals, but do not have a strict formula for doing so; in the
end, the decision on Treasury's level of participation in GM's IPO was
a judgment call. In particular, Treasury's auto team recommended to
the Secretary of the Treasury and the Acting Assistant Secretary for
Financial Stability the number of Treasury shares to offer in the IPO,
but the Secretary made the final decision on how many of Treasury's
shares to offer in the IPO.
Additionally, since GM and Chrysler began operating as new companies,
Treasury has stated that it has taken a "hands-off" approach to
managing the companies, meaning that it does not interfere with their
day-to-day business decisions. Treasury developed this approach as a
means to reassure the market of the government's limited intervention
in the companies. Confirming this approach, Treasury officials did not
comment on company operating risks identified in preparation for GM's
IPO because Treasury did not want to opine on the company's issues or
how to address them. According to GM officials, government involvement
in GM was among the key issues raised by potential investors during
the company's road show presentations before the IPO. GM officials
confirmed that Treasury acted like a typical large shareholder
throughout the IPO process and has not interfered in company decisions.
However, Treasury's involvement in certain aspects of GM's IPO
illustrates the difficulties of balancing its goals of maximizing
taxpayer return and exiting as quickly as practicable. As the
following illustrates, Treasury, as a government entity, had to juggle
sometimes competing interests that a typical, large shareholder (i.e.,
nongovernmental) would not normally confront.
* Share price: GM officials noted that Treasury, as a seller, was
particularly interested in maximizing the IPO share price and avoiding
a significant increase in the share price immediately following the
IPO.[Footnote 32] A significant increase in the post-IPO share price
could suggest that the IPO share price was too low--that is, the
company could have offered the shares at a higher price. According to
Treasury officials, Treasury participated in a number of discussions
about the share price before the IPO and worked to maximize the share
price without eroding demand for the shares. According to GM
officials, Treasury focused on ensuring that the price would generate
sufficient demand during the IPO, but not lead to a significant
increase or "pop" in price in the following days. Such an increase
could have exposed Treasury to criticism that it had "left money on
the table"--that is, it did not secure adequate value for its shares.
However, in the month following the IPO, GM's shares traded within
roughly $1 of the IPO share price, with the average share price around
$34.03, or 3 percent above the IPO price. According to Treasury
officials, the post-IPO share price performance demonstrates that the
IPO was appropriately priced to maximize the initial return.
* Number of Treasury shares offered: Although Treasury could have
postponed the sale of its shares, waiting for a potentially higher
share price, Treasury officials said that they stand behind their
participation in GM's IPO and the number of shares that Treasury
offered for several reasons. First, Treasury officials said that it
was important to signal to the market that the government intended to
exit its investment. Although Treasury officials noted that they did
not particularly emphasize bringing Treasury's ownership stake below
50 percent through the IPO, they pointed out that Treasury did not
have to offer many shares to bring its ownership stake under this
threshold. Second, Treasury wanted to capitalize on the high level of
investor interest in the auto industry that developed throughout 2010
and avoid uncertain market conditions going into 2011. For example,
share prices for Ford Motor Company rose almost 50 percent from the
end of August 2010 through November 17, 2010--the day of GM's IPO.
Third, as previously noted, Treasury expressed concern that old GM
bondholders could potentially disrupt the pricing process if those
shareholders gained control of their shares before an IPO, leading to
a dilution of Treasury's shares.
* IPO guidance: Treasury's IPO guidance reflects Treasury's unique
position as a U.S. government shareholder of a private company. For
example, Treasury's September 2010 guidance stressed focusing on North
American investors and not allowing a single investor or group of
investors to purchase a disproportionate share of GM shares,
reflecting the agency's awareness of potential criticisms about the
types of investors that had access to GM's IPO. According to Treasury
and Lazard officials, Lazard compared GM's IPO with that of other
large IPOs, including the potential investor mix, as information on
the prospective demand for participation in GM's IPO became available.
[Footnote 33] According to Lazard officials, this analysis showed that
the investor mix of retail and other investors for GM's IPO was
comparable to that of other large IPOs. According to the former senior
adviser of Treasury's auto team and other Treasury officials, GM and
the underwriters adhered to Treasury's guidance on the investor mix
for GM's IPO.[Footnote 34]
Treasury's unique position as a government shareholder also makes it
difficult for Treasury to be transparent about its strategy for
divesting from GM, including the actions Treasury took in preparation
for GM's IPO. This position also makes it challenging to assess
Treasury's oversight of and investment in GM and Chrysler. Although
Treasury has outlined goals to guide the management of its investments
in the companies, it did not publicly divulge details on the
development of its strategy for GM's IPO, such as how many shares it
considered offering in the IPO, given that these details could have
affected market conditions for the IPO and potentially affected the
government's ability to recover its investment. To achieve the maximum
return for taxpayers, Treasury officials said they do not plan to
disclose more information than is necessary about their strategy for
divesting Treasury's remaining ownership interests. As we have
previously reported, Treasury should seek to be as transparent as
possible about its strategy, including identifying what information
can and should be made public and indicating how it plans to balance
concerns about the public's "need to know" against those about
disclosing proprietary information in a competitive market. However,
while we recognize the need to strike a balance between the value of
transparency and the need to avoid compromising the competitive
positions for GM and Chrysler, to the extent possible, transparency
about Treasury's strategy is important to ensure accountability and
assure taxpayers that their investment is being appropriately
safeguarded.
The Timing of Treasury's Exit from GM and Chrysler and the Extent to
Which Treasury Will Recoup Its Investment Depends on How Treasury
Balances Its Competing Goals:
Treasury continues to monitor GM's and Chrysler's performance, and
according to Treasury officials, they have developed a strategy for
divesting its remaining interest in GM and all of its interest in
Chrysler and will disclose their strategy at the appropriate time. As
outlined in the underwriting agreement, Treasury is not allowed to
release any new GM shares into the market until 180 days after the
IPO, or May 2011 at the earliest. GM officials noted that it will be
up to the shareholders, including Treasury, to determine when, how
many, and at what price to offer their remaining shares. By contrast,
GM determined the timing of GM's IPO, while the share price range was
established through discussions among GM, the underwriters, Treasury,
and other shareholders. According to a senior Treasury official, until
the 180-day lock-up period expires, it is premature for Treasury to
set a timetable to divest its remaining interest in GM, given that its
strategy will depend on business and market conditions, among other
factors, at that time. However, Treasury has different options to
consider in divesting its remaining interest in GM, such as whether to
hold another offering or sell shares over a period of time--as it did
when it sold its Citigroup, Inc., common stock.[Footnote 35] According
to Treasury officials, they are determining the appropriate strategy
for disposing of Treasury's remaining investment in GM and noted that
such a strategy would be affected by market conditions, among other
things, after the 180-day lock-up period ends.
Following GM's IPO, Wall Street analysts were generally positive about
the prospects of GM's value in the following 6 to 18 months, but GM's
share price will have to increase over 60 percent from the IPO share
price to an average of over $54 for Treasury to fully recoup its
investment in GM. Such an increase is not predicted to occur over the
next year. We estimated prior to the IPO, that Treasury would need an
average share price of about $45 to fully recoup its investment in GM,
whereas Treasury received $33 per share in the IPO.[Footnote 36] After
taking into account Treasury's proceeds from the IPO, we estimate that
Treasury will need an average share price of about $54 across all
offerings for its remaining GM shares. As figure 2 shows, as of April
26, 2011, GM's share price has traded well below that range--from
about $30 to $39. Although Wall Street analysts are predicting
positive trends, the share price target estimates that these analysts
made after the company's fourth quarter 2010 earnings announcement--
showing a $37 to $50 share price target over roughly a 6-to 18-month
period--are well below the price that Treasury would need to fully
recoup its investment. Additionally, for each share sold below $54,
the threshold for the remaining investment increases, thus suggesting
that Treasury will have difficulty fully recouping its investment if
it plans to exit its remaining interest in GM within the next year.
