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entitled 'Auto Industry: Summary of Government Efforts and Automakers' 
Restructuring to Date' which was released on April 23, 2009. 

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Report to Congressional Committees: 

United States Government Accountability Office: 

April 2009: 

Auto Industry: 

Summary of Government Efforts and Automakers' Restructuring to Date: 


GAO Highlights: 

Highlights of GAO-09-553, a report to congressional committees. 

Why GAO Did This Study: 

The turmoil in financial markets and the economic downturn has brought 
significant financial stress to the auto manufacturing industry. The 
economic reach of the auto industry in the United States is broad, 
affecting autoworkers, auto suppliers, stock and bondholders, dealers, 
and certain states. To help stabilize the U.S. auto industry and avoid 
disruptions that could pose systemic risk to the nation’s economy, in 
December 2008 the Department of the Treasury established the Automotive 
Industry Financing Program (AIFP) under the Troubled Asset Relief 
Program (TARP). From December 2008 through March 2009, Treasury has 
allocated about $36 billion to this program, including loans to 
Chrysler Holding LLC (Chrysler) and General Motors (GM). 

GAO has previously identified three principles to guide federal 
assistance to large firms: define the problem, determine the national 
interests and set goals and objectives, and protect the government’s 
interests. As part of GAO’s statutorily mandated responsibilities to 
provide timely oversight of TARP activities, this report discusses the 
(1) nature and purpose of assistance to the auto industry, (2) how the 
assistance addresses the three principles, and (3) important factors 
for Chrysler and GM to address in achieving long-term viability and the 
challenges that they face to become viable. 

To address these objectives, GAO reviewed Chrysler’s and GM’s 
restructuring plans and financial statements, as well as Treasury 
documents related to AIFP. GAO also reviewed the terms and conditions 
of the federal loans to identify risks to the government and compared 
these loan provisions to GAO’s principles for providing federal 
financial assistance to large firms. In addition, GAO interviewed 
representatives of Chrysler, GM, Ford Motor Company (Ford) and the 
International Union, United Automobile, Aerospace and Agricultural 
Implement Workers of America (UAW), and officials from the Departments 
of the Treasury, Transportation, and Energy. GAO also conducted 
semistructured interviews with a panel of individuals identified by the 
National Academy of Sciences for their expertise in the fields of auto 
industry trends and data, labor relations, vehicle manufacturing, and 
corporate restructuring. 

GAO provided a draft of this report to the Departments of the Treasury, 
Transportation, and Energy for their review and comment. These agencies 
provided technical clarifications, which GAO incorporated as 
appropriate. GAO also made a draft of this report available to Chrysler 
and GM officials for their review and comment. Chrysler and GM 
officials provided technical corrections and clarifications, which GAO 
incorporated as appropriate. 

What GAO Found: 

From December 2008 through March 2009, the Treasury Department 
established a series of programs to help bring relief to the U.S. auto 
industry and prevent the economic disruptions that a sudden collapse of 
Chrysler and GM could create. In December 2008, Treasury provided 
bridge loans of $4 billion to Chrysler and $13.4 billion to GM and 
required both automakers to submit restructuring plans in February 
2009. In March, Treasury determined that the automakers’ restructuring 
plans were not sufficient to achieve long-term viability and required 
that they take more aggressive action as a condition of receiving 
additional federal assistance. At the same time, Treasury also 
established programs to ensure payments to suppliers of parts and 
components needed to manufacture cars and to guarantee warranties of 
cars Chrysler and GM sell during the restructuring period. In addition 
to these programs, the President announced a new White House initiative 
to help communities and workers affected by the downturn in the 
industry. In the coming weeks, Treasury will determine whether the 
additional steps Chrysler and GM have taken or plan to take are 
sufficient to warrant further assistance. If the companies are 
successful in implementing the additional steps toward restructuring, 
then Treasury may provide additional assistance. 

Table; Components and Funding Levels under Treasury’s AIFP: 

Component: Loans to automakers; 
Funding level: $22.9 billion. 

Component: Assistance related to auto finance companies; Funding level: 
$7.4 billion. 

Component: Supplier Support Program; 
Funding level: $5.0 billion. 

Component: Warranty Commitment Program; Funding level: $1.1 billion. 

Component: Total; 
Funding level: $36.4 billion. 

Source: GAO analysis of Treasury information. 

[End of table] 

In providing assistance to the auto industry, Treasury identified goals 
and objectives and took steps to protect the government’s interest. 
Provisions to protect the government’s interest include requiring 
automakers to submit periodic financial reports and to gain concessions 
from stakeholders such as the UAW, creditors, and bondholders. To date, 
however, Chrysler and GM have not reached agreements with these 
stakeholders. In addition, Treasury included provisions to secure 
collateral from the automakers. However, because many of Chrysler’s and 
GM’s assets were already encumbered by other creditors, the amount of 
assets on which Treasury could secure senior liens was limited. An 
additional area of risk is the financial health of the automakers’ 
pension plans. In the event that Chrysler or GM cannot continue to 
maintain its pension plans—such as in the case of liquidation—the 
Pension Benefit Guaranty Corporation, a government corporation, may be 
required to take responsibility for paying the benefits for the plans, 
which are not fully funded. 

GAO’s panel of individuals with auto industry expertise identified a 
number of factors for achieving viability, including reducing the 
number of brands, reassessing the scope and size of dealership 
networks, reducing production capacity and costs, and obtaining labor 
concessions. However, Chrysler’s and GM’s restructuring plans submitted 
in February do not fully address these factors, according to GAO’s 
panelists. In its assessment of the plans, Treasury identified concerns 
similar to those identified by the panelists, and concluded that 
Chrysler and GM need to establish a new strategy for long-term 
viability in order to justify a substantial additional investment of 
federal funds. Achieving viability is made more difficult because of 
many additional challenges facing the automakers, some of which are 
outside their control—such as the weak economy and the limited 
availability of credit. The condition of the U.S. economy will likely 
continue to affect the financial health of Chrysler and GM, as 
historically automobile sales almost always decrease during periods of 
economic recession. Given these challenges, Treasury, Chrysler, and GM 
are considering a range of options available for the automakers to 
achieve viability, including restructuring under the bankruptcy code. 

What GAO Recommends: 

GAO is not making recommendations in this report. 

View [hyperlink,] or key 
components. For more information, contact Katherine A. Siggerud or 
Susan Fleming at (202) 512-2834. 

[End of section] 



Scope and Methodology: 


Treasury Has Established Programs to Help Stabilize the Auto Industry: 

In Providing Assistance to the Auto Industry, Treasury Identified Goals 
and Objectives for the Assistance and Took Steps to Protect the 
Government's Interest: 

Automakers Have Addressed Some of the Factors Important for Achieving 
Viability, and Many Challenges Remain: 

Agency Comments and Our Evaluation: 

Appendix I: Members of GAO's Auto Industry Panel: 

Appendix II: GAO Contacts and Staff Acknowledgments: 


Table 1: GAO's Principles for Government Assistance as Applied to the 
Auto Industry Financing Program: 

Table 2: Components and Funding Levels under the Automotive Industry 
Financing Program: 

Table 3: Loan Terms and Conditions Designed to Manage Risk and Protect 
the Government's Interest: 

Table 4: Individuals with Auto Industry Expertise Identified by NAS Who 
Were Interviewed: 


Figure 1: Key Financial Relationships in the Auto Industry: 

Figure 2: Monthly Light Vehicle Sales, 1976 to 2009 (Seasonally 
Adjusted Annual Rate): 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

April 23, 2009: 

Congressional Committees: 

The United States is experiencing stress in financial markets and a 
severe economic downturn, affecting many sectors of the economy, 
including the automotive industry. The economy has been in a recession 
since December 2007, and several economic indicators, including 
economic growth and the employment rate, worsened at the end of 2008. 
Economic growth is expected to continue to decline in 2009. Automakers 
selling cars in the United States, including the three major domestic 
automakers--Chrysler LLC, Ford Motor Company, and General Motors 
Corporation (the Detroit 3)--as well as Japanese automakers with 
production facilities in the United States--Honda, Nissan, and Toyota 
(transplant automakers) and others, have seen dramatic decreases in 
sales and idling of factories. Sales have been trending downward since 
2006, but the decrease has become markedly sharper in the past year. 
Although most automakers experienced declining sales in 2008 and early 
2009, recent economic conditions have particularly hurt sales of the 
Detroit 3, resulting in significant financial losses and necessitating 
the use of billions of dollars of borrowed money or cash reserves to 
keep operating. The drop in sales has a cascading economic effect as 
autoworkers are laid off, the revenues of dealerships and automotive 
parts suppliers decline, and shareholders in the companies lose the 
value of their investment. 

To help stabilize the U.S. automotive industry and avoid disruptions 
that would pose systemic risk to the nation's economy, in December 2008 
the Treasury Department established the Automotive Industry Financing 
Program (AIFP) under the Troubled Asset Relief Program (TARP).[Footnote 
1] Through AIFP, Treasury in December extended loans of $4 billion and 
$13.4 billion, respectively, to Chrysler Holding LLC (Chrysler)--for 
use by its automotive manufacturing subsidiary, Chrysler LLC--and 
General Motors Corporation (GM) and may provide substantially more 
financial assistance.[Footnote 2] As required by the loan agreements, 
Chrysler and GM submitted restructuring plans to Treasury on February 
17, 2009. These plans were to identify how the companies plan to repay 
government assistance, meet fuel economy standards, become competitive, 
and achieve and sustain long-term financial viability. On March 30, 
2009, the President announced that the restructuring plans Chrysler and 
GM submitted did not establish a credible path to viability and do not 
justify substantial new investment of taxpayer dollars. The President 
outlined a series of actions that each company must undertake within a 
specified time frame--30 days for Chrysler and 60 days for GM--and 
Treasury agreed to provide working capital to fund the companies' 
operations during this time. After these time periods expire and 
depending on the adequacy of the actions taken by Chrysler and GM, 
additional federal assistance may be provided. 

As part of our statutorily mandated responsibilities for providing 
timely oversight of TARP, we have been monitoring Treasury's assistance 
to automakers, including reporting on conditions under which assistance 
should be provided.[Footnote 3] In December 2008, for instance, we 
testified on the principles that guided previous federal assistance to 
large firms and municipalities and their applicability to assistance to 
automakers.[Footnote 4] These principles include identifying and 
defining the problem, determining the national interests and setting 
clear goals and objectives that address the problem, and protecting the 
government's interests. In this report, we describe the (1) nature and 
purpose of federal assistance to the auto industry, (2) how the federal 
assistance to the auto industry addresses these three principles, and 
(3) important factors for Chrysler and GM to address in achieving long- 
term viability and the challenges that they face to become viable. 

Scope and Methodology: 

To describe the nature and purpose of the federal assistance provided 
to the auto industry, we reviewed Department of the Treasury documents 
related to AIFP--including white papers on the Supplier Support Program 
and the Warranty Commitment Program, terms and conditions of the loans 
provided to Chrysler and GM, and disbursement reports on the amount of 
funding allocated and disbursed under the AIFP. We also interviewed 
Treasury officials to obtain further information and clarification on 
these programs. 

