Report Questions Auto Dealers’ Closings

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An audit of the Troubled Asset Relief Program found that the Obama administration’s auto task force may not have needed to urge so many struggling dealerships to close as rapidly as it did during the 2008 auto industry bailout.

“Although there was a broad consensus that GM and Chrysler generally needed to decrease the number of their dealerships, there was disagreement over where and, how quickly, the cuts should have been made,” Neil M. Barofsky, special inspector for TARP, wrote in a report released Monday.

The review was completed after questions arose as to how Chrysler and GM selected dealerships for termination and what benefits, if any, the companies gained from these terminations. Though Chrysler and GM closed their dealerships voluntarily, the need to restructure was put forth by the government before they lent both automakers $15 billion as part of its initial relief plan. A formal request for the study was made by Sen. Jay Rockefeller (D-W.Va.) and Rep. David Obey (D-Wis).

While the report doesn’t draw conclusions on the overall effectiveness of the auto bailout, its main point of contention is that closing the dealerships eliminated an estimated “tens of thousands of jobs” during a recession.

Back in 2008, Chrysler elected to terminate 789 dealerships within the first month of the government bailout, estimating each closed dealership would save the company $45,000. GM, which said it would close 1,454 dealerships by October 2010, said savings per dealership would be significantly higher: $1.1 million per establishment. Ultimately, GM rescinded 666 of these terminations and Chrysler reopened 50 dealerships. The report says that these discrepancies “casts doubt on their credibility.”

“It is not at all clear that the greatly accelerated pace of the dealership closings during one of the most severe economic downturns in our nation’s history was either necessary for the sake of the companies’ economic survival or prudent for the sake of the nation’s economic recovery,” the report reads.

Following the report’s release, the Treasury Department issued a formal letter decrying the findings.

“[The administrations’ actions] not only avoided a potentially catastrophic collapse and brought needed stability to the entire auto industry, but they also saved hundreds of thousands of American jobs and gave GM and Chrysler a chance to re-emerge as viable, competitive American businesses." Herbert M. Allison, Jr., the Treasury's assistant secretary for financial stability, said in the statement.

GM supported the Treasury’s assertion, saying that it has a stronger dealership network since its bankruptcy. Chrysler has not commented on the report. Both automakers have experienced a growth in profits in recent months. GM, in particular, posted a $865 million net profit for the first quarter of 2010. Chrysler said it will break even or post modest operating profit improvements for 2010.  

The report does not require the automakers to take any corrective action. Rather, it suggests the government take these findings into account before it makes another similar leap.

“Although the auto dealership termination process is beginning to come to a close, several of the lessons from the process should be considered in the event the Treasury once again is compelled to make decisions that directly affect the business in which it has invested,” it concludes.

Still wondering about those bailouts? Check out this MainStreet article on whether government bailouts really work.

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