Figure 2: GM Share Price for November 18, 2010, through April 26,
2011, and the Pre-and Post-IPO GM Share Price Needed to Fully Recoup
Treasury's Investment:
[Refer to PDF for image: multiple line graph]
Date: 11/18/2010;
GM closing share price: $34.19;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 11/25/2010;
GM closing share price: $33.48;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 12/2/2010;
GM closing share price: $34.68;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 12/9/2010;
GM closing share price: $33.74;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 12/16/2010;
GM closing share price: $33.61;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 12/23/2010;
GM closing share price: $34.81;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 12/30/2010;
GM closing share price: $36.82;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 1/6/2011;
GM closing share price: $38.9;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 1/13/2011;
GM closing share price: $38.27;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 1/20/2011;
GM closing share price: $37.18;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 1/27/2011;
GM closing share price: $38.67;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 2/3/2011;
GM closing share price: $36.06;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 2/10/2011;
GM closing share price: $35.88;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 2/17/2011;
GM closing share price: $36.37;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 2/24/2011;
GM closing share price: $33.02;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 3/3/2011;
GM closing share price: $33.03;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 3/10/2011;
GM closing share price: $31.42;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 3/17/2011;
GM closing share price: $31.44;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 3/24/2011;
GM closing share price: $31.39;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 3/31/2011;
GM closing share price: $31.03;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 4/7/2011;
GM closing share price: $32.31;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 4/14/2011;
GM closing share price: $30.58;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Date: 4/26/2011;
GM closing share price: $31.27;
Pre-IPO share price to fully recoup Treasury’s investment: $45;
Post-IPO share price to fully recoup Treasury’s investment: $54.
Source: Datastream and GAO analysis.
[End of figure]
Treasury's options for divesting its stake in Chrysler differ from
those it had for GM, given the type and amount of Treasury's
investment in Chrysler. Chrysler officials confirmed that the company
is considering a potential IPO, but not before the second half of
2011, subject to approval from the board of directors, and depending
on economic and equity market conditions, and that the company was
looking to establish a performance track record that is longer than a
couple of quarters in order to gain credibility and build trust in the
marketplace. Because the majority of Treasury's investment in Chrysler
was through loans, Treasury officials noted that Treasury's exit
strategy for Chrysler depends on Chrysler's repayment of its loans
from Treasury. As previously noted, Chrysler recently announced that
it intends to repay its loans to Treasury during the second quarter of
2011, subject to market and other conditions. The government's equity
stake in Chrysler is much smaller than in GM--roughly 9 percent versus
about 61 percent and 33 percent before and after GM's IPO,
respectively. According to Treasury officials, Treasury could
potentially sell its equity stake to a third party, depending on
market conditions. Treasury's exit strategy for Chrysler could also be
complicated by the other Chrysler shareholders--Fiat, UAW VEBA, and
the Canadian government--since these shareholders may have different
interests and incentives, as well as more influence over the IPO
process than Treasury.[Footnote 37] For example, as previously noted,
Fiat announced that once Chrysler's loans from Treasury and the
Canadian government are repaid, the company is exercising its option
to acquire up to an additional 16 percent fully diluted equity
interest in Chrysler, which, along with achieving the third
performance target, would increase its ownership in Chrysler to over
50 percent and could give Fiat more influence over the timing of
Chrysler's IPO.
Additionally, Chrysler's equity will have to grow appreciably in order
to reach the value at which Treasury would recover the entire equity
investment in the company. We estimated that Chrysler would need a
market capitalization of about $41 billion for Treasury to earn enough
on the sale of its equity to fully recoup its investment in Chrysler.
[Footnote 38] 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, its estimated value was $37
billion.[Footnote 39] Also, as the Congressional Oversight Panel
reported, for Treasury to recover all of the funds that it has
invested in both old and new Chrysler, all of Chrysler's loans would
have to be repaid and Treasury's equity stake would have to yield at
least $3.5 billion to make up for the losses to date.[Footnote 40]
In January 2011, Treasury modified its agreement with Lazard to retain
its support in disposing of Treasury's remaining investments in GM and
Chrysler. As we previously reported, it is critical for Treasury to
employ or contract with individuals with experience managing and
selling equity in private companies to provide advice and expertise on
the oversight and sale of Treasury's equity investments. According to
Treasury and Lazard officials, Lazard analyzed the expected
distribution of shares to old GM bondholders, given that this
distribution of shares may result in changes to the market for GM's
shares. Lazard also continues to provide Treasury with information on
the financial performance for GM, Chrysler, and Ford, and overall
stock market performance. According to Treasury and Lazard officials,
Lazard is examining various disposition strategies relating to
Treasury's stake in Chrysler, including an analysis of Chrysler's
ability to repay debt under various scenarios, such as accessing debt
markets or a Department of Energy loan to support its advanced
technology vehicle program, among other options.
Treasury's divestment strategy for its GM and Chrysler investments--
including the timing of Treasury's exits and the extent to which it
will recoup its investments--will depend on how Treasury balances its
goals of maximizing taxpayer return and exiting as soon as
practicable. For example, GM's share price will have to grow
significantly for Treasury to approach fully recouping its investment
in the near term. Otherwise, Treasury will have to temper any desire
to exit as quickly as possible with the need to maintain its ownership
interest long enough for the company to demonstrate sufficient
financial progress. However, Treasury's goal of exiting its
investments as soon as practicable could lead it to choose a speedier
exit at the expense of a fuller recovery of its investments. We
previously reported that Treasury would have to address the inherent
trade-offs between these goals in developing its exit strategy.
[Footnote 41] Treasury officials noted that they continue to balance
these goals as they develop their divestment strategies for GM and
Chrysler as market conditions and other events unfold. Given the
fluidity of conditions and the number of factors that will need to be
considered when determining how and when to divest, it will be
important for Treasury to analyze and consider all options as it
weighs its goals of maximizing taxpayers' return and exiting its
investments as soon as practicable.
Council Established to Help Auto Communities Has Not Demonstrated the
Results of Its Efforts:
For Auto Communities, Plant Closures Added to Employment, Housing, and
Environmental Challenges:
Though restructuring allowed GM and Chrysler to remain in business,
and therefore benefited communities in which the companies retained
manufacturing plants and employees, communities in which plants were
idled or closed experienced economic challenges in addition to those
they already faced. As previously mentioned, GM and Chrysler
restructured their costs partly by closing manufacturing plants, and
between 2008 and 2010, the companies closed or halted production at 22
plants (16 GM plants and 6 Chrysler plants), 15 of which were located
in the Midwest (see figure 3).
Figure 3: GM and Chrysler Plants Closed or Idled in 2008-2010
Restructuring:
[Refer to PDF for image: illustrated map of the Eastern U.S.]
GM plant closures and idlings:
Massena, New York, Castings (2009);
Flint North, Michigan, Engine (2008);
Flint North, Michigan, Components (Powertrain) (2010);
Grand Rapids, Michigan, Stamping (2009);
Janesville, Wisconsin, Assembly (2008);
Pontiac, Michigan, Assembly (2009);
Livonia, Michigan, Powertrain (2010);
Parma, Ohio, Components (Powertrain) (2010);
Willow Run, Michigan, Powertrain (2010);
Wilmington, Delaware, Assembly (2009);
Pittsburgh, Pennsylvania, Stamping (2008);
Fredericksburg, Virginia, Components (Powertrain) (2010);
Mansfield, Ohio, Stamping (2010);
Moraine, Ohio, Assembly (2008);
Spring Hill, Tennessee, Assembly (2009)[A];
Doraville, Georgia, Assembly and Stamping (2008).
Chrysler plant closures and idlings:
Kenosha, Wisconsin, Engine Plant (2010);
Newark, Delaware, Assembly (2008);
St. Louis North, Missouri, Assembly (2009);
St. Louis South, Missouri, Assembly (2008);
Conner Avenue, Michigan, Assembly Plant (2010)[A];
Twinsburg, Ohio, Stamping (2010).
Sources: GAO presentation of GM and Chrysler data and Map Resources
(map).
[A] Chrysler's Conner Avenue Assembly Plant in Detroit, Michigan, GM's
Spring Hill Assembly Plant in Spring Hill, Tennessee, and GM's
Janesville Assembly Plan in Janesville, Wisconsin, are currently
idled. Production at these facilities has stopped, but they are not
officially closed.
[End of figure]
Of the six communities we visited where GM or Chrysler closed or idled
a plant as part of its recent restructuring, five had unemployment
rates prior to the closure that were already higher than the national
average or the average rates in their respective states, and
unemployment in all six worsened in the years following the closure
(see table 5).[Footnote 42] One of the worst-hit communities was
Detroit, where the reported unemployment rate increased nearly 80
percent from October 2007 through October 2010, reaching 13.3 percent--
exceeding Michigan's average of 12 percent and the national average of
9.0 percent over the same time period. Nashville was the only
community we visited where the reported unemployment rate was lower
than both the state average and the national average during this
period. This could be because Spring Hill, the town where a GM plant
is located, is only a part of the Nashville metropolitan area, and
other parts of the metropolitan area fared better, such as Franklin,
Tennessee, where Nissan's North American headquarters is located.