To identify how the federal assistance to the auto industry addresses 
our three principles for government assistance, we obtained and 
reviewed program information and loan documentation from Treasury to 
identify the goals and objectives of the assistance and the problems 
the assistance was intended to address. We reviewed the terms and 
conditions of the loan agreements to determine mechanisms in place to 
protect taxpayers from excessive or unnecessary risks and compared 
these mechanisms to the principles we have previously identified for 
providing financial assistance to large firms. We also obtained and 
reviewed financial information of the automakers to ascertain the 
automakers' financial position. We reviewed the reports that GM and 
Chrysler periodically submitted to Treasury, as required by the loan 
terms, and interviewed Treasury officials about their reviews of these 
reports. We conducted interviews with Treasury about the loan program 
and agreements to identify the procedures established to oversee, 
monitor, and enforce the terms and conditions of the loan agreements. 
We also conducted interviews with officials from the Departments of 
Energy and Transportation to obtain information on their coordination 
with Treasury in providing and overseeing assistance to automakers; 
representatives from Chrysler, GM, Chrysler Financial Services Americas 
LLC (Chrysler Financial) and GMAC LLC (GMAC) to obtain information on 
how they determined the level of funding needed and their plans for 
using the funding; and representatives from Ford Motor Company and Ford 
Motor Credit Company to determine why they have not sought federal 
assistance.[Footnote 5] 

To identify important factors for Chrysler and GM to address to achieve 
long-term viability and the challenges they face to become viable, we 
contracted with the National Academy of Sciences (NAS) to identify a 
diverse group of individuals with expertise about the past and current 
financial condition and operations of the domestic automakers, the 
restructuring of distressed companies, labor relations issues, 
financial management and analysis of distressed or restructuring 
companies, factors influencing competitiveness in the auto industry, 
and engine and vehicle technologies that may affect the auto 
manufacturing industry today as well as in the near future. We selected 
a panel of 17 individuals from among those NAS identified based on 
achieving a variety of expertise and avoiding any potential conflicts 
of interest. We conducted individual semi-structured interviews with 
the panelists to identify factors influencing the current condition of 
the auto industry; factors affecting future viability; obstacles to 
achieving long-term viability; and elements that, according to members 
of our panel, if contained in the plans, would positively or negatively 
influence the potential for successful restructuring and future 
viability. (Appendix I lists the panel of individuals whom we 
interviewed.) We used a content analysis to systematically analyze 
transcripts of these interviews to identify principal themes that 
emerged from the interviews. We also reviewed comments on the content 
of the restructuring plans that panelists provided to us once the plans 
had been submitted. We compared the content of the automakers' 
restructuring plans to the criteria identified by our panel and the 
requirements in the loan agreements. To further identify challenges to 
achieving long-term viability, we reviewed Treasury's assessment of the 
restructuring plans Chrysler and GM submitted in February. 

The views expressed by the members of our panel should be interpreted 
in the context of the following qualifications. Although we were able 
to secure the participation of a balanced, highly qualified group of 
individuals, other individuals with expertise in relevant fields could 
not be included because of the need to limit the number of interviews 
conducted. Although many points of view were represented, the panel was 
not representative of all potential views. Nevertheless, the members of 
our panel provided rich information on the current state and future of 
the auto industry and insightful comments. 

To provide additional information and context on all issues examined in 
this report, we conducted interviews with other stakeholders, including 
a representative of the International Union, United Automobile, 
Aerospace and Agricultural Implement Workers of America (UAW), 
representatives of the Association of International Automobile 
Manufacturers, and other knowledgeable individuals including financial 
analysts specializing in the auto sector, a lawyer knowledgeable about 
state franchise laws, and an economist specializing in labor issues. 

To ensure the accuracy and completeness of the information contained in 
the report, we asked representatives of Chrysler, Ford, GM, the UAW, 
and the Pension Benefit Guaranty Corporation (PBGC), and two members of 
our panel to review portions of a draft of this report. We also 
provided Chrysler and GM with the opportunity to review the complete 
draft and discuss their comments with us. They offered some technical 
corrections and clarifications, which we incorporated as appropriate. 

We conducted this performance audit from January 2009 to April 2009 in 
accordance with generally accepted government auditing standards. Those 
standards require that we plan and perform the audit to obtain 
sufficient, appropriate evidence to provide a reasonable basis for our 
findings, based on our audit objectives. We believe that the evidence 
obtained provides a reasonable basis for our findings based on our 
audit objectives. 


GM, a publicly traded company, was incorporated in 1916 and employs 
about 240,000 people worldwide. It has manufacturing facilities in 34 
countries and sells more than a dozen brands of vehicles in about 140 
countries.[Footnote 6] Chrysler is a privately held company that was 
established 9 years later, in 1925, and employs about 54,000 people 
worldwide, including at manufacturing facilities in 4 countries and 
vehicles assembled under contract in 4 others.[Footnote 7] Chrysler and 
GM reported losses in 2008 totaling $8 billion[Footnote 8] and $31 
billion,[Footnote 9] respectively, and there are significant concerns 
about the future of both companies. For instance, in GM's 2008 audit 
report, its independent registered public accountant raised 
"substantial doubt" about GM's ability to continue as a going concern 
due to "recurring losses from operations, stockholders' deficit, and 
inability to generate sufficient cash flow to meet its obligations." In 
addition, Chrysler stated in its restructuring plan that additional 
federal funds will be needed this spring to prevent the company from 
having to file for bankruptcy. 

The automakers themselves are not alone in suffering the effects of 
declining automotive sales and revenues. The economic reach of the auto 
industry in the United States is broad, with many groups affected by 
its downturn and the financial condition of the automakers. Some key 
groups include the following. 

* Autoworkers: At the end of 2007, Chrysler, Ford, and GM employed 
about 240,000 hourly and salaried workers in the United States. 
Thousands of workers have been laid off, retired, or taken buyouts in 
the past months as the automakers seek to cut their costs and excess 
production capacity. Most hourly workers are represented by the UAW, 
which is in discussions with Chrysler and GM to modify existing labor 
agreements to achieve cost reductions.[Footnote 10] 

* Suppliers: More than 500,000 workers are employed by companies in the 
United States that manufacture parts and components used by automakers-
-both domestic automakers and transplants. According to the Motor and 
Equipment Manufacturers Association, many suppliers are in severe 
financial distress, with a number having filed for bankruptcy in 2008. 
Some members of our panel said that because many of these suppliers 
have relatively high costs and depend on the business of the Detroit 3, 
some of them may not have enough revenue to survive if one of the 
automakers were to cease production. This, in turn, could affect the 
automakers' ability to obtain parts needed to manufacture vehicles. 
This dynamic has the potential to affect all automakers with production 
facilities in the United States, regardless of home country. 

* States and localities in auto manufacturing regions: The automotive 
manufacturing industry, including the Detroit 3, transplant automakers, 
and suppliers, is concentrated in certain states in the Midwest and 
South. For instance, in Michigan, 28 percent of manufacturing jobs are 
in the automotive sector, as of March 2008. Other states with a high 
proportion of jobs in this sector include Kentucky (19 percent), 
Indiana (14 percent), Ohio (13 percent), Alabama (10 percent), and 
Tennessee (9 percent). A December 2008 Brookings Institution report 
identified 50 metropolitan areas, clustered primarily in the Midwest 
and South, that rely heavily on Detroit 3-related jobs.[Footnote 11] 
Although any loss of output due to the difficulties of the auto 
industry could be felt nationwide, the geographic concentration of the 
industry means certain regions will be harder hit than others as 
residents in these regions lose their jobs and the tax base shrinks. 

* Automaker retirees: About 600,000 individuals currently receive 
pension payments from Chrysler and GM.[Footnote 12] Due to the 
retirement benefits--including pensions and healthcare--provided to 
autoworkers, established and enhanced through several decades of 
collective bargaining, the Detroit 3 are facing a significant financial 
commitment. In an effort to reduce costs and become more competitive 
with the transplants, the Detroit 3 in 2007 reached an agreement with 
UAW to transfer responsibility for administering the health plans to 
the union. Under this agreement, voluntary employee beneficiary 
associations (VEBAs) were created to manage retiree health plans 
starting January 1, 2010, and the automakers agreed to make several 
cash contributions of specific amounts (totaling about $10.3 billion 
for Chrysler and up to $26 billion for GM) on specific dates to fund 
the VEBAs. Chrysler and GM are currently negotiating with the union to 
provide a portion of their monetary contribution as equity in the 
companies rather than cash. 

* Dealerships: The Detroit 3 have about 14,000 U.S. dealerships, most 
of which are independently owned and operated. Many are struggling 
financially due to low sales and lack of credit to purchase inventory 
from the automakers. In addition, in comparison to transplants, the 
Detroit 3 automakers generally have more dealers and sell fewer 
vehicles per dealer. According to Automotive News, more than 900 
dealers have closed during the last year, due in part to the current 
economic conditions. Employment at dealers--with more than 1 million 
jobs--has also fallen. 

* Bondholders and other creditors: Individual and institutional 
investors hold about $27.2 billion of unsecured GM bonds, and GM is 
currently engaged in negotiations with its bondholders to reduce this 
debt by at least two-thirds through an exchange of the bonds into 
company equity, or other appropriate means. Chrysler, which does not 
have significant unsecured public debt,[Footnote 13] has proposed debt 
restructuring to three creditor groups, which would convert $5 billion 
of debt to equity. 

* Shareholders: GM, as a publicly traded company, has experienced a 
significant decline in the price per share of its common stock. In 
October 2007, GM's equity traded at levels over $40 per share; in March 
2009 the equity traded for a low of $1.45 per share. Chrysler, which is 
privately owned, currently has two shareholders.[Footnote 14] Chrysler 
reported in its restructuring plan that these shareholders have 
expressed willingness to relinquish their current equity and to convert 
their debt to equity. To the extent that restructuring efforts result 
in additional equity, the interest of GM's and Chrysler's current 
shareholders' will be diluted, which would affect the voting of shares 
and any future dividends. 

The sharp downturn in the U.S. auto industry has been influenced by a 
convergence of factors, including both those within and outside the 
control of the automakers. According to reports on the auto industry 
and individuals with expertise in the industry, the following factors 
contributed to this downturn. 

* Economic factors contributing to the downturn include the weak 
economy and competition from transplants, which have led to decreased 
sales and market share. The U.S. economy has been in recession since 
December 2007, with increasing unemployment and declining personal 
wealth. During this time period, light vehicle sales in the United 
States--including domestic and foreign brands--have dropped by about 
half, with the decrease disproportionately affecting the Detroit 3. 
[Footnote 15] For example, Detroit 3 sales in the United States dropped 
by 49 percent from February 2008 through February 2009, whereas U.S. 
sales for Honda, Nissan, and Toyota dropped 39 percent during this 
period. Additionally, the Detroit 3 have been losing U.S. market share 
to foreign automakers for several years. For instance, GM's U.S. market 
share for total light vehicle retail sales fell from 27.2 percent in 
2004 to 22.1 percent in 2008, while during the same period, the market 
share of Japanese auto manufacturers grew from 29.8 percent to 38.9 
percent. In addition, the recession has made credit less available, 
which may have limited the ability of auto manufacturers and suppliers 
to finance their businesses, consumers to purchase cars, and dealers to 
obtain loans to sustain their inventories. Figure 1 illustrates the 
financial relationships among suppliers, automakers, dealers, 
consumers, and financing companies. 

Figure 1: Key Financial Relationships in the Auto Industry: 

[Refer to PDF for image: illustration] 

Financing companies (such as GMAC and Chrysler Financial) provide 
financing to help dealers pay for their inventories and consumers 
purchase vehicles. 

Dealers are paid when consumers purchase vehicles; 

Automakers are paid when dealers purchase vehicles; 

Suppliers are paid by automakers 45-60 days after receipt of parts. 

Source: GAO. 

[End of figure] 

* Management decisions that, according to members of our panel, have 
contributed to the automakers' financial condition include labor 
agreements that resulted in wages and retiree benefit costs higher than 
those of transplants and a heavy reliance on sales of light trucks and 
sport utility vehicles (SUV), which are more profitable than 
cars.[Footnote 16] Additionally, offering consumer incentives and 
discounts over the past few years stimulated demand but contributed to 
an erosion of the value of the brands and to average purchase prices 
that are lower than comparable foreign cars. As a result of the lower 
purchase prices, Chrysler and GM have to sell more cars in order to 
cover costs. 

