Troubled Asset Relief Program:

Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM

GAO-10-151: Published: Nov 2, 2009. Publicly Released: Nov 2, 2009.

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The Department of the Treasury (Treasury) provided $81.1 billion in Troubled Asset Relief Program (TARP) aid to the U.S. auto industry, including $62 billion in restructuring loans to Chrysler Group LLC (Chrysler) and General Motors Company (GM). In return, Treasury received 9.85 percent equity in Chrysler, 60.8 percent equity and $2.1 billion in preferred stock in GM, and $13.8 billion in debt obligations between the two companies. As part of Government Accountability Office's (GAO) statutory responsibilities for providing oversight of TARP, this report addresses (1) steps Chrysler and GM have taken since December 2008 to reorganize, (2) Treasury's oversight of its financial interest in the companies, and (3) considerations for Treasury in monitoring and selling its equity in the companies. GAO reviewed documents on the auto companies' restructuring and spoke with officials at Treasury, Chrysler, and GM, and individuals with expertise in finance and the auto industry.

Chrysler and GM have made changes since December 2008 to address key challenges to achieving viability, but the ultimate effect of these changes remains to be seen. The companies have eliminated a substantial amount of their long-term debt, reduced the number of brands and models of vehicles they sell, rationalized their dealership networks, and lowered production costs and capacities by reducing the number of factories and employees. It is difficult to fully assess the impact of these changes because of the short amount of time that has passed since reorganization and the low level of new vehicle sales. Moreover, Chrysler and GM are revaluing their assets and liabilities based on their reorganizations in 2009 and expect to prepare financial statements based on this effort in the coming months. Treasury does not plan to be involved in the day-to-day management of Chrysler and GM, but it plans to monitor the companies' performance. Treasury developed several principles to guide its role as a shareholder, including the commitment that although Treasury reserves the right to set up-front conditions to protect taxpayers and promote financial stability, Treasury will oversee its financial interests in a hands-off, commercial manner. The conditions that Treasury set for the companies include requiring that a portion of their vehicles be manufactured in the United States and that they report to Treasury on the use of the TARP funding provided. Treasury officials told us that they are also requiring that Chrysler and GM submit financial information on a regular basis and that they plan to meet with the companies' top management on a regular basis to discuss the companies' financial condition. Treasury should make certain that its current approach for monitoring and selling its equity in Chrysler and GM fully addresses all important considerations financial and industry experts identified. For example, Treasury initially hired or consulted with a number of individuals with experience in investment banking or equity analysis to help assess Chrysler's and GM's financial condition and develop financing packages for the companies. Many of these individuals have recently left as the restructuring phase of Treasury's work has been completed. Treasury will need to ensure these staff and any staff that depart in the future are replaced as needed with similarly qualified personnel. Also, Treasury does not currently contract with or employ outside firms with specialty expertise for its work with the auto industry but may need to do so in the future, to make sure sufficient expertise is available to oversee the government's significant financial interests in Chrysler and GM. In addition, although Treasury officials told us they are considering all options for divesting the government's ownership interests, including an initial public offering or private sale, they have focused primarily on a series of public offerings for GM and have not identified criteria for determining the optimal time and method to sell. Regardless of the option pursued, however, Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially above what they have been in the past.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: In a November 2009 report on Treasury's Automotive Industry Financing Program (AIFP), GAO found that many of the individuals that Treasury initially hired, either as full-time staff or consultants, to help monitor and eventually sell Treasury's 9.9 percent equity in Chrysler and 61 percent equity in GM had left or were planning to leave the department. More specifically, two thirds of the original professional staff dedicated to overseeing the AIFP (known as the Treasury "auto team") had left Treasury, and Treasury did not contract with or employ outside firms with specialty expertise for its work with the auto industry. In addition, the leader of the auto team had been recently appointed Senior Counselor for Manufacturing Policy, requiring him to split his time between the auto team and his new role. As such, GAO recommended that Treasury ensure it had the expertise needed to adequately monitor and divest the government's investment in Chrysler and GM, and obtain needed expertise where gaps were identified. In response, Treasury hired two additional staff to work on the auto team and hired Lazard LLC in May 2010 to act as an advisor on the disposition of Treasury's investment in GM. As a result of these changes, Treasury will (1) have additional staff and assistance dedicated to overseeing its equity in Chrysler and GM and (2) be better equipped to develop a strategy for divesting its ownership interest in these companies and protecting the government's significant financial investment.