Spring Hill officials reported that suppliers to non-GM auto
companies, such as Nissan, are fairly healthy. Nevertheless,
unemployment in the Nashville metropolitan area increased as well,
nearly doubling over this period.
Table 5: Unemployment Rate before and after Restructuring in Case
Study Communities, States, and the Nation:
State/community: Delaware;
Rate in October 2007: 3.5%;
Rate in October 2010: 8.1%;
Percent change between October 2007 and October 2010: 131.4%.
State/community: Delaware; Wilmington;
Rate in October 2007: 3.7%;
Rate in October 2010: 8.4%;
Percent change between October 2007 and October 2010: 127.0%.
State/community: Michigan;
Rate in October 2007: 6.6%;
Rate in October 2010: 12.0%;
Percent change between October 2007 and October 2010: 81.8%.
State/community: Michigan; Detroit;
Rate in October 2007: 7.5%;
Rate in October 2010: 13.3%;
Percent change between October 2007 and October 2010: 77.3%.
State/community: Michigan; Flint;
Rate in October 2007: 7.4%;
Rate in October 2010: 13.0%;
Percent change between October 2007 and October 2010: 75.7%.
State/community: Ohio;
Rate in October 2007: 5.2%;
Rate in October 2010: 9.5%;
Percent change between October 2007 and October 2010: 82.7%.
State/community: Ohio; Dayton/Moraine;
Rate in October 2007: 5.5%;
Rate in October 2010: 10.4%;
Percent change between October 2007 and October 2010: 89.1%.
State/community: Ohio; Mansfield;
Rate in October 2007: 5.9%;
Rate in October 2010: 10.9%;
Percent change between October 2007 and October 2010: 84.7%.
State/community: Tennessee;
Rate in October 2007: 4.9%;
Rate in October 2010: 9.1%;
Percent change between October 2007 and October 2010: 85.7%.
State/community: Tennessee; Nashville/Spring Hill;
Rate in October 2007: 4.2%;
Rate in October 2010: 8.3%;
Percent change between October 2007 and October 2010: 97.6%.
Nation:
Rate in October 2007: 4.4%;
Rate in October 2010: 9.0%;
Percent change between October 2007 and October 2010: 104.5%.
Source: GAO analysis of Bureau of Labor Statistics data.
[End of table]
According to housing price index data from the Federal Housing Finance
Agency, housing prices also generally deteriorated in the years
following a plant closure. From October 2007 through October 2010,
housing prices in metropolitan areas of five of the six communities we
visited declined at least as fast as or faster than housing prices in
the states where the communities are located (see table 6).[Footnote
43] For instance, housing prices in the metropolitan areas around
Detroit and Flint dropped roughly twice as fast between the third
quarter of 2007 and the third quarter of 2008 as housing prices in
Michigan--a decline of 14 percent and 12 percent for the communities,
compared with a statewide decline of 6.6 percent.
Table 6: Percentage Change in Housing Price Index (HPI) Compared with
the Third Quarter of the Previous Year for the Years before, during,
and after Restructuring in the Metropolitan Areas of the Case Study
Communities and States:
Delaware;
HPI 2006-2007 Q3: 1.89%;
HPI 2007-2008 Q3: -3.51%;
HPI 2009-2010 Q3: -2.28%;
HPI 2007-2010 Q3: -10.5%.
Wilmington;
HPI 2006-2007 Q3: 1.75%;
HPI 2007-2008 Q3: -3.59%;
HPI 2009-2010 Q3: -2.77%;
HPI 2007-2010 Q3: -10.5%.
Ohio;
HPI 2006-2007 Q3: -0.65%;
HPI 2007-2008 Q3: -2.24%;
HPI 2009-2010 Q3: -0.26%;
HPI 2007-2010 Q3: -3.6%.
Mansfield;
HPI 2006-2007 Q3: -3.54%;
HPI 2007-2008 Q3: -3.78%;
HPI 2009-2010 Q3: -8.89%;
HPI 2007-2010 Q3: -11.1%.
Dayton/Moraine;
HPI 2006-2007 Q3: -0.4%;
HPI 2007-2008 Q3: -0.95%;
HPI 2009-2010 Q3: -0.99%;
HPI 2007-2010 Q3: -3.2%.
Michigan;
HPI 2006-2007 Q3: -4.34%;
HPI 2007-2008 Q3: -6.63%;
HPI 2009-2010 Q3: -2.7%;
HPI 2007-2010 Q3: -14.7%.
Detroit-Livonia-Dearborn;
HPI 2006-2007 Q3: -7.85%;
HPI 2007-2008 Q3: -13.93%;
HPI 2009-2010 Q3: -3.7%;
HPI 2007-2010 Q3: -25.2%.
Flint;
HPI 2006-2007 Q3: -6.14%;
HPI 2007-2008 Q3: -12.24%;
HPI 2009-2010 Q3: -6.8%;
HPI 2007-2010 Q3: -25.9%.
Tennessee;
HPI 2006-2007 Q3: 4.6%;
HPI 2007-2008 Q3: 0.14%;
HPI 2009-2010 Q3: -1.2%;
HPI 2007-2010 Q3: -2.0%.
Nashville/Spring Hill;
HPI 2006-2007 Q3: 5.22%;
HPI 2007-2008 Q3: -0.1%;
HPI 2009-2010 Q3: -0.84%;
HPI 2007-2010 Q3: -2.9%.
Source: GAO analysis of Federal Housing Finance Agency data.
Note: The housing price index data track the average housing prices at
the metropolitan area and may not reflect the housing prices at the
smaller constituent counties, such as auto communities, within the
metropolitan area.
[End of table]
Closing automotive plants also created properties called brownfields,
whose reuse or redevelopment may be hindered by the threat of
contamination.[Footnote 44] Brownfields present additional and unique
economic challenges for communities and, as we previously reported,
are potentially harmful to residents' heath and reduce local tax
bases.[Footnote 45] Before a closed automotive plant can be
redeveloped or used again, contamination must be assessed and a plan
for remediation or clean-up must be established, a process that can
make it more difficult for communities trying to attract new employers
into shuttered plants. Among the communities we visited, Flint
reported that it has been disproportionately affected by brownfield
issues, since it has lost four major automotive plants in the last 20
years in addition to the two that closed in the recent restructuring.
As a result, Flint has the unique challenge of cleaning up and
redeveloping more brownfields--reportedly more than 1,000 acres--than
any other community in the country.
Federal Funding Assistance Was Targeted Mainly to Unemployed Workers,
and Federal Support for Community Economic Development Has Been
Limited:
Much of the federal assistance that the communities we visited
received was reportedly targeted to individuals recently laid off from
auto plants and most officials said that it was secured without the
assistance of the Council. According to community officials, this
assistance came primarily through Department of Labor resources, such
as funding provided through the Workforce Investment Act (WIA)
Dislocated Workers Program, Trade Adjustment Assistance, and National
Emergency Grants programs.
* Dislocated Workers Program: This program provides funding for
employment and training services to help individuals find and qualify
for employment. Laid-off autoworkers can qualify as dislocated workers
because this term includes those who have been "terminated or laid off
or received notification of termination or layoff from employment as a
result of a permanent closure or substantial layoff."
* Trade Adjustment Assistance: This program helps workers who have
lost their jobs as a result of international trade.
* National Emergency Grants: These grants temporarily increase the
funding for Dislocated Worker training and employment programs at the
state and local levels by providing funding assistance in response to
large, unexpected economic events that cause significant job losses,
such as those experienced in the auto industry.
All six communities we visited reported accessing these Department of
Labor programs, which were supplemented by Recovery Act funds in 2009
and 2010.[Footnote 46] For example, Spring Hill, Tennessee, officials
reported using National Emergency Grant and other Department of Labor
funds to develop training programs for workers laid off from the
former GM plant in the area, as well as for those laid off from
companies that supplied the plant. According to a workforce training
organization in Spring Hill, officials there used WIA dollars in part
to fund a job readiness certificate program, which included training
in math and English. A community college near Detroit reported
receiving Department of Labor funds to retrain laid-off workers,
including those from automotive plants, for work in new fields, such
as defense.
In addition to receiving support for workers, community officials
noted that federal assistance is available to help with the clean-up
and redevelopment of old plants. In all six communities we visited, a
plant had closed since 2008, and the community had to address the
resulting brownfield. Two funding sources that communities identified
as providing potential assistance with the remediation and
redevelopment of brownfields are the Environmental Protection Agency's
(EPA) Brownfields Program, which provides grants for environmental
assessment, cleanup, and related job training activities, and an
approximately $772 million trust created by old GM--with TARP
assistance--in which funds will be set aside to clean up and repurpose
89 properties that were closed in GM's restructuring (see sidebar).