In December 2008, the chief executive officers (CEOs) of Chrysler, 
Ford, and GM testified before Congress to request financial assistance 
from the federal government.[Footnote 17] In their testimonies, the 
CEOs from Chrysler and GM stated that without federal assistance, their 
companies would likely run out of the cash needed to continue 
operating. The Chrysler and GM CEOs further testified that they 
believed it would be difficult or impossible to return to financial 
solvency while operating under bankruptcy because consumers would be 
reluctant to make a long-term purchase such as an automobile from a 
company whose future was in question. 

We have previously identified three fundamental principles that can 
serve as a framework for considering federal government financial 
assistance to large firms. According to these principles, the federal 
government should (1) identify and define the problem, (2) determine 
the national interests and set clear goals and objectives that address 
the problem, and (3) protect the government's interests.[Footnote 18] 
Table 1 provides a description of these principles as they apply to the 
assistance provided to the auto industry. 

Table 1: GAO's Principles for Government Assistance as Applied to the 
Auto Industry Financing Program: 

Principle: Identify and define the problem; 
Applicability to AIFP: Clearly identify and define the problems 
confronting the industry, separating out those that require an 
immediate response from structural challenges that will take longer to 

Principle: Determine the national interests, and set clear goals and 
objectives that address the problem; 
Applicability to AIFP: State the objectives and goals of the program to 
help determine which financial tools are best, provide criteria for 
program decisions, and serve as a basis for monitoring progress. 

Principle: Protect the government's interest; 
Applicability to AIFP: 
* Achieve concessions from management, labor, suppliers, dealers, and 
* Institute controls over management. The government must have the 
authority to approve an aid recipient's financial and operating plans 
and new major contracts; 
* To the extent feasible, the government should require that the 
recipient provide adequate collateral and that the government be in a 
first lien position; 
* The government should receive compensation through fees or equity 
participation for risk; 
* Accountability should be built in so that Congress and the public can 
have confidence that the assistance is used in a manner consistent with 
the identified objectives. 

Source: GAO. 

[End of table] 

Treasury Has Established Programs to Help Stabilize the Auto Industry: 

In an attempt to help stabilize the U.S. automotive industry and avoid 
disruptions that would pose systemic risk to the nation's economy, in 
December 2008 Treasury established AIFP and agreed to provide Chrysler 
and GM with loans of $4 billion and $13.4 billion, respectively. 
[Footnote 19] These loans were intended to allow the automakers to 
continue operating through the first quarter of 2009 while working out 
details of their plans to achieve and sustain long-term viability, 
recognizing that after that point, additional loans or other steps 
would be needed. According to Chrysler and GM officials, the companies 
have been using the loans to cover routine operating costs. 

As a condition of the December loan agreements, Chrysler and GM were 
required to submit restructuring plans to Treasury in February that 
describe actions the automakers would take to achieve and sustain long- 
term viability. These plans were required to show how the automakers 
would repay the loans, comply with federal fuel economy requirements, 
develop a product mix and cost structure that are competitive in the 
U.S. marketplace, and become financially viable. Chrysler and GM 
submitted these plans on February 17, 2009, and requested up to an 
additional $5 billion and $16.6 billion in federal financial 
assistance, respectively, because of the continued sluggish economy and 
lower than expected revenues.[Footnote 20] 

To oversee the federal financial assistance--including evaluating the 
restructuring plans--and to make decisions about future assistance to 
the automakers, the loan agreements provided for a presidential 
designee. Rather than appoint a presidential designee, President Obama 
on February 20, 2009, announced that he was establishing the 
Presidential Task Force on the Auto Industry to advise him and the 
Secretary of the Treasury on issues impacting the financial health of 
the industry.[Footnote 21] Under the terms of the loan agreements, 
since no presidential designee was appointed, the Secretary of the 
Treasury will make decisions on all matters involving financial 
assistance to the automakers, including future decisions about 
providing additional assistance to Chrysler or GM. 

[Text box: Treasury’s Key Findings on the Viability of Chrysler and GM: 
Treasury determined that Chrysler’s and GM’s restructuring plans did 
not establish a credible path to viability. For Chrysler, Treasury 
identified the following challenges: 

* A limited global presence that leads to greater vulnerability to 
local economic fluctuations and the inability to leverage economies of 

* Quality scores that lag behind those of competitors. 

* A product mix that does not cover smaller-car segments. 

* Lack of investment in manufacturing practices that are critical to 
long-term profitability. 

For GM, Treasury identified the following challenges: 

* Over reliance on trucks and SUVs for a large share of profits. 

* Substantial costs associated with retiree benefits, which will 
continue to grow through the restructuring period. 

* Closing under performing dealers at too slow a rate. End text box] 

On March 30, 2009, the President announced that the restructuring plans 
submitted by Chrysler and GM did not establish a credible path to 
viability and do not justify substantial new investment of taxpayer 
dollars. The President outlined a series of actions that each company 
must undertake to receive additional federal assistance. The 
President's announcement further said that Treasury officials will work 
closely with Chrysler and GM as the companies take steps to achieve the 

Chrysler: According to the Task Force, Chrysler is not viable as a 
stand-alone company and must find a partner to achieve long-term 
viability. Chrysler and the European automaker Fiat are in discussions 
about such a partnership, but additional work must be completed to 
result in a binding agreement and gain the necessary support of 
stakeholders. Treasury agreed to provide Chrysler with up to $500 
million in loans under TARP to fund its operations for 30 days while 
the company takes additional steps toward restructuring. If Chrysler is 
successful in completing the additional steps, Treasury said it will 
consider investing up to an additional $6 billion in Chrysler. If not, 
Treasury will not provide further federal assistance, which, according 
to Treasury officials, would likely result in a liquidation bankruptcy. 

GM: The Task Force concluded that GM can be a viable company if it 
develops a more aggressive restructuring plan and implementation 
strategy. Treasury agreed to provide GM up to $5 billion in loans under 
TARP to fund its operations for 60 days while it undertakes the 
additional work. Treasury also announced this restructuring effort 
would entail leadership changes at GM and increased involvement by 
Treasury and its outside advisers. If GM submits a satisfactory 
restructuring plan and implementation strategy by the end of the 60 
days, Treasury will invest an unspecified amount of additional federal 
funds to help with GM's restructuring efforts. If, however, GM fails to 
meet these conditions, according to Treasury, it will not invest 
additional federal funds, creating the possibility that GM will file 
for a reorganization bankruptcy. GM's CEO stated that the Treasury's 
determination makes a bankruptcy filing for GM more "probable" than 
prior to the announcement. 

Several new initiatives to help stabilize the auto industry and bring 
relief to those affected by the industry were announced in March 2009. 
The first two initiatives will be administered through AIFP and will be 
funded under TARP. The third initiative will seek to leverage federal 
funding available through other programs. 

* Supplier Support Program: Under this program, Chrysler and GM will 
receive funding for the purpose of ensuring payment to suppliers. The 
program is designed to ensure that automakers receive the parts and 
components they need to manufacture vehicles and that suppliers have 
access to credit from lenders. The automakers will designate certain 
suppliers who are most critical to their operations to receive 
guaranteed payment for delivered supplies. After agreeing to 
participate in the program, the supplier sells eligible receivables to 
a special purpose entity established by the automaker to fund the 
program. Prior to the sale of the receivable, the automaker owes the 
supplier a payment for the receivable at a due date. If the supplier 
sells a receivable to the program, it receives payment from the special 
purpose entity, which becomes the owner of the receivable. If the 
supplier chooses to receive cash up front, a service fee of 3 percent 
is deducted from the payment; if the supplier chooses to receive 
payment on the receivable's due date--typically 45 to 60 days after 
delivery--the service fee is 2 percent. On the due date, the automaker 
is responsible for paying the program servicer the amount due for the 
delivery. Treasury has made up to $5 billion available through this 
program.[Footnote 22] 

* Warranty Commitment Program: This program is intended to mitigate 
potential consumer reluctance to buy a vehicle from a financially 
distressed company by providing funding to guarantee the warranties on 
new vehicles purchased from participating auto manufacturers during the 
restructuring period.[Footnote 23] Under this program, participating 
automakers (currently Chrysler and GM) and Treasury will contribute 
cash to a separate special purpose company. The total amount of cash to 
be contributed will equal 125 percent of the expected cost of paying 
for warranty service on each covered vehicle, with the automakers 
contributing 15 percent of the projected costs and Treasury providing a 
loan to contribute 110 percent of the projected cost. Should a 
participating automaker go out of business, a program administrator 
will be appointed to identify a qualified service provider to supply 
warranty services for vehicles sold during the restructuring period in 
exchange for the assets of the special purpose company. Treasury 
officials estimate the cost of this program to be about $1.1 billion. 
According to several members of our panel, addressing consumers' 
concerns about warranties is important because, unlike buying a plane 
ticket from a bankrupt airline, purchasing a vehicle is a significant 
and long-term investment. Thus, consumers may avoid purchasing vehicles 
from an automaker facing the possibility of bankruptcy because they are 
concerned their warranties may not be honored, further depressing 
vehicle sales. 

* Initiative to Support and Revitalize Auto Industry Workers and 
Communities: This initiative is intended to coordinate government 
efforts in providing assistance to communities and workers affected by 
the loss of auto manufacturing jobs. The director responsible for the 
initiative is tasked with working with all parties to ensure that 
communities and workers take advantage of all available government 
resources and to work with government and elected officials in helping 
retool and revitalize the economies of affected communities. In 
carrying out his duties, the director is charged with exploring all 
possible strategies, including seeking to maximize the use of funds 
from the American Recovery and Reinvestment Act of 2009 (Recovery Act), 
deploying rapid response units to communities facing plant closings, 
attracting new industries to the region, and working with stakeholders 
on legislative efforts to direct emergency support to the affected 
communities.[Footnote 24] 

The programs that Treasury has announced for the auto industry-- 
including the automakers, auto financing companies, and other 
stakeholders--as of April 2009, are summarized in table 2. 

Table 2: Components and Funding Levels under the Automotive Industry 
Financing Program: 

Component: Automaker loans; 
Description: Loans to Chrysler and GM to fund their operations while 
they take steps to restructure their companies; 
Funding level: $22.9 billion[A]. 

Component: Assistance related to auto finance companies; 
Description: Funding to assist Chrysler Financial and GMAC; 
Funding level: $7.4 billion[B]. 

Component: Supplier Support Program; 
Description: The program will provide funding to guarantee suppliers 
are paid for the products they ship to participating automakers; 
Funding level: $5.0 billion[C]. 

Component: Warranty Commitment Program; 
Description: The program will set aside funds to guarantee warranties 
for vehicles Chrysler and GM sell during restructuring; 
Funding level: $1.1 billion[C]. 

Funding level: $36.4 billion. 

Source: GAO analysis of Treasury information. 

[A] This includes the $17.4 billion in loans agreed to in December 
2008, which have been fully disbursed, and the up to $500 million and 
up to $5 billion that Treasury is providing to Chrysler and GM during 
their additional 30-and 60-day restructuring periods. Treasury may 
provide more assistance based on the outcome of the restructuring 

[B] This amount includes an $884 million loan to GM to allow the 
company to participate in GMAC's new rights offering related to its 
reorganization as a bank holding company; a $5 billion purchase of 
preferred stock investment plus warrants from GMAC; and a loan of $1.5 
billion to a special purpose entity created by Chrysler Financial to 
finance the extension of new consumer automotive loans. A separate 
subsidiary of the Chrysler Holdings, Chrysler Financial Company 
provides financing to automotive dealers and consumers. Chrysler and 
Chrysler Financial operate independently from each other under separate 
managements. In April 2009, Treasury offered additional financial 
assistance to Chrysler Financial, but the company declined the 

[C] These amounts are Treasury's estimated costs of the programs. 