    Recommendation: To improve the stewardship of the federal government's substantial financial investment in the auto industry, the Secretary of the Treasury should ensure that the department has the expertise needed to adequately monitor and divest the government's investment in Chrysler and GM, and obtain needed expertise in areas where gaps are identified. In addressing any existing or future expertise gaps, Treasury should consider both in-house and external expertise.

    Agency Affected: Department of the Treasury

  2. Status: Closed - Implemented

    Comments: As part of a November 2009 report on the U.S. Treasury's (Treasury) Automotive Industry Financing Program (AIFP), GAO reported that, in an effort to oversee its $62 billion investment in GM and Chrysler, Treasury had established requirements in its credit agreements with the companies under which the companies had to report certain financial information to Treasury. In addition, Treasury reached agreement with the companies on additional financial, managerial, and operating information that they would provide in monthly reporting packages to Treasury. Treasury had planned to use this information to closely monitor the financial condition of GM and Chrysler. However, Treasury had not informed Congress which components of the reporting packages would be shared or how Treasury planned to use the information contained in these packages to monitor and assess the companies' performance. Therefore, we recommended that Treasury report to Congress on how it plans to assess and monitor the companies' performance to help ensure the companies are on track to repay their loans and to return to profitability. Treasury was apprehensive about publicly reporting this information, due to concerns about disclosing proprietary information in a competitive market. As an alternative, Treasury agreed to provide GAO, as a congressional oversight body, with information on how it was using this sensitive information to oversee the companies' performance. This alternative was consistent with GAO's recommendation that noted the need for transparency to be balanced with the need to protect certain proprietary business information. As a result, taxpayers have better accountability and assurances that their investment is being appropriately safeguarded.

    Recommendation: To improve the stewardship of the federal government's substantial financial investment in the auto industry, the Secretary of the Treasury should report to Congress on how it plans to assess and monitor the companies' performance to help ensure the companies are on track to repay their loans and to return to profitability. In reporting to Congress, Treasury should balance the need for transparency with the need to protect certain proprietary information that would put the companies at a competitive disadvantage or negatively affect Treasury's ability to recover the taxpayers' investments.

    Agency Affected: Department of the Treasury

  3. Status: Closed - Implemented

    Comments: As part of a November 2009 report on the U.S. Treasury's (Treasury) Automotive Industry Financing Program (AIFP), GAO reported that one of the key components for Treasury's strategy in exiting its $62 billion investment in GM and Chrysler is to determine how and when to sell the investment. Although Treasury officials said that they were considering all options for divesting the government's ownership interests, including an initial public offering or private sale, they had not identified criteria for determining the optimal time and method to sell. GAO concluded that determining when and how to divest the government's ownership stake will be one of the most important decisions Treasury will have to make regarding the federal assistance provided to GM and Chrysler, as this decision will affect the overall return on investment that taxpayers will realize from aiding these companies. Therefore, GAO recommended that Treasury develop criteria for evaluating the optimal method and timing for divesting the government's ownership stake in GM and Chrysler. In line with our recommendation, in June 2010, Treasury issued guidance on its participation in GM's initial public offering (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 September 2010, Treasury issued additional guidance on requiring GM and the IPO underwriters to, among other things, balance maximizing the price per share and the total proceeds to taxpayers while achieving a stable shareholder base, an active market for selling shares after the IPO, and broad interest in follow-on offerings to the extent practicable. Treasury officials noted that guidance was issued to give the market confidence that Treasury planned to follow an orderly process exiting the company, consistent with its guidance. As a result, Treasury's guidance facilitated its participation in GM's IPO in November 2010, which resulted in Treasury recouping $13.5 billion in net proceeds.

    Recommendation: To improve the stewardship of the federal government's substantial financial investment in the auto industry, the Secretary of the Treasury should develop criteria for evaluating the optimal method and timing for divesting the government's ownership stake in Chrysler and GM. In applying these criteria, Treasury should evaluate the full range of available options, such as IPOs or private sales.

    Agency Affected: Department of the Treasury

 

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