[Footnote 47] EPA Brownfields Program funds have been available, but
old GM trust funds only recently became available after the bankruptcy
court signed an order approving old GM's bankruptcy on March 29, 2011.
One community--Flint--reported receiving assistance through the EPA
Brownfields Program to remediate possible contamination at Buick City,
a plant that GM closed in the 1990s, prior to the recent restructuring.
Side bar:
Old GM Environmental Cleanup Trust:
[Figure: Refer to PDF for image: photograph]
Source: GAO.
[End of figure]
GM's assembly plant in Moraine, Ohio, in 2010, approximately 2 years
after GM closed it in restructuring. In the first quarter of 2011, GM
signed a sale agreement with a company to purchase the plant.
On October 2010, Motors Liquidation Corporation (old GM) reached an
agreement with the United States, 14 states, and the St. Regis Mohawk
Tribe to establish a trust to clean up and repurpose 89 properties in
the 14 states that were closed in GM’s restructuring. The Trustee, a
former Assistant Administrator for Solid Waste and Emergency Response
at EPA, will oversee the administration of the funds and work with
local communities when selling or repurposing the old GM plants. $431
million will be provided to remediate specific old GM sites in 14
states. Two-thirds of these sites are known to be contaminated with
hazardous waste. The bankruptcy plan was approved in March 2011, and
states are expected to receive the following amounts:
State: Delaware;
Expected funding from the trust and old GM: $11,728,473.
State: Illinois;
Expected funding from the trust and old GM: $5,258,489.
State: Indiana;
Expected funding from the trust and old GM: $25,174,482.
State: Kansas;
Expected funding from the trust and old GM: $4,786,321.
State: Massachusetts;
Expected funding from the trust and old GM: $2,325,836.
State: Michigan;
Expected funding from the trust and old GM: $158,698,888.
State: Missouri;
Expected funding from the trust and old GM: $1,724,806.
State: New Jersey;
Expected funding from the trust and old GM: $24,708,069.
State: New York;
Expected funding from the trust and old GM: $153,864,758.
State: Ohio;
Expected funding from the trust and old GM: $39,394,990.
State: Pennsylvania;
Expected funding from the trust and old GM: $3,299,231.
State: Virginia;
Expected funding from the trust and old GM: $25,922.
State: Wisconsin;
Expected funding from the trust and old GM: $210,857.
Total site-specific payments:
Expected funding from the trust and old GM: $431,201,122.
Source: White House press release.
[End of table]
[End of side bar]
Council Provided Communities with Information on Funding and Contacts
but Has Not Maintained Data to Demonstrate the Results of Its Efforts:
To date, the Council has focused primarily on portions of two of the
four functions established for it in the executive order--coordinating
the efforts and support of federal agencies to ensure a coordinated
federal response to issues that affect auto communities and workers.
These functions have been carried out primarily by the Department of
Labor's Auto Recovery Office, which provides staff for the Council
(referred to as the Council staff). To date, the Council has not made
recommendations to the President, and it is not clear to what extent
staff have advised the President on legislation or policy proposals.
As outlined in the executive order, the Council is set to expire on
June 23, 2011, unless extended by the President, but the Department of
Labor's fiscal year 2012 budget request includes funding for the Auto
Recovery Office's efforts to target strategies and resources for
revitalizing jobs for auto workers and communities, though it does not
state any specific plans for the office's activities.
As part of their efforts to ensure a coordinated federal response, the
Council members and staff visited auto communities around the country
and connected them to the appropriate federal agencies and resources.
For example, from May 2009 through June 2010, the Council held
"listening sessions" in 11 communities that had been affected by the
decline in the auto industry.[Footnote 48] Council staff, including
the former director, were often accompanied at these sessions by
cabinet-level Council members such as the EPA Administrator and the
Secretary of Labor, whose agencies offer programs with the potential
to assist auto communities. Additionally, in each community, Council
staff met with local officials to understand the key challenges facing
the community and to inform them of and connect them to an appropriate
federal program or individual. The Council reported that the problems
they heard about most often involved jobs, land use, and difficulties
maintaining services in the face of budget shortfalls. A specific
Council staff member was assigned to each auto community and state to
represent the Council and to serve as the point person for each auto
community. These staff members responded to their assigned
communities' needs, such as by providing technical assistance or
identifying contacts, and continued to connect the communities to
resources and individuals as appropriate. In May 2010, the Council
released its first annual report outlining what it had done to help
auto communities affected by restructuring.[Footnote 49] At the same
time, to coincide with the release of this report, the Council co-
sponsored a summit titled "Auto Communities and the Next Economy:
Partnerships in Innovation" with the Brookings Institution
Metropolitan Policy Program, the Department of Labor, and the Funders'
Network for Smart Growth and Livable Communities on the challenges
facing auto communities.
Community officials we interviewed said that the Council brought
federal attention to auto communities, but four of the six communities
noted that they did not receive additional federal assistance, as they
might have expected. For instance, Detroit officials reported that,
although the Council's efforts highlighted the challenges facing auto
communities and improved relationships between city and federal
entities, these efforts did not result in additional funding for the
city. Officials in Dayton and Nashville/Spring Hill agreed, stating
that the Council's focus on them resulted in increased federal
attention but not increased federal assistance to their regions. These
comments suggest that some community officials may have believed that
the Council had the ability to provide funding. However, officials in
two of the six communities did attribute their receipt of federal
funds to the Council. In particular, officials in Flint told us that
the Council was instrumental in helping them qualify for a $6.7
million grant from the Federal Emergency Management Agency to hire or
maintain firefighters, and an official in Dayton/Moraine reported that
they received a National Emergency Grant a few weeks after the Council
visited the community.
Though the Council was not established to provide funding directly to
communities and does not have a program budget to do so, its press
releases and annual report may have led some communities to believe
that they would receive financial assistance from the Council. For
example, the Council has published 100 press releases on its Web site
announcing Administration activities that may have assisted automotive
communities, including federal funds awarded to auto communities, such
as Recovery Act and Department of Energy grants. One of these press
releases was an announcement that a "landmark federal framework to
speed the cleanup of and redevelopment of shuttered auto facilities"
would make more than $800 million available for environmental cleanup
at old GM sites. However, the Council was not responsible for securing
these funds. Rather, the available funds were part of the TARP funding
provided by Treasury in 2009 for expenses related to the liquidation
of old GM. More specifically, as part of GM's bankruptcy settlement,
the budget for winding down old GM, which the bankruptcy court
approved in 2009, included approximately $773 million for
environmental cleanup. This budget is part of old GM's bankruptcy
plan, which was recently confirmed by the bankruptcy court. The
Council's May 2010 annual report includes similar announcements and
states that the Council, along with its member agencies, "marshaled
Recovery Act and other federal funds" for auto communities in areas
such as high-speed rail, health care services, and education, totaling
billions of dollars. The report also states that the Council "cuts red
tape," suggesting it can eliminate certain bureaucratic hurdles for
communities, though when we interviewed Council staff they said that
communities had to go through the same application and qualification
processes as other communities.
The Council's May 2010 annual report cites various federal programs
that have helped auto communities, but neither the Council nor its
staff in the Auto Recovery Office systematically tracks, measures, or
assesses the Council's assistance to the communities. For example,
they have not kept an inventory of assistance that it has provided or
funding it has helped communities secure, analyzed the inventory for
trends, and published the results of their analysis. Consequently, it
is difficult to identify the assistance the Council and its staff have
provided. Council staff stated that they keep informal records of in-
person meetings with auto communities, such as the 2009 and 2010
listening sessions, but do not routinely review or categorize these
records. Furthermore, the Council itself provides no resources or
direct assistance to the affected communities, but according to
Council staff, the Council acts as a liaison to coordinate the
responses of the individual member agencies that retain full
responsibility and authority for their activities and, though the
Council has published many press releases and an annual report,
Council staff told us they do not want to take credit for any federal
assistance awarded to auto communities and are reluctant to track or
measure the outcomes of the Council's assistance as something separate
and discrete. We have previously reported that federal agencies
engaged in collaborative efforts--like the multi-agency response to
auto community issues coordinated by the Council--need to create the
means to monitor and evaluate their efforts so that they can identify
areas for improvement.[Footnote 50] However, without tracking or
measuring the assistance it has provided to communities or
systematically reviewing this information to identify common concerns
or themes, the Council is neither monitoring nor evaluating its
efforts and will have difficulty identifying areas for improvement and
corresponding recommendations.