[End of table] 

In Providing Assistance to the Auto Industry, Treasury Identified Goals 
and Objectives for the Assistance and Took Steps to Protect the 
Government's Interest: 

Treasury identified as a problem of national interest the financial 
condition of the U.S. automakers and its potential to affect financial 
market stability and the economy at large. In determining what actions 
to take to address this problem, Treasury concluded that Chrysler and 
GM's lack of liquidity needed immediate attention and, in order to 
prevent a significant disruption of the automotive industry, provided 
short-term bridge loans to the automakers. To address the industry's 
structural challenges, which will take more time to resolve, Treasury 
required Chrysler and GM to prepare restructuring plans that describe 
the changes the automakers intend to make in order to achieve long-term 
financial viability. 

Treasury established goals and objectives for the federal financial 
assistance in the loan agreements and other program documentation. For 
example, the loan agreements state that funding should be used to 
enable the automakers to develop a viable and competitive business and 
develop the capacity to produce energy-efficient advanced technology 
vehicles, among other things. Although Treasury identified goals for 
the assistance, it will need to determine how to assess goals that rely 
on concepts that are not clearly defined and to evaluate the relevant 
trade-offs associated with the goals that appear to conflict. For 
example, the goals stated in the loan agreements include concepts that 
were not defined, such as rationalized manufacturing capacity and 
competitive product mix. 

If additional assistance is provided to the automakers, it will be 
important for Treasury to clearly articulate what it intends to achieve 
with this assistance. We have previously reported that it is important 
for policymakers to identify objectives and goals for federal 
assistance that are clear, concise, and consistent. Such objectives and 
goals can help program administrators and Congress determine which 
financial tools are needed and most appropriate for the industry and 
for company-specific circumstances; provide criteria for program 
decisions; and serve as a basis for monitoring progress. In addition to 
lacking clear definitions, some of Treasury's goals may work at cross 
purposes, at least in the short-term, and thus will require an 
assessment of the relevant trade-offs among the goals. For example, 
according to members of our panel, producing advanced technology 
vehicles has the potential to conflict with the goal of developing a 
viable business in the near term because the costs of designing, 
developing, and producing these types of vehicles are greater than the 
revenue generated in the initial years of sales. We have previously 
reported that it is important that policymakers choose clearly among 
potentially conflicting goals of providing federal financial 
assistance.[Footnote 25] Without knowing the primary goal, it is 
difficult to decide what steps are appropriate and to judge whether a 
program has succeeded. 

In developing the terms and conditions of the loans to Chrysler and GM, 
Treasury included provisions to manage risk and protect the 
government's interest. Table 3 describes these provisions. Treasury 
also established an internal working group--referred to as the auto 
team--to oversee the AIFP and provide analysis in support of the Task 
Force and the Secretary. 

Table 3: Loan Terms and Conditions Designed to Manage Risk and Protect 
the Government's Interest: 

Concessions from stakeholders. 

* Executive compensation limitations: Restrictions on compensation for 
senior executive officers include recovery of any bonus or incentive 
payments based upon materially inaccurate statements of earnings, 
limiting tax deductions on executive compensation over $500,000 per 
executive, and prohibiting golden parachute payments[A]; 

* Agreements with debt holders: The automakers must use their "best 
efforts" to convert at least two-thirds of their unsecured public debt 
through a bond exchange or other appropriate means; 

* Labor concessions: The automakers must use their "best efforts" to 
reduce the compensation of their workers to be comparable to workers at 
transplant facilities, align their work rules[B] more closely with 
those of transplants, and close the Jobs Bank programs[C]; 

* Retiree concessions: The automakers must use their "best efforts" to 
reach agreement with the union to provide at least one-half of the 
automakers' future payments or contributions for retiree health plans 
(VEBAs) in the form of company stock. 

Controls over management: 

* Approval of material transactions: Treasury must approve any 
fundamental changes to the automakers' companies and certain 
transactions for more than $100 million in value and outside the 
ordinary course of business; 

* Restrictions on expenses: The automakers must maintain and implement 
an expense policy with limitations on, among other things, sponsoring 
conferences and events, travel costs, office renovations, and 
entertainment. In addition, the automakers must provide for oversight 
and mechanisms to ensure compliance with the expense policy; 

* Restructuring plans: The automakers are required to prepare 
restructuring plans outlining the actions they will take to meet the 
requirements set forth in the loan agreements, including concessions 
from various stakeholders. Treasury must approve these plans and the 
actions the automakers have taken toward implementing the plans before 
additional assistance is provided[D]; 

* Periodic reporting requirements: The automakers must submit periodic 
financial reports including weekly rolling cash forecasts[E] and 
biweekly liquidity status reports,[F] as well as monthly certifications 
of expense policy conformance and quarterly certification of compliance 
with executive compensation provisions. 


* Liens: In negotiations prior to signing the loan agreements, Treasury 
attempted to obtain senior liens on all unencumbered assets at both GM 
and Chrysler.[G] 

Compensation for risk: 

* Compensation: The automakers agreed to provide Treasury with 
compensation in the form of warrants and notes in the case of GM and 
additional notes in lieu of warrants in the case of Chrysler. Both 
automakers are required to repay the loans with interest. 

Source: GAO analysis of Treasury information. 

[A] A golden parachute is defined as any payment in the nature of 
compensation to a senior executive officer made on account of 
involuntary termination or in connection with any bankruptcy filing, 
receivership, or insolvency of the institution to the extent that the 
present value of the payment equals or exceeds three times the 
executive's average annual compensation over the preceding 5 years. 

[B] Work rules generally refer to those sections of a contract that 
define issues such as hours to be worked and what work is done by what 

[C] Under their Jobs Bank programs, the Detroit 3 continue to provide 
wages and benefits to workers that have been laid off. 

[D] As discussed above, Chrysler and GM submitted these plans on 
February 17, and Treasury announced on March 30 that additional steps 
must be taken before further assistance is provided. 

[E] This forecast outlines for each of the thirteen weeks both 
operating and non-operating cash receipts and disbursements which 
result in a net cash flow for the week that increases or decreases the 
previous week's ending cash balance and results in the current cash 

[F] This report details the company's current liquidity profile; 
expected liquidity needs; any material changes in the company's 
business since the date of the last status report; any transfer, sale, 
pledge or other disposition of any material asset since the date of the 
last status report; and any changes to the company's capital structure. 

[G] A lien is a legal right that a creditor has in another's assets, 
usually lasting until a debt is repaid. Senior liens have priority over 
other liens on the same asset. 

[End of table] 

While the loan agreements include a number of terms and conditions to 
help protect the government's interests, some potential risks, as 
described below, remain. 

Concessions from stakeholders. The loan agreements called for 
stakeholder concessions, including agreements from creditors to reduce 
overall debt, from labor for more competitive wage structures, and from 
retirees for modifications to VEBA contributions, as well as limits on 
executive compensation. 

Agreements with debt holders: According to Chrysler officials, the 
company does not have substantial public debt, but it said in its 
restructuring plan that it would work with three groups of creditors, 
including Treasury, senior lien bank lenders, and the UAW VEBA, to 
reduce debt by $5 billion. GM stated in its restructuring plan that it 
was negotiating a potential debt-for-equity exchange with an unofficial 
committee of GM bondholders.[Footnote 26] As of April 22, although the 
automakers have begun negotiations with their bondholders (in the case 
of GM) and creditors (in the case of Chrysler) agreement has not been 

Labor and retiree concessions: Chrysler's and GM's negotiations with 
the UAW continue, and tentative agreements have been reached on 
modifications to labor costs and work rules. For instance, General 
Motors and the UAW reached a tentative agreement modifying wages, 
benefits and work rules to become more cost competitive with 
transplants. The net effect of these changes is a reduction in the 
company's annual hourly-related cost by approximately $1.0 billion to 
$1.1 billion, and potentially more, according to GM. As of April 22, 
agreements on restructuring Chrysler and GM's monetary contributions to 
fund retirees' health care plans have not been reached. 

Executive compensation: According to Treasury officials, they are 
waiting for the Office of Management and Budget to approve additional 
regulations that Treasury has drafted on executive compensation as 
required by the Recovery Act before establishing a process to monitor 
compliance with the executive compensation requirements. Establishing 
procedures to oversee compliance with such requirements is important to 
help ensure that the automakers adhere to conditions set forth in the 
loan agreements. 

Collateral. Treasury's goal in its negotiations with Chrysler and GM 
prior to signing the loan agreements was to obtain senior liens 
whenever possible and, for assets already encumbered, to obtain junior 
liens. For Chrysler, because most assets were already encumbered with 
senior liens, Treasury was only able to obtain a senior lien on a 
portion of the company's parts inventory, known as Mopar.[Footnote 27] 
For GM, Treasury obtained a senior lien on cash, inventory, real 
property, equity in domestic and foreign subsidiaries, and intellectual 
property. Treasury also received junior liens on additional assets from 
both companies. According to Treasury officials, Treasury cannot put an 
estimated dollar value on either company's pledged collateral because 
the value of certain items, such as cash and inventory, is constantly 
changing. Treasury officials said that the limited amount of assets on 
which the government has senior liens could become an issue if the 
companies enter bankruptcy or otherwise liquidate their assets, 
although the situation differs somewhat for the two companies.[Footnote 
28] According to Treasury, in the case of Chrysler, the sale of the 
assets would result in cash equal to only a small percentage of the 
value of the loans. Moreover, because Treasury placed liens on all 
unencumbered assets to secure the December loans, it will be difficult 
or impossible for the government to obtain additional collateral for 
any new loans that may be provided. In its restructuring plan, GM 
proposed that additional federal assistance could be in the form of a 
preferred equity investment in the company, a revolving facility, 
[Footnote 29] and a loan secured by the collateral already used to 
support the current $13.4 billion loan. Chrysler did not propose 
collateral options for any additional federal assistance in its 
restructuring plan. 

In considering whether the federal government should provide additional 
assistance to Chrysler and GM, it is important to assess the 
government's overall financial exposure should one or both of the 
automakers fail to achieve long-term viability. A potential area of 
significant financial exposure is the government's liability for 
terminated pension plans. Specifically, the Pension Benefit Guaranty 
Corporation (PBGC)--a self-funded government corporation--insures 
private-sector defined benefit plans.[Footnote 30] When PBGC takes over 
a terminated pension plan, it assumes responsibility for future benefit 
payments to the plan's participants, up to the limits set in law. 
[Footnote 31] An underfunded pension plan that is insured by PBGC may 
be terminated only if certain statutory criteria are met. In general, 
an employer is permitted to terminate an underfunded plan only if it 
can demonstrate that it is in serious financial distress and cannot 
continue in business or reorganize (if in bankruptcy) unless the 
pension plan is terminated. 

