Watchdog Report: The Government’s Investment in GM & Chrysler

U.S. Government Accountability Office
May 10, 2011

Listen to Watchdog Report: The Government’s Investment in GM & Chrysler - MP3 - 4.7MB - 5:06

From the U.S. Government Accountability Office, www.gao.gov

Transcript for: Watchdog Report: The Government’s Investment in GM &
Chrysler

Audio interview by GAO staff with Nikki Clowers, Director, Financial
Management and Community Investment

Related GAO Work: GAO-11-471: TARP: Treasury's Exit from GM and Chrysler
Highlights Its Competing Goals, and Results of Support to Auto
Communities Are Unclear

Released on: May 10, 2011


[ Background Music ]

[ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and
information from the Government Accountability Office. It's May 10th,
2011. Since 2008, the U.S. Treasury Department has committed $62 billion
in Troubled Asset Relief Program funding to the auto manufacturers
General Motors and Chrysler. A group led by Nikki Clowers, a director in
GAO’s Financial Management and Community Investment Team, recently
reviewed the effect of that funding and the steps Treasury is taking to
wind down its investment. GAO’s Jeremy Cluchey sat down with Nikki to
learn more.

[ Jeremy Cluchey: ] How much of an investment did the U.S. government
make in GM and Chrysler and where's that investment stand today?

[ Nikki Clowers: ] Through the TARP program Treasury invested about $62
billion in Chrysler and GM, which was about $12.5 billion in Chrysler as
well as $49.5 billion in GM. In exchange for that investment, Treasury
received about 61 percent in equity in GM and about 10 percent in
Chrysler, as well as $2.1 billion in preferred shares in GM as well as
about $12 billion in debt between the two companies. In terms of where
that investment stands now, the government has recouped about half of
its investments, with a big chunk of that coming through GM’s IPO from
last fall.

[ Jeremy Cluchey: ] Your team looked at the impact of this investment as
well. What did you find this investment has accomplished so far?

[ Nikki Clowers:] The investment really allowed, helped stabilize both
companies and allowed them time to restructure and not go through a
disorderly liquidation, which was a potential they were on a path for,
for disorderly liquidation. Through restructuring, they've been able to,
the companies have been able to reduce their fixed costs by reducing
dealerships, reducing the number of plants, reducing workers, among
other things, and by reducing the fixed costs this has had an important
consequence for the companies and that they've been able to lower their
breakeven cost, so, for example, before the restructuring, GM’s
breakeven was about 4 million sales in the United States. After
restructuring, for them to break even it's about 2 million car sales,
vehicle sales in the United States, so this is significant and it has
allowed them to cover all their fixed costs at the bottom of the cycle,
which has been really important over the past couple of years as auto
sales have remained depressed given the current economic conditions.

[ Jeremy Cluchey: ] Your report explains the competing priorities the
Treasury faces as it looks to divest from these companies. Can you
elaborate on this?

[ Nikki Clowers: ] Sure, Treasury has established different principles
that help guide their management of the investments in the auto
companies, and a few of those include managing the companies in a
commercial way, trying to maximize the return on investment for
taxpayers as well as exiting as soon as possible, and we previously
reported that these are sound principles but sometimes they may conflict
or compete. For Treasury to fully recoup its investment, it’ll have to
sell its remaining shares of about $54 per share, and while the Wall
Street analysts we talk to are optimistic that GM shares will increase
in value, they project that they'll trade between $40 and $50 over the
next year. So for Treasury to maximize its return on investments as one
of its principles, they would probably want to hold onto those shares a
little bit longer, but this would conflict with their principle of
exiting as soon as possible.

[ Jeremy Cluchey: ] For taxpayers who are interested in how the
government’s investment in GM and Chrysler is going, what's the bottom
line from this report?

[ Nikki Clowers: ] The government's assistance helps stabilize both auto
companies; it put them on the path to achieving financial viability, but
they're not out of the woods yet. Both continue to face challenges as
they look to launch new products in a continuing weak economy as well as
an economy that's experienced volatile fuel prices right now. They also
face challenges in maintaining their cost discipline and reducing or
maintaining, or controlling costs in the areas of pension and debt. The
Treasury has also taken steps to protect the taxpayers’ interest in
managing these investments, and although they have recouped about half
of the government assistance provided, there's still a significant
amount of federal assistance tied up in these companies, so it's
important that Treasury remain vigilant in monitoring these investments.
Treasury will have to strike the right balance between maximizing the
return on investment for taxpayers and exiting as soon as possible.

[ Background Music ]

[ Narrator: ] To learn more, visit GAO's Web site at GAO.gov and be sure
to tune in to the next edition of GAO's Watchdog Report for more from
the congressional watchdog, the Government Accountability Office.