While the Council, through its staff, has worked to identify the needs
of auto communities and put community officials in touch with federal
contacts and programs--efforts that could generally be described as
coordinating the efforts and support of federal agencies on auto
community issues--the Council has not fulfilled the remaining two
primary functions outlined in the executive order. Specifically, it
has not advised the President on the effects of legislative and policy
proposals on auto communities or provided recommendations to the
President on changes to federal policies and programs that could
benefit auto communities. According to Council staff, they have not
yet seen trends in concerns or needs across auto communities that
could be addressed with a uniform policy or program change, but that
some common needs may emerge as their work continues. Furthermore, in
their view, changes to individual specific programs are most
appropriately addressed by the responsible agencies. In addition, they
noted that they are unlikely to make recommendations to the President
while the Council is without an executive director. The executive
director resigned in August 2010, and, as of April 2011, the President
had not appointed anyone to fill this position. The Council has
contracted with the Center for Automotive Research to produce a report
on lessons learned from communities in which a major auto facility has
closed during the last 30 years. It is possible that recommendations,
such as successful strategies for redeveloping closed plants or for
identifying the most effective types of federal assistance, could
emerge from this report, which is due to the Council by August 2011.
Conclusions:
With the help of billions of federal dollars, GM and Chrysler have
reported improved financial conditions, earning profits for the first
time in several years. As the companies' financial condition has
improved, Treasury has taken steps to recoup the federal assistance
provided, most notably recouping more than $13 billion in GM's IPO.
Nevertheless, Treasury still has roughly $34 billion invested in GM
and Chrysler and thus will have to continue to monitor the companies
and the markets to identify possible divestment strategies that strike
the right balance between Treasury's competing goals of maximizing
taxpayers' return and exiting as soon as practicable. We previously
recommended that Treasury develop criteria for identifying the optimal
method and time for divesting the government's ownership, and we were
pleased to see that Treasury took some key steps toward doing this for
the initial GM divestment, such as issuing guidance on GM's IPO and
hiring Lazard to conduct company, industry, and market analysis and
generally help the department secure an appropriate price for its
shares. Now, with the majority of Treasury's total investment in the
two companies still outstanding, it is even more important that
Treasury carefully and critically identify and weigh its options,
given that industry analysts see little likelihood of GM's share price
rising high enough during this year for Treasury to fully recoup its
investment in GM. Treasury told us that it plans to develop a strategy
for further divesting its equity stakes in both auto companies in the
coming months. Because of these plans, we are not making a further
recommendation in this area, but we believe that such a strategy,
communicated to the public as transparently as possible, is important
because the decisions that Treasury makes about further divestment
will affect the extent to which the government is able to recoup its
investments.
While restructuring benefited GM and Chrysler, it created economic
challenges for communities in which the companies closed a
manufacturing plant or otherwise reduced employment. Our review of
selected economic indicators for and site visits of these communities
illustrates these challenges. While the Council and its staff within
the Department of Labor's Auto Recovery Office have tried to help auto
communities navigate these challenges by serving as a listening post
and federal liaison, the results of their efforts are unclear. As
officials from the communities we visited noted, the Council brought
attention to the plight of auto communities, but it may have created
unrealistic expectations of government assistance that led to
disappointment, particularly when no funding was provided.
Furthermore, because the Council and the Auto Recovery Office have not
tracked their assistance to auto communities or measured or assessed
the results of that assistance, it is difficult for communities, the
public, or Congress to understand what the Council or the Auto
Recovery Office have done or accomplished, as well as what value they
might have in the future. By not systematically tracking their
assistance and assessing and documenting the results, such as by
keeping an inventory of the funding they have helped auto communities
secure, analyzing the inventory for trends, and publishing the
results, the Council and the Auto Recovery Office are also missing an
opportunity to identify and share best practices, including the
methods or types of assistance that are most effective in helping auto
communities. This means that the assistance that auto communities have
received and are currently receiving may not be as effective as it
could be. Given the looming expiration date for the Council and the
Administration's interest in continuing the Auto Recovery Office as
noted by the 2012 budget request, the Department of Labor should
evaluate what the office has achieved and, equally important, what can
best be done to help auto communities. Such information is especially
important if the Council--whose executive order outlines its
functions, which are carried out by the Auto Recovery Office, and
provides a framework for interagency collaboration to assist auto
communities--is not extended. Absent this executive order, the
office's purpose and functions are neither articulated nor documented.
In addition, it is important that this information be promptly shared
with Congress so that it can be used in making future funding
decisions for the Auto Recovery Office and other federal programs that
have been used by auto communities.
Recommendation for Executive Action:
Given the absence of demonstrated results and the 2012 budget request
for the Auto Recovery Office, the Secretary of Labor, as co-chair of
the Council, should direct the Auto Recovery Office to (1) document
the office's achievements to date, including its support to the
Council and assistance provided to various auto communities; (2)
identify its functions and strategy going forward; (3) establish a
process for measuring the office's results; and (4) determine when and
how the specialized assistance provided by the office can be
transitioned to existing federal programs. This information should be
communicated to Congress as soon as possible so that it can be
considered in the fiscal year 2012 appropriations process.
Matter for Congressional Consideration:
Congress should consider not funding the Office of Recovery for Auto
Communities and Workers, as requested for in the Department of Labor's
fiscal year 2012 budget request, unless the Secretary of Labor
provides Congress with information about the results of the federal
government's assistance to auto communities to date and a plan for
carrying out the federal government's efforts in the future.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of Labor,
Treasury, and Executive Office of the President for their review and
comment.
The Department of Labor provided written comments on the draft report,
which are reprinted in appendix I. In its comments, the Department of
Labor reiterated that the Council and the Auto Recovery Office have
been able to marshal federal resources to support distressed auto
communities by making over 60 visits to these communities, engaging
congressional leaders, developing public-private partnerships between
communities and philanthropic foundations, and coordinating federal
agencies on their efforts to meet the needs expressed by these
communities. The department notes that the best measure of success of
the Council and Auto Recovery Office is evident in the numerous
federal resources awarded by the federal agencies represented on the
Council. As further evidence of the office's achievements, the
department provided a list of the communities that they visited, which
detailed the purpose of each trip and whether representatives from
other federal agencies participated, and a table listing examples of
federal resources that have been distributed to auto communities and
workers by the federal agencies that comprise the Council. While the
information on community visits provides additional detail of the
office's activities, it does not articulate the office's achievements
or results. Documenting the activities of the office is useful, but it
does not address the intent of our recommendation--that is, the
department should document, track, and assess the specific assistance
being provided by the Auto Recovery Office to distressed auto
communities, such as technical assistance, or the outcomes resulting
from this assistance, such as whether auto communities received any
additional resources as a result of the office's efforts. Similarly,
the information on federal resources provided by the department shows
the funding provided to auto communities by federal agencies--much
like what is detailed in the Council's May 2010 report--but it does
not show the extent to which the Council or the Auto Recovery Office
influenced the distribution of these funds or helped the auto
communities apply for and receive these funds. Therefore, we reiterate
the need for the Auto Recovery Office to provide Congress with more
specific information on how the office's efforts have addressed
challenges facing auto communities and to better justify the continued
investment in this targeted effort to auto communities, given the
constrained federal budget environment. The Auto Recovery Office needs
to provide Congress this information as well as it plans for the
future as soon as possible given Congress' ongoing efforts to develop
the fiscal year 2012 appropriations.
In its letter, the Department of Labor also agreed that a process
needs to be put in place to monitor the Council's and office's
progress toward fulfilling its mission and notes the challenges in
developing a set of metrics that measures activities such as
facilitation and process and that the more traditional measures of
performance-based results are being tracked by the agencies that are
responsible for administering the actual delivery of services. While
we appreciate the challenges in developing metrics for the type of
work conducted by the Council and Auto Recovery Office, it is
imperative such metrics be developed to help track and assess the
Council's and office's results. By systematically measuring its
results, the Council and office could assess their progress in meeting
the functions outlined in the executive order, and such information on
the Council's and office's results could help policymakers better
target federal resources to address challenges facing these
communities by identifying methods or types of assistance that are
most effective in helping auto communities.