The pension plans of Chrysler and GM pose considerable financial 
uncertainty to PBGC. In the event that Chrysler or GM cannot continue 
to maintain their pension plans--such as in the case of liquidation or 
an asset sale--PBGC may be required to take responsibility for paying 
the benefits for the plans, which are currently underfunded by a total 
of about $29 billion.[Footnote 32] Although it is impossible to know 
what the exact claims to PBGC would be if it took over Chrysler's and 
GM's pension plans, doing so would likely strain PBGC's resources, 
because the automakers plans' represent a significant portion of the 
benefits it insures. Further, from an administrative standpoint, PBGC 
would be presented with an unprecedented number of assets to manage as 
well as benefit liabilities to administer.[Footnote 33] To the extent 
these additional claims markedly increase PBGC's accumulated deficit 
and decrease its long-run liquidity, there could be pressure for the 
federal government to provide PBGC financial assistance to avoid 
reductions in guaranteed payments to retirees or unsustainable 
increases in the premium burden on sponsors of ongoing plans.[Footnote 

Automakers Have Addressed Some of the Factors Important for Achieving 
Viability, and Many Challenges Remain: 

In general, we found that Chrysler's and GM's February restructuring 
plans contain some of the key factors our panel of individuals with 
auto industry expertise identified as important for achieving 
viability, such as reducing the number of models and brands and 
rationalizing dealerships. However, the plans do not fully address all 
of the considerations that members of the panel identified, which are 
discussed below. Treasury identified similar concerns and concluded 
that Chrysler and GM need to establish a new strategy for long-term 
viability in order to justify substantial additional investment of 
federal funds. Achieving viability may be difficult because of a number 
of challenges facing the automakers, including some outside of their 

Chrysler's and GM's February Restructuring Plans Do Not Fully Address 
Factors Needed to Achieve Viability: 

Reducing the number of brands and models: 

About half of the members of our panel said that reducing the number of 
brands and models would be a key factor in achieving financial 
viability. Some of the cited advantages of eliminating brands and 
models include reducing intracompany competition for sales of similar 
models, eliminating associated costs such as factory tooling and 
product development, and focusing remaining resources on fewer models 
for greater improvements in quality, brand image, and performance. One 
panelist further noted that eliminating brands and models also 
eliminates dealers, another cost savings, although as discussed below, 
there are costs associated with closing dealers that can be difficult 
to estimate. 

According to its February plan, Chrysler has reduced its number of 
vehicle models by seven. However, some members of our panel criticized 
Chrysler's product mix; for example, one panelist noted that most of 
Chrysler's product line contains older models and that to be 
competitive the company needs to introduce more new products in 2009. 
Another noted that Chrysler has plans for only one midsize model and no 
luxury models to compete with models from other companies. GM's 
February plan proposes to reduce its brands to the four core brands 
that account for more than 90 percent of the company's U.S. aggregate 
contribution margin (revenue less variable cost) by selling or phasing 
out three brands.[Footnote 35] One panelist noted that GM's focus on 
the remaining four brands is a good long-term strategy, although 
another noted that this may cause difficulties in short-term sales 
because consumers may be unlikely to buy cars from a brand that is 
being discontinued. GM's plan also includes a total reduction in the 
number of models by 25 percent, including the reduction of models from 
brands that GM is planning to sell or phase out. Within the planned 
overall reduction in the number of models, GM is planning to introduce 
five new hybrid and plug-in models by 2012, bringing the total of such 
models to 14. These new models would include at least one extended 
range electric vehicle;[Footnote 36] however, members of our panel 
cautioned that this electric model may not sufficiently improve GM's 
viability because the car is expected to be priced too high to result 
in substantial sales. 

Treasury identified similar challenges related to both Chrysler's and 
GM's product mixes. According to Treasury, given that Chrysler and GM 
rely on profits from trucks and SUVs, which typically have higher 
profit margins than smaller vehicles, both companies face challenges 
due to the vulnerability of demand for these vehicles based on fuel 
prices.[Footnote 37] Treasury also concluded GM is currently burdened 
with under performing brands and models and that GM's plan does not act 
aggressively enough to curb these problems. Treasury noted that 
although the decision to sell or phase out three brands is an important 
step, GM is late in taking this step. Additionally, Treasury determined 
that GM's current plan retains too many unprofitable models that have 
negative effects on GM's operations. 

Rationalizing dealership networks: 

Half of the panelists considered decreasing the size of the domestic 
automakers' dealership networks to be an important factor for future 
viability, with several noting that the networks are too large to be 
supported by the sales levels of recent years. Today, Detroit 3 
dealerships--many of which are independently owned and operated--are 
more numerous and, in general, sell half or fewer vehicles per 
dealership than transplant dealerships. As one panelist noted, higher 
sales per store allow for a greater return on the dealer's fixed costs 
of running the business, allowing for more investment in facilities and 
advertising--which ultimately benefits the automaker by improving the 
price for which its cars can be sold. 

Chrysler's plan for reducing dealerships includes merging its three 
brands--Chrysler, Jeep, and Dodge--into combined dealerships rather 
than having separate dealerships for each brand. Although the plan 
indicates that Chrysler has reduced its number of dealerships by about 
700 since 2004, the plan does not indicate how many additional 
dealerships can be eliminated through combined dealerships. A Chrysler 
official also noted that because of unfavorable market conditions, many 
dealers are choosing to close or consolidate with other dealers. GM has 
already reduced the size of its dealership network and plans to further 
reduce it from its 2008 level of 6,246 to 4,100 in 2014. GM's plan also 
indicates specifically which brands and locations (metropolitan or 
rural markets, for instance) will be targeted for reductions. Several 
members of our panel told us that eliminating dealerships against their 
will would be challenging due to state franchise laws that protect 
dealers, as discussed later in this report, and therefore the companies 
would need to negotiate with the dealers. Chrysler's plan does not 
discuss such negotiations and associated costs, such as buying back 
dealer inventory; however, GM's plan acknowledges that each negotiation 
is unique depending on factors such as the individual state law, the 
dealer, possible union contracts, and associated finance and warranty 
business, and that the costs of terminating a dealership can vary 

Treasury concluded that although GM has been successfully pruning 
dealerships for several years, more aggressive restructuring is needed. 
According to Treasury, GM's current pace for reducing the number of 
dealerships will burden the company with too many unprofitable or under 
performing dealerships for a long period of time, which hurts brand 
equity and the prospects of stronger dealerships. 

Reducing production costs and capacity: 

According to our panel, the companies have excess production capacity 
and their cost structures do not facilitate the companies' profitable 
operation in a market in which sales volumes are significantly lower 
than they have been in past years. Panelists told us that the 
companies' cost structures were established during a time when they 
dominated the U.S. market, and as foreign competition grew, their 
market shares decreased. Some of the panelists added that rather than 
adjust their cost structures, such as by reducing fixed costs, the 
companies pursued higher sales volumes to try to profitably operate 
under their existing cost structure. Given the forecast for continued 
decreased sales volumes, members of our panel said that they expected 
the restructuring plans to identify significant reductions in fixed 
costs. Additionally, these individuals said the automakers could 
benefit from incorporating efficiencies used by some of the foreign 
automakers into their production processes, such as manufacturing 
multiple types of vehicles at the same production facility or relying 
more on common vehicle architectures for the production of vehicles. 
Common vehicle architectures can allow automakers to plan, design, 
engineer and source vehicles for all global markets, whereas previously 
these efforts may have differed based on whether a car was to be sold 
in the United States or Europe, for example. 

According to Chrysler's February plan, the company began restructuring 
in 2007 to reduce fixed costs, and, by the end of 2009, these costs 
will have been reduced by $3.8 billion (27 percent), which includes a 
reduction of its salaried workforce by 35,000.[Footnote 38] In 
addition, Chrysler is requesting a 3 percent reduction in suppliers' 
prices. However, some members of our panel said that reliance on 
supplier price cuts is a problematic assumption because the suppliers 
are struggling financially and cannot afford to reduce their prices. 
Chrysler's plan does not address specific plans for production 
flexibilities. According to GM's February plan, the company plans to 
reduce its North American fixed costs by about $6 billion from 2008 to 
2011 and keep those cost levels constant through 2014. These savings 
are largely the result of the initiatives outlined in the plan and 
include the reduction of U.S. employment levels (hourly and salaried) 
by about 20,000 from 2008 to 2011, acceleration of labor cost parity 
with transplants, idling of 14 additional manufacturing facility in the 
United States by 2012, and reduction of 12 models offered in the United 
States by 2012. However, some members of our panel cautioned that the 
company may not be able to "cut its way to prosperity" and that GM 
needs to have a plan for how remaining salaried workers will carry out 
the restructuring efforts. GM's plan also indicates that the company 
plans to increase production flexibility by increasing the number of 
plants that can produce multiple vehicle models and that by 2012, more 
than half of its U.S. passenger car sales will be derived from common 

Treasury concluded that although both Chrysler and GM have made 
progress related to manufacturing, Chrysler still faces challenges in 
this area. Treasury noted that Chrysler's plan identified opportunities 
for reducing the company's cost structure, including fixed-cost 
reductions; however, manufacturing is still a key challenge for 
Chrysler because it has not invested significantly in common 
architectures and manufacturing flexibility. In contrast, Treasury said 
that GM has made material progress in creating common architectures and 
has worked to create greater flexibility in its facilities. According 
to Treasury, GM's actions in this area allow it to spread its product 
development and fixed costs over a large range of vehicles; in 
contrast, Treasury identified Chrysler's scale as a challenge because 
the company must spread fixed costs over a smaller number of vehicles, 
which may limit funding for the research and development needed to 
maintain competitiveness. 

Obtaining labor concessions: 

A number of panelists attributed the domestic automakers' current 
financial condition in part to the labor agreements with the existing 
workforce, as well as health-care and pension costs associated with the 
companies' retirees. Several of them noted that Chrysler's and GM's 
labor costs are higher than those of transplants primarily because of 
more generous healthcare benefits for workers. Others noted that work 
rules contained in the labor agreements can increase costs and limit 
production flexibility.[Footnote 39] According to the companies' plans, 
the UAW, and our panelists, previous labor agreements reached between 
the UAW and the automakers are helping to restructure labor costs to be 
competitive with transplants, by, for instance, bringing in new hires 
in nonskilled trades at a substantially lower wage rate than current 
workers, but some members of our panel said that more needs to be done 
in this area.[Footnote 40] 

Both Chrysler's and GM's February restructuring plans discuss proposed 
labor concessions, but no final agreements have been reached to date. 
According to Chrysler's plan, it has a tentative agreement with the UAW 
to implement labor terms competitive with those of transplants. The 
tentative agreement includes adjustments to levels of compensation, 
work rules, and severance provisions such as elimination of the Jobs 
Bank program, which provided income and benefit protection in lieu of 
layoffs. Similarly, GM's plan indicates that the company has reached 
agreement with the UAW to implement competitive work rules and to 
reduce labor costs. GM's plan also discusses some labor concessions 
that are in the process of being implemented, namely reducing costs 
through buyouts. Neither company has reached an agreement with the UAW 
to reduce cash contributions to the VEBAs to fund retirees' healthcare 
plans, also part of Chrysler's and GM's plans to achieve viability. 
According to the UAW, union members will not vote to ratify the labor 
modifications (e.g., compensation and work rules) until a tentative 
agreement has been reached on the modification to VEBA contributions. 
[Footnote 41] 

Treasury concluded that neither company has satisfied the terms of the 
loan agreements, in part, because neither reached approval on labor and 
VEBA modifications. Treasury also identified liabilities associated 
with pensions and health care for retirees as a challenge for GM, given 
that the company would need to sell 900,000 additional cars per year to 
cover its future cash payments for these costs. According to Treasury, 
these costs leave GM aiming to maximize sale volumes rather than 
focusing on return on investment. 

Relying on realistic estimates for sales volumes, market share, and 
other assumptions: 

Members of our panel said that the success of the plans would depend on 
whether the underlying assumptions for sales, market share, and 
possible future financial assistance were realistic. They cautioned 
against basing estimates for viability on assumptions of an immediate 
increase in sales volumes or in the Detroit 3's market share. Some of 
the panelists attributed the automakers' financial struggles, in part, 
to the companies' historical reliance on unrealistic expectations of 
sales volumes and market share that were not later met. As previously 
discussed, given their existing cost structure, the companies must have 
high sales volumes in order to achieve profitability. However, if the 
companies' forecasts for sales volumes and market share are too 
optimistic compared to actual consumer demand, the restructuring plans 
may not result in financial viability without further modifications to 
the restructuring plans. Therefore, some panelists said that 
restructuring efforts need to rely on realistic or conservative 
assumptions about sales volumes and market share. 

