Troubled Asset Relief Program: Continued Stewardship Needed as Treasury Develops Strategies for Monitoring and Divesting Financial Interests in Chrysler and GM

General Accountability Office
November 2, 2009

Summary

GAO-10-151, Nov 2, 2009

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

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

Recommendations for Executive Action

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

Agency Affected: Department of the Treasury

Status: Closed - Implemented

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

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

Agency Affected: Department of the Treasury

Status: Closed - Implemented

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

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

Agency Affected: Department of the Treasury

Status: Closed - Implemented

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

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Report to Congressional Committees: 

United States Government Accountability Office:
GAO: 

November 2009: 

Troubled Asset Relief Program: 

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

GAO-10-151: 

GAO Highlights: 

Highlights of GAO-10-151, a report to congressional committees. 

Why GAO Did This Study: 

The Department of the Treasury (Treasury) provided $81.1 billion in 
Troubled Asset Relief Program (TARP) aid to the U.S. auto industry, 
including $62 billion in restructuring loans to Chrysler Group LLC 
(Chrysler) and General Motors Company (GM). In return, Treasury 
received 9.85 percent equity in Chrysler, 60.8 percent equity and $2.1 
billion in preferred stock in GM, and $13.8 billion in debt obligations 
between the two companies. 

As part of GAO’s statutory responsibilities for providing oversight of 
TARP, this report addresses (1) steps Chrysler and GM have taken since 
December 2008 to reorganize, (2) Treasury’s oversight of its financial 
interest in the companies, and (3) considerations for Treasury in 
monitoring and selling its equity in the companies. GAO reviewed 
documents on the auto companies’ restructuring and spoke with officials 
at Treasury, Chrysler, and GM, and individuals with expertise in 
finance and the auto industry. 

What GAO Found: 

Chrysler and GM have made changes since December 2008 to address key 
challenges to achieving viability, but the ultimate effect of these 
changes remains to be seen. The companies have eliminated a substantial 
amount of their long-term debt, reduced the number of brands and models 
of vehicles they sell, rationalized their dealership networks, and 
lowered production costs and capacities by reducing the number of 
factories and employees. It is difficult to fully assess the impact of 
these changes because of the short amount of time that has passed since 
reorganization and the low level of new vehicle sales. Moreover, 
Chrysler and GM are revaluing their assets and liabilities based on 
their reorganizations in 2009 and expect to prepare financial 
statements based on this effort in the coming months. 

Treasury does not plan to be involved in the day-to-day management of 
Chrysler and GM, but it plans to monitor the companies’ performance. 
Treasury developed several principles to guide its role as a 
shareholder, including the commitment that although Treasury reserves 
the right to set up-front conditions to protect taxpayers and promote 
financial stability, Treasury will oversee its financial interests in a 
hands-off, commercial manner. The conditions that Treasury set for the 
companies include requiring that a portion of their vehicles be 
manufactured in the United States and that they report to Treasury on 
the use of the TARP funding provided. Treasury officials told us that 
they are also requiring that Chrysler and GM submit financial 
information on a regular basis and that they plan to meet with the 
companies’ top management on a regular basis to discuss the companies’ 
financial condition. 

Treasury should make certain that its current approach for monitoring 
and selling its equity in Chrysler and GM fully addresses all important 
considerations financial and industry experts identified. For example, 
Treasury initially hired or consulted with a number of individuals with 
experience in investment banking or equity analysis to help assess 
Chrysler’s and GM’s financial condition and develop financing packages 
for the companies. Many of these individuals have recently left as the 
restructuring phase of Treasury’s work has been completed. Treasury 
will need to ensure these staff and any staff that depart in the future 
are replaced as needed with similarly qualified personnel. Also, 
Treasury does not currently contract with or employ outside firms with 
specialty expertise for its work with the auto industry but may need to 
do so in the future, to make sure sufficient expertise is available to 
oversee the government’s significant financial interests in Chrysler 
and GM. In addition, although Treasury officials told us they are 
considering all options for divesting the government’s ownership 
interests, including an initial public offering or private sale, they 
have focused primarily on a series of public offerings for GM and have 
not identified criteria for determining the optimal time and method to 
sell. Regardless of the option pursued, however, Treasury is unlikely 
to recover the entirety of its investment in Chrysler or GM, given that 
the companies’ values would have to grow substantially above what they 
have been in the past. 