Finally, the Department of Labor notes that there are currently senior-
level discussions within the Administration on the continued role of
the Council and office in the Administration's effort to support auto
communities and workers and anticipates that the Administration will
identify the office's functions and strategy going forward in the next
60 days. The letter further states that our report presupposes that
the Council and office will be eliminated in the short term and argues
that the services provided by the Auto Recovery Office can and should
continue for the foreseeable future, even absent an extension of the
executive order establishing the Council. While we do not assume that
the Council or office will be eliminated, we do believe it is
appropriate for the department to consider when and how the targeted
assistance provided by the office can be transitioned to existing
federal programs to minimize duplication of efforts between the office
and the federal agencies providing the services. Furthermore, the
potential absence of the Council makes it all the more important for
the Auto Recovery Office to articulate its future plans, including how
it will coordinate with other federal agencies to assist auto
communities, given the executive order provides a framework to
leverage interagency collaboration. The Department of Labor's written
comments also included three technical comments, which we incorporated.
Treasury generally agreed with the report's findings and provided
written comments, which are reprinted in appendix II. Treasury also
provided technical comments and clarification, which we incorporated
as appropriate. The Executive Office of the President did not provide
comments.
We also provided relevant portions of a draft of this report to GM and
Chrysler for their review and comment. GM and Chrysler provided
technical comments and clarification that we incorporated as
appropriate. We also provided representatives from the auto
communities that we visited with statements from our interviews and
made technical changes based on their comments, as appropriate.
We are sending copies of this report to the Department of Labor,
Treasury, the Executive Office of the President, Special Inspector
General for TARP, interested congressional committees and members, 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 staffs have any
questions about this report, please contact me at (202) 512-8678 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:
A. Nicole Clowers:
Acting Director:
Financial Markets and Community Investment Issues:
List of Committees:
The Honorable Daniel K. Inouye:
Chairman:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate:
The Honorable Tim Johnson:
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 Jeff Sessions:
Ranking Member:
Committee on the Budget:
United States Senate:
The Honorable Max Baucus:
Chairman:
The Honorable Orrin G. Hatch:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Hal Rogers:
Chairman:
The Honorable Norm Dicks:
Ranking Member:
Committee on Appropriations:
House of Representatives:
The Honorable Paul Ryan:
Chairman:
The Honorable Chris Van Hollen:
Ranking Member:
Committee on the Budget:
House of Representatives:
The Honorable Spencer Bachus:
Chairman:
The Honorable Barney Frank:
Ranking Member:
Committee on Financial Services:
House of Representatives:
The Honorable Dave Camp:
Chairman:
The Honorable Sander Levin:
Ranking Member:
Committee on Ways and Means:
House of Representatives:
[End of section]
Appendix I: Comments from the United States Department of Labor:
U.S. Department of Labor:
Office of Recovery for Auto Communities and Workers:
Washington, D.C. 20210:
May 3, 2011:
Ms. A. Nicole Clowers:
Acting Director, Financial Markets, and Community Investment Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Glowers:
Thank you for the opportunity to review the Government Accountability
Office's (GAO) draft report entitled "Treasury's Exit from GM and
Chrysler Highlights Competing Roles, and Results of Support to Auto
Communities Are Unclear." In general, the draft report does a good job
of understanding the role and activities of the White House Council on
Automotive Communities and Workers (the Council) and the Office of
Recovery for Auto Communities and Workers (the Office). However, there
are a few factual clarifications we wish to make, as well as respond
to the recommendations proposed by the GAO in the draft report.
Page 35 of the draft report includes a bullet on National Emergency
Grants, which are designed to respond to large, unexpected economic
events. As written, the reference to "declines in the national
economy" is too general. NEGs are not designed to subsidize Dislocated
Worker Formula Allocation funds, rather NEGs are designed to respond
to specific economic dislocation events. We request that the last line
under "National Emergency Grants" be changed to read "that cause
significant job losses, such as those experienced in the auto
industry".
Additionally, on page 38 of the draft report, reference is made to a
budget justification. The 2012 Department of Labor budget
justification does reference general activities which the Auto
Recovery Office will undertake in 2012. Page DM-26 includes the
following: "Office of Recovery Auto Communities and Workers: targets
strategies and resources for revitalizing jobs for auto workers and
the communities central to the industry." You can view this document
at [hyperlink,
http://www.dol.gov/dol/budget/2012/PDF/CBJ-2012-V3-02.pdf].
Lastly, on page 39, there is a reference made to a summit the Council
co-sponsored with the Brookings Institution in May 2010. To clarify,
this event, titled "Auto Communities and the Next Economy:
Partnerships in Innovation", was co-sponsored by four entities:
the White House Council on Automotive Communities and Workers, the
United States Department of Labor, the Funders Network for Smart
Growth and Livable Communities, and the Brookings Institution
Metropolitan Policy Program.
Turning to the specific recommendations for executive action set forth
in the draft report, we submit the following for your consideration.
GAO recommendation: Auto Recovery Office should document the office's
achievements to date, including its support to the Council and
assistance provided to various auto communities.
Even before the President signed the Executive Order creating the
Council, the primary objective for the Office was to support workers
and automotive communities as they dealt with the impact of the
economic downturn in the auto industry. Staff from the
Office, including then-Executive Director Ed Montgomery, visited
communities large and small, listening to the concerns of the
communities and their leaders, and making sure these communities had a
partner at each and every step of the way on their path towards
recovery. The Council and the Office were charged with reaching out to
the affected communities, bringing the communities and federal agency
partners together, facilitating a dialogue that would identify the
unique challenges each community faces, and act as an ombudsman for
the communities and federal partners as they collaborated on solutions
to the problems and barriers to recovery. The Office was not created
to act as a new programmatic office with its own budget or authority
to provide direct support to these communities. Rather than duplicate
the programs and services already in place, the Office was established
to provide communities with a direct link to the existing federal
agencies and resources that could best help them through the recovery
process. The intent was to highlight the needs of distressed auto
communities and to help them navigate their way to the needed support
government can provide.
As we have learned, the journey towards a recovery is long and
continues to this day, but the Council and the Office have been able
to marshal federal resources to support those communities in greatest
need of support. To that end, the Council and the Office made over 60
visits to distressed auto communities across the country, engaged with
congressional leaders, developed public-private partnerships between
communities and philanthropic foundations, and coordinated with
federal agencies on their efforts to meet the needs expressed by
distressed auto communities. In the attached spreadsheet, we have
compiled a list of the communities we visited and the purpose of the
trips.
The work of the Council and the Office was always designed to help
lift up the concerns of the distressed auto communities and the GAO
study confirms that they received reports from communities they
visited that we were successful in bringing increased federal
attention to the plight of auto communities.
The best measure of the success of the Council and the Office is
evident in the numerous federal resources awarded by the federal
agencies that comprised the Council and were a result of both the
communities' diligent efforts to apply for them, as well as the
federal agencies commitment to consider the special needs of auto
communities. Attached is a table which gives examples of federal
resources that have gone out to Auto Communities and Workers. It is
not an exhaustive list, but it illustrates the types of resources that
have been provided. It is important that we stress that our office did
not have funds at our disposal to directly respond to the communities,
and that our primary role was make sure the communities were connected
to the right agency and to facilitate the agency's response.
GAO recommendation: Auto Recovery Office should identify its functions
and strategy going forward.
In light of the success the Administration has had in its efforts to
help the auto industry turn around, it is appropriate to now review
the continued role of the Council and the Office in efforts to support
automotive communities and workers. There are currently senior level
discussions within the Administration on exactly this issue. We
anticipate that the Administration will provide an answer to this
question in the next 60 days.
GAO recommendation: Auto Recovery Office should establish a process
for measuring the office's results.
The Council and the Office were created as a demonstration of an
administration-wide commitment to provide the support needed by auto
communities and workers as they deal with the current crisis in the
short-term and work towards recovery over the longterm. They have
operated with that mission in mind since their inception. Since the
function of the Council and the Office has thus far been to act as an
ombudsman for the communities and federal partners as they
collaborated on solutions to the problems and barriers to recovery, it
may be challenging to develop a set of metrics that measures
facilitation and process. The more traditional measures of performance
based on results are being tracked by the agencies that are
responsible for administering the actual delivery of services.
However, we agree with the GAO's recommendation that a process needs
to be put in place to monitor the Council's and the Office's progress
towards fulfilling its mission. We are committed to develop such a
process.
GAO recommendation: Auto Recovery Office should determine when and how
the specialized assistance provided by the office can be transitioned
to existing federal programs.
While this recommendation by the GAO presupposes that the Council and
the Office are eliminated in the short term, it is our position that
the service provided by the Office to distressed auto communities can,
and should, continue even absent an extension of the Executive Order.