Regarding sales assumptions, Chrysler's baseline plan relies on 10.1 
million unit sales in the United States for cars and light trucks in 
2009, and GM's baseline plan relies on 10.5 million unit sales. Both 
plans include 2009 downside scenario sales estimates that are 1 million 
unit sales lower than their 2009 baseline scenario sales estimates (9.1 
million, for Chrysler; and 9.5 million, for GM). Some panelists told us 
that they thought the automakers' baseline sales estimates were 
realistic. With respect to market share, they said the companies should 
provide analysis to support their market share assumptions, given that 
the companies have been losing market share for decades while 
continuing to project gains in market share. GM's plan includes some 
key assumptions that drive its market share analysis; however the plan 
does not indicate to what extent each of these assumptions affects 
market share estimates. Chrysler's plan does not identify the 
assumptions that contribute to its market share estimates. One panelist 
commended GM for acknowledging the potential for dropping from its 2008 
U.S. market share of 22 percent to below 20 percent market share, 
although another cautioned that GM may not be able to maintain more 
than 16 percent market share. A few of the panelists noted that sales 
projections may not be realized due to the effect of eliminating or 
discontinuing brands because buyers interested in those brands may turn 
to competitors' products, rather than to other brands of GM and 

The February plans also assume assistance from other entities, 
including loans from the Department of Energy (DOE), an alliance with 
another automaker (in the case of Chrysler), and loans from foreign 
governments (in the case of GM).[Footnote 42] In addition to the AIFP 
funding the automakers requested in their February restructuring plans, 
Chrysler's plan assumes $6 billion in DOE loans and GM's plan assumes 
$7.7 billion in DOE loans. However, DOE has not completed its review of 
either company's application, in part, because DOE's program rules 
require loan recipients to be financially viable. DOE officials told us 
that they cannot finish reviewing Chrysler's and GM's applications 
until Treasury makes a final determination on the companies' viability, 
and that DOE will coordinate with Treasury in making that 
determination. Additionally, Chrysler's plan indicates that to be 
viable on a long-term basis, the company must pursue strategic 
alliances and includes a scenario based on a proposed alliance between 
Chrysler and Fiat, a European car company. Chrysler states in its plan 
that this alliance would provide Fiat with an equity stake in Chrysler 
and will provide Chrysler access to Fiat's smaller, fuel-efficient 
platforms and technologies, as well as Fiat's international dealer 
network. However, the alliance does not provide any financial 
resources, for example, through equity contributions to Chrysler. 
Chrysler also states in its plan that even with a Fiat alliance, the 
company would struggle if sales fall below its downside estimate. 

In its plan, GM assumes it will receive about $6 billion in financial 
assistance from foreign governments to be able to maintain adequate 
cash balances for its global operations through the beginning of 
economic recovery. The company's restructuring plan details the 
progress of ongoing discussions with governments in Australia, Canada, 
Europe, and Asia in order to achieve viable operations in those 
regions. GM submitted a separate restructuring plan to the Canadian 
government on February 20, 2009, which the Canadian government found to 
be insufficient. 

Treasury criticized several of the automakers' assumptions as being too 
optimistic or too aggressive. Treasury noted that Chrysler assumes it 
will maintain its market share even though it has lost market share 
over the last decade and there are few signs it can reverse this trend. 
Similarly, Treasury determined that GM's market share assumptions are 
too optimistic. GM has been losing 0.8 percent market share annually 
over the last 30 years and its plan assumes a slower rate--0.3 percent 
per year--of market share decline. With regard to pricing assumptions, 
Treasury stated that it will be challenging for Chrysler to maintain 
pricing as projected in its plan given what Treasury characterized as 
the perception of poorer product quality. With respect to GM, Treasury 
noted that its plan does not assume a decreased contribution margin 
despite a severely distressed market and the company's plan focuses on 
passenger cars and crossovers, which traditionally have earned lower 
contribution margins than trucks and SUVs. Additionally, Treasury 
concluded that GM's assumption of European assistance represents a risk 
to the viability of its plan because funds from European governments 
have not been allocated. 

Automakers Face Many Challenges to Successful Restructuring: 

The automakers are confronting a number of challenging conditions in 
their efforts to restructure in a way that will achieve and sustain 
long-term viability, according to members of our panel and research we 
reviewed. Some of the challenges are the same ones that led to the 
automakers' current condition, such as the weak economy and changing 
consumer preferences. Although Chrysler and GM acknowledged many of 
these challenges in their restructuring plans, many are beyond their 

Weak economic conditions: 

The poor condition of the U.S. economy will likely continue to affect 
the financial health of Chrysler and GM. As figure 2 shows, over the 
past 30 years, automobile sales almost always decreased during periods 
of economic recession. Chrysler and GM officials, as well as some 
panelists, noted that the current recession has had a similar effect on 
consumer confidence in general and automotive purchases in particular. 
Some panelists attributed this pattern to the discretionary nature of 
automobile purchases--that is, these purchases are easily postponed 
during periods of economic downturn. Reflecting the current economic 
conditions and projected slow recovery, both Chrysler and GM revised 
their sales projections downward, as noted above. However, if the 
economy recovers more slowly than the companies anticipate and sales 
revenues are lower than projected, the companies may not be able to 
achieve viability according to schedule and under the conditions laid 
out in their plans. For instance, both Chrysler and GM noted that their 
downside scenarios, which will occur if sales volumes are lower than 
expected, would result in the need for more federal funding than their 
baseline scenarios. However, although GM's assumption about economic 
growth (measured by gross domestic product) for 2009 was characterized 
as more conservative than other estimates, this assumption now looks 
optimistic compared to Congressional Budget Office and IHS Global 
Insight estimates.[Footnote 43] 

Figure 2: Monthly Light Vehicle Sales, 1976 to 2009 (Seasonally 
Adjusted Annual Rate): 

[Refer to PDF for image: line graph] 

Year: 1976; 
Monthly sales: 12.5 million. 

Year: 1977; 
Monthly sales: 14 million. 

Year: 1978; 
Monthly sales: 13.3 million. 

Year: 1979; 
Monthly sales: 14.6 million. 

Year: 1980 (includes recession period); 
Monthly sales: 14.1 million. 

Year: 1981; 
Monthly sales: 11 million. 

Year: 1982 (includes recession period); 
Monthly sales: 10.1 million. 

Year: 1983; 
Monthly sales: 10.7 million. 

Year: 1984; 
Monthly sales: 14 million. 

Year: 1985; 
Monthly sales: 15.3 million. 

Year: 1986; 
Monthly sales: 15.8 million. 

Year: 1987; 
Monthly sales: 12.2 million. 

Year: 1988; 
Monthly sales: 15.8 million. 

Year: 1989; 
Monthly sales: 15 million. 

Year: 1990; 
Monthly sales: 16 million. 

Year: 1991 (includes recession period); 
Monthly sales: 11.6 million. 

Year: 1992; 
Monthly sales: 12.4 million. 

Year: 1993; 
Monthly sales: 13.2 million. 

Year: 1994; 
Monthly sales: 15 million. 

Year: 1995; 
Monthly sales: 14.4 million. 

Year: 1996; 
Monthly sales: 14.4 million. 

Year: 1997; 
Monthly sales: 15.3 million. 

Year: 1998; 
Monthly sales: 14.4 million. 

Year: 1999; 
Monthly sales: 16.1 million. 

Year: 2000; 
Monthly sales: 18.2 million. 

Year: 2001 (includes recession period); 
Monthly sales: 17.2 million. 

Year: 2002; 
Monthly sales: 16.2 million. 

Year: 2003; 
Monthly sales: 16.4 million. 

Year: 2004; 
Monthly sales: 16.3 million. 

Year: 2005; 
Monthly sales: 16.4 million. 

Year: 2006; 
Monthly sales: 17.5 million. 

Year: 2007; 
Monthly sales: 16.3 million. 

Year: 2008 (includes recession period); 
Monthly sales: 15.3 million. 

Year: 2009 (includes recession period); 
Monthly sales: 9.5 million. 

Source: U.S. Department of Commerce, Bureau of Economic Analysis. 

Note: According to members of our panel, the spike in sales during 
2001, a recession period, is largely attributed to the financing 
incentives that the automakers offered consumers. 

[End of figure] 

Frozen credit markets: 

The continuing lack of credit availability--on both a consumer and 
institutional level--is a major challenge for the automakers. A 
substantial amount of vehicle financing is obtained through asset- 
backed securities (ABS) transactions, which provide liquidity to the 
automotive financing companies, such as GMAC and Chrysler Financial, 
and enable dealer and consumer financing. However, due to conditions in 
the capital markets, considerably less of this type of financing is 
occurring. In turn, this has affected the ability of dealers to offer 
retail financing to consumers. Because almost all consumers rely on 
some level of financing to purchase automobiles, this lack of credit 
has negatively impacted sales. In addition, the lack of credit 
availability has affected dealers' ability to finance their inventory 
(referred to as floorplan financing). Since dealers purchase vehicles 
from the automakers, the lack of floorplan financing also negatively 
impacts the automakers' revenues. Given the role the automotive 
financing companies play in vehicle sales, Chrysler and GM indicated in 
their restructuring plans that the financial health of Chrysler 
Financial and GMAC is critical to their financial viability. As noted 
earlier, both GMAC and Chrysler Financial have received federal 
financial assistance through AIFP.[Footnote 44] 

To increase the availability of credit for consumers, Treasury and the 
Federal Reserve have announced the Term Asset-Backed Securities Loan 
Facility (TALF) program, which will provide financing to investors for 
purchases of ABS and could generate up to $1 trillion in lending for 
individuals and businesses.[Footnote 45] Eligible ABS includes newly 
issued AAA-rated tranches of securitizations backed by auto loans. 
However, officials from the automakers and auto financing companies we 
interviewed expressed concern about the AAA-rating requirement, noting 
that under such a requirement certain of the auto financing companies' 
securities would not be eligible. 

Solvency of suppliers: 

Officials from Ford, GM, and Chrysler, as well as members of our panel, 
stated that the tenuous financial condition of auto suppliers is a 
major concern because the solvency of the supply chain is critical to 
the automakers' viability. As Ford's CEO noted in his December 2008 
congressional testimony, the domestic auto manufacturing industry is 
interdependent, especially in the area of suppliers, with an estimated 
80 percent overlap in supplier networks. Thus, according to the 
automakers and some panelists, the collapse of one or more of the 
domestic automakers would affect the remaining automakers because, 
among other things, such a collapse could impact the ability of shared 
suppliers to continue operations. Ford also noted that a supplier 
financing safety net--such as guarantees on payment from the federal 
government--would help prevent this situation. Moreover, large 
production cuts due to sluggish sales, especially in the first quarter 
of 2009, have affected the cash flow and liquidity of many automotive 
suppliers. According to the Motor & Equipment Manufacturers Association 
(MEMA), more than 40 major suppliers filed for Chapter 11 restructuring 
in 2008, with industry surveys indicating approximately one-third of 
all suppliers are in imminent financial distress.[Footnote 46] As 
previously noted, Treasury announced in March it would provide up to $5 
billion in assistance to help suppliers. 

