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Taxpayers Unlikely To Recover Full Auto Industry Investment

Panel recommends placing Chrysler, GM shares in independent trust

By James Limbach
ConsumerAffairs.com

September 09, 2009

Even before last year's financial meltdown, U.S automakers were facing severe strains. In 2008, auto sales fell to a 26-year low. By the end of the year, the long-term slump became acute, with Chrysler and General Motors unable to secure credit and facing reduced consumer demand.

Without new financing, they faced collapse -- a potentially crippling blow to the American economy that could eliminate nearly 1.1 million jobs. Facing this prospect, the Troubled Asset Relief Program (TARP) was used to provide American automotive companies with short-term financing and additional loans to finance the bankruptcy reorganizations of Chrysler and GM.

Auto industry analyst Jack Plunkett of Plunkett Research, Ltd., tells Consumer Affairs.com that he doesn't think the likelihood that taxpayers won't get all their money back from GM and Chrysler "is a big surprise at all," adding that everyone who was involved knew it was "a huge gamble and a huge risk."

Plunkett says this is a different situation from when the government bailed out Chrysler back in 1979. "The stakes are higher now," he says, adding that this latest effort "was money thrown at the companies in desperation to keep them afloat a while. I can't imagine anyone had any idea they'd be getting all their money back."

American taxpayers now own ten percent and 61 percent of the new Chrysler and GM companies respectively. Treasury's support for the automotive industry differed significantly from its assistance to the banking industry.

The bulk of the funds were available only after the companies had filed for bankruptcy, wiping out their old shareholders, cutting their labor costs, reducing their debt obligations and replacing some top management.

COP says the government's role raises serious oversight issues, particularly Treasury's conflict between competing objectives.

The Panel recommends that, to mitigate the potential conflicts and political issues inherent in owning Chrysler and GM shares, Treasury should take exceptional care to explain its decision making and provide a full, transparent picture of its actions.

The Panel also recommends that Treasury consider placing its GM and Chrysler shares in an independent trust that would be insulated from political pressure and government interference.

Plunkett says, "on the face of it, it's an excellent idea. But to put it into effect in a way that would be truly independent and unbiased I think would be surprising to me."

Given the questions about whether Treasury had the authority to use of TARP funds to aid the ailing domestic auto industry, COP recommends that Treasury provide a legal analysis justifying this decision.

The Panel found that further questions about the propriety of the bankruptcy proceedings -- accusations of illegal behavior and allegations that statutory bankruptcy priorities were overturned -- are overblown and inaccurate.

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