As evidenced by the GAO's recommendation, the Office provides
"specialized assistance" to these communities. The Council and the
Office were created to provide auto communities with a central point
of contact to help them navigate the various federal agencies that can
provide assistance in their recovery efforts. Absent the creation of a
specialized position in each of the key federal agencies, the Office
exists as an established resource that can effectively coordinate the
response of multiple federal agencies to multiple communities.
We acknowledge that the Office will not exist in perpetuity; we
believe that the situation facing distressed auto communities is still
acute enough to be best addressed through the existence of a
centralized, coordinated effort.
Again, thank you for the opportunity to review the draft report.
Should you or your staff have any questions concerning the statements
or requests contained herein, please do not hesitate to contact us.
Sincerely,
Signed by:
James E. McMullen:
Acting Director:
Attachments:
[End of section]
Appendix II: Comments from the Department of the Treasury:
Department Of The Treasury:
Assistant Secretary:
Washington, D.C. 20220:
April 27, 2011:
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 Department of the Treasury ("Treasury") appreciates the
opportunity to review the GAO's latest draft report on the Troubled
Asset Relief Program ("TARP"), titled "Treasury's Exit from
GM and Chrysler Highlights Competing Roles, and Results of Support to
Auto Communities Are Unclear". Treasury welcomes the GAO's
acknowledgment that Treasury's assistance enabled General Motors and
Chrysler to restructure and "tackle key challenges to achieving
viability" and that without this assistance the companies may have had
to liquidate. We also appreciate GAO's recognition that, in providing
this assistance, Treasury took important steps to protect taxpayer
interests and that Treasury has taken action consistent with many of
GAO's earlier recommendations.
We also appreciate GAO's comments regarding the principles that guide
our management of TARP investments. As we stated in our Agency
Financial Report for the fiscal year 2010, we endeavor to "protect
taxpayers and maximize overall investment returns within competing
constraints" and "dispose of investments as soon as practicable, in a
timely and orderly manner that minimizes financial market and economic
impact."
Treasury values the GAO's oversight of TARP and we look forward to
continuing this constructive dialogue.
Sincerely,
Signed by:
Timothy G. Massad:
Acting Assistant Secretary for Financial Stability:
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
A. Nicole Clowers (202) 512-8678 or clowersa@gao.gov Katherine A.
Siggerud (202) 512-2834 or siggerudk@gao.gov:
Staff Acknowledgments:
In addition to the contacts named above, Raymond Sendejas (Assistant
Director), Marcia Carlsen, Kieran Coe, Sharon Dyer, Elizabeth
Eisenstadt, Sarah Farkas, Heather Krause, Terence Lam, Henry Malone,
Matthew McDonald, Susan Michel-Smith, and SaraAnn Moessbauer made
significant 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.
[2] 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.). EESA originally authorized Treasury to purchase 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, 123 Stat. 1632 (2009),
amended EESA to reduce the maximum allowable amount of outstanding
troubled assets under EESA by almost $1.3 billion, from $700 billion
to $698.741 billion. While the Secretary of the Treasury extended the
authority provided under EESA through October 3, 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), Pub.
L. No. 111-203, 124 Stat. 1376 (2010), enacted on July 21, 2010, (1)
reduced Treasury's authority to purchase or insure troubled assets to
$475 billion and (2) prohibited Treasury from using its authority
under EESA to incur any additional obligations for a program or
initiative unless the program or initiative already had begun before
June 25, 2010.
[3] GAO, Troubled Asset Relief Program: Continued Stewardship Needed
as Treasury Develops Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM, [hyperlink,
http://www.gao.gov/products/GAO-10-151] (Washington, D.C.: Nov. 2,
2009).
[4] 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.
[5] For the purpose of this report, we consider Dayton and Moraine,
Ohio, to be one auto community given Dayton's proximity to Moraine--
the location of GM's closed assembly plant--and Nashville and Spring
Hill, Tennessee, to be one auto community given Nashville's proximity
to Spring Hill--the location of GM's idled assembly plant.
[6] The $12.5 billion committed to Chrysler includes $2.1 billion that
had not been drawn as of April 1, 2011. AIFP also provided funding to
support certain automotive finance companies, Chrysler Financial ($1.5
billion) and GMAC, Inc. (now Ally Financial, Inc.) ($16.3 billion),
which are not discussed in this report. Additionally, GM received a
$884 million loan to participate in GMAC/Ally Financial's rights
offering. Treasury exchanged this loan for a portion of GM's equity in
GMAC/Ally Financial. As a result, Treasury initially received 35.4
percent common equity interest in GMAC/Ally Financial. The GM loan was
terminated, but GM paid $9 million in interest on the loan to
participate in GMAC/Ally Financial's rights offering before the loan
was terminated. In addition, under AIFP, Treasury established two
programs--the Auto Supplier Support Program and the Warranty
Commitment Program. The Auto Supplier Support 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. Under this program, GM and Chrysler received loans,
both of which have been repaid. The Warranty Commitment 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 GM and Chrysler under this program but have been repaid in
full because both were able to continue to honor consumer warranties.
[7] General Motors Company and Chrysler Group LLC are new legal
entities that were created through the bankruptcy process to purchase
substantially all of the operating assets of the pre-organization
companies. Throughout this report, in cases where such a distinction
is important, we refer to the pre-reorganization companies as "old GM"
and "old Chrysler" and the post-reorganization companies as "GM" and
"Chrysler."
[8] The $11.8 billion in debt obligations includes $6.7 billion to GM,
$0.5 billion assumed by new Chrysler for financing extended to old
Chrysler, and $6.6 billion in loan obligations to new Chrysler, of
which $2.1 billion has not been drawn. Treasury also provided funding
that remained with the old companies--$986 million for GM and $5.4
billion for Chrysler. Treasury received a $1.9 billion repayment on
the original $4 billion loan extended to old Chrysler, wrote off $1.6
billion of this loan, and as previously noted, $0.5 billion of this
loan was assumed by new Chrysler. Treasury expects to receive limited
recoveries related to the liquidation of collateral for its old
Chrysler loan of $1.9 billion. Treasury's $986 million loan to old GM
was converted to an administrative claim. As of April 20, 2011,
Treasury received $95 million in proceeds on these loans. Treasury
retains the right to recover additional proceeds from this loan, but
any additional recovery is dependent on actual liquidation proceeds
and pending litigation.
[9] 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. These
major corporate transactions include events such as mergers, sales of
substantially all assets, and dissolutions; issuances of equity
securities that entitle shareholders to vote; and amendments to the
charter or bylaws.
[10] 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).
[11] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[12] Executive Order 13509, entitled "Establishing a White House
Council on Automotive Communities and Workers." Exec. Order No. 13509,
74 Fed. Reg. 30903 (June 23, 2009).
[13] According to the order, the White House Council members are drawn
from agencies and councils, including the Secretaries of Agriculture,
Commerce, Defense, Education, Energy, Health and Human Services,
Homeland Security, Housing and Urban Development, the Interior, Labor,
Transportation, the Treasury, and Veterans Affairs, as well as the
Administrators of the Environmental Protection Agency, General
Services Administration, and Small Business Administration; the
Directors of the Office of Management and Budget and the Domestic
Policy Council; the Chairs of the Council of Economic Advisers and
Council on Environmental Quality; the Attorney General; and the United
States Trade Representative.
[14] In fiscal years 2009 and 2010, according to the budget for the
Office of Recovery for Auto Communities and Workers, it received about
$277,000 and $130,000 of its funding from the American Recovery and
Reinvestment Act of 2009, Pub. L. No. 111-5, 123 Stat. 115 (2009).
[15] The Consolidated Appropriations Act, 2010 mandated a binding
arbitration process that terminated General Motors and Chrysler
dealers could follow if they were interested in having their franchise
agreements reinstated. See Pub. L. No. 111-117, Division C, Title VII,
§ 747, 123 Stat. 3034, 3219-3222 (2009).
[16] Chrysler does not have a publicly available prebankruptcy break-
even number for comparison.
[17] This estimate assumes that GM will have an 18 to 19 percent share
of the total market.
[18] Operating income describes a company's profit or loss from core
operations. Net income includes gains and losses from nonoperating
sources, such as interest income/loss, investment income, taxes, and
noncash, accounting charges. As noted in table 3, Chrysler uses
modified operating income (loss), a measure that generally accepted
accounting principles do not provide for to monitor operating results.
Chrysler notes that this financial measure may not be comparable to
other similarly titled measures of other companies, such as GM.