Cost of developing advanced technology vehicles: 

Several panelists noted that not only is developing advanced technology 
vehicles expensive, but also the return on the investment in those 
vehicles can be low because the initial demand for new technologies can 
be slow to develop. For example, the Toyota Prius was on the market for 
10 years before reaching 1 million units sold. According to our panel, 
given the high development costs and low initial demand, especially if 
gasoline prices remain relatively low, these new vehicles are not 
likely to generate a profit for several years. Thus, changing the 
companies' product mix to include more advanced technology vehicles may 
not be the best way to improve the financial bottom line in the short 
term. Furthermore, at least one panelist questioned whether the 
necessary energy infrastructure, such as electrical outlets to charge 
batteries, will be available to support these new technologies. Without 
adequate infrastructure, consumers will be reluctant to purchase these 
new advanced technology vehicles. GM officials acknowledged these 
challenges but indicated that the company decided to continue investing 
in advanced technologies even during the current financial crisis 
because they need this technology in their fleet to help meet federal 
fuel economy standards in the future. In addition, GM officials said 
they are planning for higher oil prices than current futures market 
expectations, in order to make GM's plan more robust against oil price 

Reducing the number of dealerships to align with sales volumes: 

Many panelists said that it will be difficult for Chrysler and GM to 
resize their dealership networks. The large number of dealers increases 
intra-brand competition and thus reduces the pricing power of 
individual dealers. One GM official noted that the biggest competition 
for a GM dealer is often the other GM dealer down the street. As 
previously mentioned, Detroit 3 dealerships sell substantially fewer 
vehicles per dealership than transplant dealerships sell. Given these 
and other concerns, Chrysler, Ford, and GM are working to "right size" 
their dealer networks to better align with automakers' current and 
projected sales volumes and market shares. However, panelists told us 
state franchise laws make eliminating dealerships difficult because 
these laws generally provide strong protections for auto dealer 
franchisees. For example, Michigan's law on auto dealer franchises 
states that manufacturers must provide adequate notice, act in good 
faith, and have good cause in order to terminate an agreement with a 
dealer.[Footnote 47] Any action to consolidate or eliminate a dealer-- 
outside of a bankruptcy court--must be negotiated with the affected 
dealers. According to members of our panel, under the best-case 
scenarios, the automakers can expect to incur significant costs and 
delays in rationalizing their dealership networks. Given the current 
depressed level of automobile sales, automakers and panelists also told 
us that some dealers are looking either to go out of business 
voluntarily or to merge their business with other dealerships. 

Uncertainty over future fuel economy standards: 

The current uncertainty of future fuel economy standards could 
complicate the auto manufacturers' ability to plan for future market 
conditions. The National Highway Traffic Safety Administration (NHTSA), 
within the Department of Transportation, issues fuel economy standards 
for vehicles sold in the United States. Currently, fuel economy 
standards are set through model year 2011. NHTSA officials told us they 
plan to propose standards for model years 2012 through 2016 this summer 
and issue final standards by March 31, 2010. Further, according to 
NHTSA, it must coordinate the rule making with the Environmental 
Protection Agency (EPA). EPA will be responsible for setting standards 
regarding the level of greenhouse gases passenger vehicles can emit if 
it adopts its proposed finding that greenhouse gases in the atmosphere 
endanger the public health and welfare.[Footnote 48] In addition, NHTSA 
officials said they were monitoring events relating to California's and 
other states' attempts to set and enforce individual greenhouse gas 
emission standards for passenger vehicles. Chrysler and GM officials 
told us they would prefer one national standard to individual state 
standards. If NHTSA raised the fuel economy standards above what the 
automakers have planned for their near-term product line, or if states 
are allowed to set individual standards, it could complicate the 
viability plans of the auto manufacturers by forcing them to make 
faster, more costly technological investments in their vehicles than 
they otherwise had planned. NHTSA officials told us that when setting 
future fuel economy standards, they would take into account the ability 
of the auto industry to make the necessary technological investments in 
its products to increase fuel economy. 

Reducing debt: 

Restructuring the automakers' balance sheets by reducing debt and 
related leverage are critical elements to any plan for long-term 
viability.[Footnote 49] As of December 31, 2008, GM had total 
liabilities of $176.4 billion compared to negative stockholders' equity 
of $86.2 billion. GM's liabilities of $176.4 billion included current 
liabilities (payable in 2009) of $73.9 billion and noncurrent 
liabilities of $54.1 billion for pensions and postretirement benefits 
and $29.6 billion of long-term debt.[Footnote 50] The loan agreement 
calls for GM's "best efforts" to reduce its unsecured public debt by at 
least two-thirds. As of December 31, 2008, GM had about $27.2 billion 
of unsecured public debt (consisting of amounts included in GM's debt 
payable in 2009 and long-term debt). In its restructuring plan, GM 
reported that negotiations were under way with its bondholders to 
convert the unsecured debt to equity. This debt restructuring would 
reduce interest expense and immediately improve cash flow to GM. 
Chrysler, which does not have significant unsecured public debt, 
proposed working with creditors, including Treasury, senior lien bank 
lenders, and the UAW VEBA, to reduce its debt by $5 billion.[Footnote 

According to members of our panel and financial analysts we 
interviewed, reaching agreements with bondholders could be difficult 
because the value of company stock is less than the value of the bonds. 
Bondholders will be trading a known rate of return that is subject to 
bankruptcy risk for a completely unknown rate of return that is also 
subject to bankruptcy risk. As a Treasury official noted, however, by 
not agreeing to the exchange, the bondholders are subject to the risk 
that the companies could file for bankruptcy, potentially rendering 
their bonds worthless. According to financial analysts we spoke with, 
many bondholders are willing to take their chances waiting for more 
government assistance. Recognizing these challenges, officials from 
both Chrysler and GM told us they will likely need the assistance of 
the Presidential Task Force or Treasury to reach agreement with their 
bondholders or creditors. 

Given Challenges, Treasury and Automakers Are Considering Options for 

Given the substantial amount of debt that both Chrysler and GM have, 
and the uncertainty that revenues from car sales will increase in the 
near term or that the automakers' stakeholders will reach an agreement 
needed for successful restructuring, Treasury and the automakers have 
acknowledged the very real possibility that restructuring might be 
accomplished through a reorganization under the bankruptcy code. Under 
that scenario, according to Treasury, the most likely approach would be 
a court-supervised asset sale, in which the company's good assets would 
be sold to a new entity,[Footnote 52] and substantial amounts of the 
company's debt would remain in possession of the old part of the entity 
to be dealt with in bankruptcy court. Treasury said this approach would 
help accelerate the turnaround of the companies by allowing them to 
quickly exit bankruptcy. According to Treasury, another possibility for 
restructuring for GM would be a "prepackaged" bankruptcy, in which the 
company's creditors approve a reorganization plan before the company 
files for bankruptcy; however, according to Treasury, it appears 
unlikely that such an agreement could be reached in the limited amount 
of time available. Treasury has said it would consider providing 
bankruptcy financing to Chrysler and GM if the companies meet the 
conditions Treasury set in its March 30 announcement and if Treasury 
and the companies determine that a reorganization bankruptcy is the 
best course of action.[Footnote 53] 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Departments of the Treasury, 
Transportation, and Energy for review and comment. These agencies 
provided technical clarifications, which we incorporated as 

We also made a draft of this report available to Chrysler and GM 
officials for their review and comment. Chrysler and GM officials 
provided technical corrections and clarifications, which we 
incorporated as appropriate. 

We are sending copies of this report to other interested congressional 
committees and members, the Departments of the Treasury, 
Transportation, and Energy, and others. The report also is available at 
no charge on the GAO Web site at [hyperlink,]. 

If you or your staff have any questions about this report, please 
contact Katherine Siggerud at (202) 512-2834 or or 
Susan Fleming at (202) 512-2834 or 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 II. 

Signed by: 

Gene L. Dodaro: 
Acting Comptroller General of the United States: 

List of Committees: 

The Honorable Daniel K. Inouye:
The Honorable Thad Cochran:
Vice Chairman:
Committee on Appropriations:
United States Senate: 

The Honorable Christopher J. Dodd:
The Honorable Richard C. Shelby:
Ranking Member:
Committee on Banking, Housing, and Urban Affairs:
United States Senate: 

The Honorable Kent Conrad:
The Honorable Judd Gregg:
Ranking Member:
Committee on the Budget:
United States Senate: 

The Honorable Max Baucus:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate: 

The Honorable David R. Obey:
The Honorable Jerry Lewis:
Ranking Member:
Committee on Appropriations:
House of Representatives: 

The Honorable John M. Spratt Jr.
The Honorable Paul Ryan:
Ranking Member:
Committee on the Budget:
House of Representatives: 

The Honorable Barney Frank:
The Honorable Spencer Bachus:
Ranking Member:
Committee on Financial Services:
House of Representatives: 

The Honorable Charles B. Rangel:
The Honorable Dave Camp:
Ranking Member:
Committee on Ways and Means:
House of Representatives: 

[End of section] 

Appendix I: Members of GAO's Auto Industry Panel: 

We contracted with the National Academy of Sciences (NAS) to identify a 
balanced, diverse group of individuals with expertise about the past 
and current financial condition and operations of the domestic 
automakers, the restructuring of distressed companies, labor relations 
issues, financial management and analysis of distressed or 
restructuring companies, factors influencing competitiveness in the 
auto industry, and engine and vehicle technologies that may affect the 
auto manufacturing industry today as well as in the near future. We 
selected 17 individuals for interviews from among those NAS identified 
based on achieving a variety of expertise and avoiding any potential 
conflicts of interest (see table 4). 

Table 4: Individuals with Auto Industry Expertise Identified by NAS Who 
Were Interviewed: 

Name: Bruce M. Belzowski; 
Company or Institution: University of Michigan, Transportation Research 

Name: Richard N. Block; 
Company or Institution: Michigan State University, School of Labor and 
Industrial Relations. 

Name: John Casesa; 
Company or Institution: Casesa Shapiro Group. 

Name: K.G. Duleep; 
Company or Institution: Energy & Environmental Analysis Inc. 

Name: George Eads; 
Company or Institution: CRA International. 

Name: Susan Helper; 
Company or Institution: Case Western Reserve University. 

Name: Rod Lache; 
Company or Institution: Deutsche Bank. 

Name: Tim Lieuwen; 
Company or Institution: Georgia Institute of Technology. 

Name: John Paul MacDuffie[A]; 
Company or Institution: University of Pennsylvania, Wharton School of 

Name: Walter S. McManus; 
Company or Institution: University of Michigan, Transportation Research 

Name: Glenn Mercer[A]; 
Company or Institution: The International Motor Vehicle Program at the 
Massachusetts Institute of Technology. 

Name: Henry S. Miller; 
Company or Institution: Miller Buckfire & Company. 

Name: Justin Mirro; 
Company or Institution: Moelis & Company, Transportation Investment 
Banking Group. 

Name: Nabil Nasr; 
Company or Institution: Rochester Institute of Technology. 

Name: William A. Niskanen; 
Company or Institution: Cato Institute. 

Name: Douglas M. Steenland; 
Company or Institution: Formerly of Northwest Airlines Corporation. 

Name: Marina Whitman; 
Company or Institution: University of Michigan, Ross School of 

Source: GAO. 

[A] These individuals also reviewed a portion of a draft of this report 
to ensure the accuracy and completeness of the information. 

[End of table] 

[End of section] 

Appendix II: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Katherine A. Siggerud, (202) 512-2834 or 

Susan Fleming, (202) 512-2834 or 

Staff Acknowledgments: 

In addition to the contact names above, the following individuals made 
important contributions to this report Marcia Carlsen, Nikki Clowers, 
and Raymond Sendejas, Assistant Directors; Alana Finley; Chuck Ford; 
Cole Haase; Heather Halliwell; Jennifer Henderson; Joah Iannotta; 
Matthew LaTour; Susan Michal-Smith; and Susan Sawtelle. 

[End of section] 


[1] The Emergency Economic Stabilization Act of 2008 (EESA) authorized 
the Troubled Asset Relief Program (TARP), Pub. L. No. 110-343, 122 
Stat. 3765 (2008), 12 U.S.C.§ 5201. Under TARP, Treasury has the 
authority to purchase or guarantee up to $700 billion in troubled 
assets through its Office of Financial Stability. As of March 27, 2009, 
Treasury had publicly announced funding programs under TARP totaling 
$667.4 billion, most of which was used to purchase or guarantee 
troubled assets from financial institutions, and about $422.4 billion 
had been apportioned. 