[19] Minimum funding requirements are set forth in the Employee
Retirement Income Security Act of 1974 (ERISA). Pub. L. No. 93 - 406,
88 Stat. 829 (codified as amended at 29 U.S.C. §§ 1001-1461). For more
information, see GAO, Troubled Asset Relief Program: Automaker Pension
Funding and Multiple Federal Roles Pose Challenges for the Future,
[hyperlink, http://www.gao.gov/products/GAO-10-492] (Washington, D.C.:
Apr. 6, 2010).
[20] This program was established to provide loans for retooling U.S.
factories to make vehicles and components that improve fuel economy.
Pub. L. No. 110-140, Title I, Subtitle B, § 136, 121 Stat. 1492, 1514-
1516 (2007).
[21] As part of Chrysler's bankruptcy sale transaction, Daimler agreed
to fund $600 million in three equal installments to Chrysler's U.S.
pension plans. Consistent with this agreement, Chrysler received
payments of $200 million in June 2009 and June 2010, which it
contributed to its U.S. pension plans, and is scheduled to receive the
remaining $200 million in June 2011.
[22] Of Treasury's $7.1 billion commitment to Chrysler, $2.1 billion
remains available for Chrysler to draw down. As previously noted, as
part of a settlement agreement on the $4 billion in loans that
Treasury extended to finance old Chrysler, Treasury received a $1.9
billion loan repayment and wrote off $1.6 billion of the loan and new
Chrysler assumed $0.5 billion.
[23] The amended UAW contract includes a "no strike" provision,
requiring the parties to submit to binding arbitration if no agreement
can be reached.
[24] Historically, the companies offered consumers incentives and
discounts because of these perceptions, but incentives and discounts
can also contribute to an erosion of the vehicles' value and have a
negative impact on margins realized on vehicle sales.
[25] GM's fleet sales are for the first 9 months of 2010.
[26] The recent earthquake in Japan could have an effect on all
automakers' vehicle production. On April 20, 2011, GM announced that
the company was increasingly confident that the situation in Japan
would not have a material impact on the company's full-year results.
[27] To aid in restructuring its European operations, GM entered into
negotiations with a consortium including Magna International, a
Canadian auto supplier, to sell a majority stake of its Germany-based
Opel brand. GM's Board of Directors decided not to pursue the deal and
to maintain full ownership of Opel.
[28] Treasury's equity has since been diluted to 32.04 percent because
of the shares contributed to GM's hourly and salaried pension plans in
January 2011.
[29] As previously noted, Treasury also wrote off $1.6 billion of the
loan extended to finance old Chrysler. According to Treasury, this
repayment, while less than face value, was significantly more than it
had previously estimated to recover following Chrysler's bankruptcy
and greater than the estimated valuation prepared by Keefe, Bruyette
and Woods, Treasury's adviser for this transaction.
[30] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[31] As previously noted, on March 29, 2011, the bankruptcy judge
signed an order approving old GM's amended bankruptcy plan. This plan
created four trusts, including a trust responsible for, among other
things, distributing the GM common stock and warrants owned by old GM
to those unsecured creditors whose claims are allowed. Old GM
announced that on or about April 21, 2011, it expected to begin
distributing shares of common stock and warrants to its unsecured
creditors.
[32] Initially, GM's IPO share price was expected to be between $26
and $29, but strong investor interest during the company's road show
presentations resulted in the offering being oversubscribed. According
to Treasury, Lazard and the underwriters assessed the extent to which
the IPO could support an increase in the share price without eroding
the demand. The underwriters advised that $33 was possible, and the
price was subsequently increased.
[33] Lazard had access to the underwriters' changing tally of
expressed demand from market participants, which identified the
specific investors interested in the IPO and the share price that they
were willing to pay. Treasury and Lazard officials noted that Treasury
did not have access to investor-specific information, but instead,
Treasury relied on Lazard to provide analysis on the distribution of
investors. Lazard's comparative analysis drew on previous large IPOs,
including Visa's and the Agricultural Bank of China's.
[34] The list of original investors in GM's IPO is not publicly
available.
[35] As we previously reported, Treasury received preferred stock in
Citigroup, which Treasury exchanged for common stock and trust
preferred securities. Treasury began selling its common stock in April
2010. See GAO, Financial Audit: Office of Financial Stability
(Troubled Asset Relief Program) Fiscal Years 2010 and 2009 Financial
Statements, [hyperlink, http://www.gao.gov/products/GAO-11-174]
(Washington, D.C.: Nov. 15, 2010).
[36] To calculate the share price needed for Treasury to recoup its
investment, we divided Treasury's outstanding balance for GM by the
number of Treasury's shares in GM. In both the pre-IPO and post-IPO
share price calculations, the outstanding balance reflects the total
amount disbursed to GM ($49.5 billion) less GM's $2.1 billion payment
for Treasury's preferred shares and $6.8 billion in loan repayments.
In calculating the post-IPO share price, we also subtracted the $13.5
billion in IPO proceeds from the outstanding balance and divided it by
the number of Treasury's remaining shares in GM after the IPO.
[37] As of April 2011, the ownership interests of Chrysler are the UAW
VEBA trust (59.2 percent), Fiat (30 percent), Treasury (8.6 percent),
and the Canadian government (2.2 percent).
[38] Our analysis includes all funds Treasury has provided to Chrysler
that will be repaid through a combination of debt and equity, but
excludes the $2.1 billion that has not been drawn. We include the $1.9
billion repayment from the old Chrysler settlement and assume that new
Chrysler will repay its $5 billion in debt. Additionally, the $1.6
billion write-off is included in the amount that is needed to fully
recoup Treasury's investment in Chrysler. We also based our
calculation on Treasury's current equity stake of 8.6 percent. As a
result, Treasury's equity will have to be worth its total investments
minus projected repayments of principal. 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 company 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 one remaining
performance-related target and earns an additional 5 percent equity
along with exercising its option to acquire an additional 16 percent
equity, Treasury's equity stake will be diluted to 6 percent, meaning
that Chrysler's total equity value would need to reach $58 billion for
Treasury to recoup its investment.
[39] In commenting on a draft of this report, Treasury officials noted
that Chrysler's past equity values are not comparable to today's
equity values because Chrysler has substantially restructured its
balance sheet through bankruptcy. Although we recognize the changes
Chrysler has experienced in recent years, we believe this information
provides a sense of the magnitude of growth that will be required of
Chrysler.
[40] Congressional Oversight Panel, January Oversight Report, "An
Update on TARP Support for the Domestic Automotive Industry" (Jan. 13,
2011).
[41] [hyperlink, http://www.gao.gov/products/GAO-10-151].
[42] As previously noted, for the purpose of this report, we consider
Dayton and Moraine, Ohio, to be one auto community. Moraine is
proximal to Dayton and is the community in which GM closed an assembly
plant in 2008 as part of restructuring.
[43] The housing price index data have limitations, in that they track
only the average housing prices at the metropolitan area and may not
reflect the housing prices at the smaller constituent counties, such
as auto communities, within the metropolitan areas. The housing prices
are generally determined by the supply of and demand for housing
units. To the extent that the plant closures' effect on the stock of
housing units and population varied among counties or small
communities, the housing prices would also behave differently. As a
result, averaging housing prices across the counties within a
metropolitan area could obscure the varying movement of housing prices.
[44] In 2004, GAO reported that an estimated 450,000 to 1 million
brownfield sites are abandoned or underused across the country.
[45] GAO, Brownfield Redevelopment: Stakeholders Cite Additional
Measures That Could Complement EPA's Efforts to Clean Up and Redevelop
Properties, [hyperlink, http://www.gao.gov/products/GAO-05-450T]
(Washington, D.C.: Apr. 5, 2005).
[46] Pub. L. No. 111-5, 123 Stat. 115 (2009).
[47] Of the $772 million set aside in the Motors Liquidation
Corporation ("Old GM") bankruptcy plan, $536 million was provided for
remediation with the remaining amount for administrative costs.
[48] The Council held listening sessions in Fremont, California;
Flint, Detroit, Grand Rapids, and Warren, Michigan; St. Louis,
Missouri; Dayton, Twinsburg, and Toledo, Ohio; and Janesville and
Kenosha, Wisconsin.
[49] White House, Annual Report of the White House Council on
Automotive Communities and Workers (Washington, D.C: May 2010). The
Council has not established a timeline for issuing an annual report in
2011.
[50] GAO, Results-Oriented Government: Practices That Can Help Enhance
and Sustain Collaboration among Federal Agencies, [hyperlink,
http://www.gao.gov/products/GAO-06-15] (Washington, D.C.: Oct. 21,
2005).
[End of section]
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