[2] Specifically, Treasury purchased debt obligations of GM and of 
Chrysler LLC's parent company, Chrysler Holding LLC. Debt obligations 
constitute TARP "troubled assets" under section 3(9) of the Act, 12 
U.S.C. § 5202(9). Under the terms of the Treasury-Chrysler Holding LLC 
Loan and Security Agreement, Chrysler Holding then provided the loan 
proceeds to Chrysler LLC, and Chrysler LLC has carried out the 
requirements of the loan agreement. 

[3] 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. 

[4] GAO, Auto Industry: A Framework for Considering Federal Financial 
Assistance, [hyperlink,] 
(Washington, D.C.: Dec. 4, 2008) and Auto Industry: A Framework for 
Considering Federal Financial Assistance, [hyperlink,] (Washington, D.C.: Dec. 5, 

[5] Ford Motor Credit Company, GMAC, and Chrysler Financial are 
companies that provide financing for consumer automotive and dealer 

[6] GM's core U.S. brands are Buick, Cadillac, Chevrolet, and GMC; 
other brands include Daewoo, Holden, HUMMER, Opel, Pontiac, Saab, 
Saturn, Vauxhall and Wuling. 

[7] Chrysler's brands include Dodge, Chrysler, and Jeep. 

[8] Chrysler noted that its losses are preliminary and include non- 
recurring impairment and restructuring charges totaling $4.2 billion. 
Because Chrysler is privately owned, data on its financial condition 
are not currently available to the public. However, Chrysler reported 
the unaudited $8 billion loss for 2008 in its restructuring plan 
submitted to Treasury on February 17, 2009. 

[9] GM's loss was reported in its audited financial statements for 

[10] In March, the UAW ratified changes to its 2007 labor agreement 
with Ford. 

[11] Detroit 3-related jobs account for 1 percent or more of the 
workforce in these 50 metropolitan areas. Howard Wial, "How a Metro 
Nation Would Feel the Loss of the Detroit Three Automakers," 
Metropolitan Policy Program at Brooking (Dec.12, 2008). 

[12] Data on pension recipients are from March 2009 for Chrysler and 
December 2008 for GM. 

[13] According to Chrysler, $20 million of unsecured public debt 
remains outstanding following a tender offer made by Chrysler in 2007 
for the purpose of eliminating all such debt. 

[14] An affiliate of Cerberus Capital Management owns 80.1 percent of 
Chrysler Holding LLC, and Daimler AG indirectly owns the remaining 19.9 
percent. Chrysler Holding LLC, in turn, indirectly owns 100% of 
Chrysler LLC. 

[15] Light vehicle refers to passenger cars, multipurpose passenger 
vehicles, trucks, and buses with a gross vehicle weight rating of up to 
10,000 pounds. 

[16] A UAW representative, in commenting on this statement, disagreed, 
saying that the difficulties facing the Detroit 3 are more a result of 
the sharp drop in vehicle sales. 

[17] Ford subsequently determined that it would not request loans from 
Treasury at this time. 

[18] [hyperlink,]. 

[19] Ford requested a $9 billion line of credit to protect against 
further industry downturns, but company officials have said that they 
do not intend to use this line of credit. 

[20] These amounts are in addition to the loans Chrysler and GM are 
seeking through the Department of Energy for advanced technology 
vehicles. These loan applications are discussed later in this report. 

[21] The Task Force is a cabinet-level group that includes the 
secretaries of Transportation, Commerce, Labor, and Energy. It also 
includes the Chair of the President's Council of Economic Advisers, the 
Director of the Office of Management and Budget, the Administrator of 
the Environmental Protection Agency, and the Director of the White 
House Office of Energy and Climate Change. The President has directed 
the Secretary of the Treasury and the Director of the National Economic 
Council to lead the Task Force. Also, Treasury has retained two 
additional individuals to assist the Task Force--a senior adviser to 
the Task Force who has experience in labor-management relations and a 
counselor to the Secretary who will advise on issues related to the 
auto industry. According to Treasury officials, the Task Force is 
advisory and has no decision-making authority. 

[22] If Chrysler or GM file for bankruptcy, Treasury has the right to 
cease accepting receivables into the program. 

[23] In April, the government of Canada announced a similar program to 
guarantee warranties on Chrysler and GM vehicles sold in Canada. The 
program is valued at about $150 million. 

[24] Pub. L. No. 111-5, 123 Stat. 115 (2009). 

[25] GAO, Guidelines for Rescuing Large Failing Firms and 
Municipalities, [hyperlink,] 
(Washington, D.C.: Mar. 29, 1984). 

[26] According to a GM official, as of March 2009, GM had identified 
about 182,000 bondholders. However, they are certain that not all 
bondholders have been identified. Therefore, the total number of 
bondholders is expected to be higher. 

[27] Chrysler reported in its restructuring plan that the Mopar 
inventory has a recovery value between $149 million and $261 million. 

[28] In commenting on a draft of this report, a GM official stated that 
in a normally functioning credit market, the assets GM provided as 
collateral would likely have supported similar loans from commercial 
lenders, although GM did not have formal valuation data to support this 

[29] A revolving facility is a type of loan allowing a borrower to draw 
down and repay amounts (up to a limit) for short periods throughout the 
life of the loan. Amounts repaid can be re-borrowed, thereby providing 
some flexibility to the borrower. 

[30] PBGC was established by the Employee Retirement Income Security 
Act of 1974. Pub. L. No. 93-406, 88 Stat. 829 (29 U.S.C.§§ 1001-1461). 

[31] PBGC's single-employer insurance program guarantees participant 
benefits up to $4,500 per month for age-65 retirees of plans 
terminating in 2009, with lower guarantees for those who retire before 
age 65. Additionally, benefit increases arising from plan amendments in 
the 5 years immediately preceding plan termination are not fully 
guaranteed, although PBGC will pay a portion of these increases. A 
similar 5-year phase-in limit applies to benefits payable upon the 
permanent closing of a plant or similar event. PBGC is also restricted 
from paying certain supplemental benefits, such as temporary benefits 
payable from early retirement to the date a retiree becomes eligible 
for Social Security benefits. These temporary supplemental benefits are 
generally not guaranteed. 

[32] Estimates of pension funding levels vary based on the methods and 
assumptions used. According to PBGC, GM's plans were underfunded by $20 
billion and Chrysler's by $9.3 billion on a termination basis as of 
November 30, 2008, for GM and January 1, 2009, for Chrysler. 
Termination liability reflects the cost to a company of paying an 
insurer to meet its pension obligations should the plan terminate. This 
is calculated by using actuarial assumptions PBGC makes including 
interest and mortality. Termination liability is often higher than 
liability calculated for other purposes. According to GM's financial 
statements, its U.S. pension plans were underfunded by $13.6 billion as 
of December 31, 2008; according to information provided by Chrysler, 
its U.S. pension plans were underfunded by $3.6 billion as of December 
31, 2008. 

[33] For example, we estimate that GM's and Chrysler's plans include 
roughly 900,000 participants, both those receiving benefits now and 
those who have earned benefits payable in the future, which would 
increase the total number of PBGC's current or future beneficiaries by 
nearly 80 percent. Additionally, PBGC would pay all the plans' benefit 
promises, up to certain limits set by Congress. These limits mean that 
some individuals, typically younger retirees, would see reduced 

[34] PBGC has available a $100 million line of credit from the U.S. 
Treasury for liquidity purposes if its self-generated funds are 
insufficient to meet operating cash needs in any period. 

[35] Additionally, one existing brand would become a niche brand. 

[36] An extended range electric vehicle has an electric motor that 
turns the vehicle's wheels and is powered by a battery that is charged 
from an outlet. It also has a small internal combustion engine that is 
fueled with gasoline or other alternative fuel, but, in this case, the 
engine acts as a generator for the electric motor. 

[37] In commenting on a draft of this report, a GM official noted that 
for all automakers, SUVs and trucks generally have higher profit 
margins than cars. In addition, the official said that GM's increased 
emphasis on smaller cars was evident by 2007 and that GM had promoted 
its ability to deliver fuel efficient cars as early as 2004. 

[38] Chrysler provided some examples of fixed-cost reductions including 
plant closures, improved asset utilization, program deferrals and 
cancellations, and healthcare actions related to active and retired 

[39] For instance, some of our panelists told us that transplants have 
fewer job classifications for hourly workers, which creates flexibility 
in reassigning workers to new or different tasks. In contrast, UAW 
contracts establish dozens of job classifications and narrowly define 
the roles that each classification can perform, limiting flexibility in 
managing staffing. 

[40] As previously discussed, the terms of the automakers' loan 
agreements require the automakers to try to (1) achieve total 
compensation packages (wages and benefits) competitive with 
transplants, (2) apply work rules that are competitive with 
transplants, and (3) eliminate any compensation or benefits, other than 
customary severance pay, to employees that have been fired, laid off, 
furloughed or idled. 

[41] Although Ford has not accepted federal assistance and is not bound 
by the terms of the loan agreements that Chrysler and GM signed, Ford 
and the UAW reached agreement in March 2009 on modifications to the 
2007 labor contract and to plans for Ford's contributions to the VEBA. 
This agreement is noteworthy because, according to the UAW, the 
agreement addresses all of the labor and VEBA modifications that 
Chrysler and GM must achieve under their loan agreements with Treasury. 

[42] Chrysler and GM have both applied for loans from DOE's Advanced 
Technology Vehicle Manufacturing Program, which will provide low-cost 
loans to auto manufacturers or component parts producers to retool or 
build plants to make cars or components that will substantially improve 
vehicle fuel economy. 

[43] IHS Global Insight is a private sector firm that provides economic 
and financial forecasts and industry analysis. 

[44] To date, Ford Motor Credit Company (Ford Credit) has not received 
financial assistance under AIFP; however, it is a participant in the 
Commercial Paper Funding Facility and the Term Asset-Backed Securities 
Loan Facility programs. Like Chrysler Financial, Ford Credit has 
applied to FDIC to establish an industrial loan company. An industrial 
loan company is a financial institution that lends money and may be 
owned by nonfinancial institutions. To date, FDIC has not made a 
decision on Chrysler Financial or Ford Credit's application. 

[45] Up to $100 billion in funding will come from TARP. 

[46] MEMA represents motor vehicle parts suppliers. MEMA supports its 
members through its three affiliate associations: Automotive 
Aftermarket Suppliers Association, Heavy Duty Manufacturers 
Association, and Original Equipment Suppliers Association. 

[47] Mich. Comp. Laws § 445.1567(1)(a)-(c). 

[48] Greenhouse gas emissions in vehicles are directly related to a 
vehicle's fuel economy. 

[49] Leverage represents the amount of debt in relation to equity plus 
reserves and is a critical measure in determining an entity's financial 
flexibility and solvency. 

[50] The remaining $18.8 billion of liabilities are comprised of 
liabilities for financing and insurance operations, other liabilities, 
and deferred income taxes. 

[51] We reviewed Chrysler's financial statements but because it is not 
a public company, information on its liabilities cannot be disclosed in 
this report. 

[52] The sale would be conducted under 11 U.S.C. § 363, and the 
shareholders of the new entity would include the federal government and 
the current stakeholders of Chrysler or GM. 

[53] Section 364 of the bankruptcy code governs debtor-in-possession 
financing and authorizes various kinds of credit after a bankruptcy 
petition is filed. If the federal government were to extend credit to 
the automakers in a Chapter 11 reorganization bankruptcy, the federal 
government could receive priority regarding the payment of such loans 
under 11 U.S.C.§ 364. 

[End of section] 

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