What GAO Recommends: 

GAO recommends that the Secretary of the Treasury ensure the expertise 
needed to monitor Treasury’s investment in Chrysler and GM remains in 
place, report to Congress on its general approach for monitoring the 
companies’ performance, and have a plan for evaluating the optimal 
method and timing for divesting Treasury’s equity. Treasury generally 
agreed with GAO’s findings, conclusions, and recommendations. 

View [hyperlink, http://www.gao.gov/products/GAO-10-151] or key 
components. For more information, contact Katherine A. Siggerud 
(sigguerdk@gao.gov) or A. Nicole Clowers (clowersa@gao.gov) at 202-512-
2834. 

[End of section] 

Contents: 

Letter: 

Scope and Methodology: 

Background: 

Chrysler and GM Have Addressed Some Challenges Important to Achieving 
Viability, but the Effect of These Actions Remains to Be Seen: 

Treasury Does Not Plan to Be Involved in Chrysler's or GM's Day-to-Day 
Operations or Management, but It Plans to Closely Monitor the 
Companies' Performance: 

Treasury's Approach for Monitoring and Selling Its Ownership Interest 
in Chrysler and GM Does Not Fully Address All Important Considerations 
Experts Identified: 

Conclusions: 

Recommendations for Executive Action: 

Agency Comments and Our Evaluation: 

Appendix I: Financial and Industry Experts GAO Interviewed: 

Appendix II: Comments from the Department of the Treasury: 

Appendix III: GAO Contacts and Staff Acknowledgments: 

Tables: 

Table 1: TARP Funding Provided to the Auto Industry, as of September 
20, 2009: 

Table 2: Changes to Chrysler's and GM's U.S. Production Costs and 
Capacity: 

Table 3: Chrysler's Financial Reporting Requirements: 

Table 4: GM's Financial Reporting Requirements: 

Table 5: Value of Chrysler and GM Equity Required for Treasury to 
Recoup Its Investment: 

Figure: 

Figure 1: Key Events in Treasury's Assistance to the Auto Industry and 
Chrysler's and GM's Restructuring: 

Abbreviations: 

AIFP: Automotive Industry Financing Program: 

COP: Congressional Oversight Panel: 

EESA: Emergency Economic Stabilization Act: 

GM: General Motors Company: 

NAS: National Academy of Sciences: 

OFS: Office of Financial Stability: 

SEC: Securities and Exchange Commission: 

TARP: Troubled Asset Relief Program: 

UAW: International Union, United Automobile, Aerospace and Agricultural 
Implement Workers of America: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

November 2, 2009: 

Congressional Committees: 

After authorizing more than $80 billion in financial assistance to the 
ailing domestic automotive industry since December 2008, the Department 
of the Treasury (Treasury) is in the unprecedented position of having 
ownership stakes in two of the nation's three largest auto 
manufacturers--Chrysler Group LLC (Chrysler) and General Motors Company 
(GM).[Footnote 1] Although most automakers experienced declining sales 
in the last couple of years as the economy slipped into a recession, 
the current economic conditions have particularly hurt the sales of 
Chrysler and GM, resulting in significant financial losses and 
necessitating the use of billions of dollars of borrowed money or cash 
reserves to keep operating. In December 2008, the chief executive 
officers of Chrysler and GM testified before Congress that without 
federal assistance, their companies would likely run out of the cash 
needed to keep operating. 

Concerned that the collapse of one, or both, of these companies could 
pose a systemic risk to the nation's economy, the previous 
Administration established the Automotive Industry Financing Program 
(AIFP) under the Troubled Asset Relief Program (TARP) in December 2008. 
[Footnote 2] Through AIFP, Treasury provided loans to help Chrysler and 
GM continue operating as the companies restructured. In exchange for 
the funding it provided, Treasury received 9.85 percent equity in the 
new Chrysler,[Footnote 3] 60.8 percent equity and $2.1 billion in 
preferred stock in the new GM, and about $13.8 billion in debt 
obligations between the two companies.[Footnote 4] The companies still 
struggle to remain competitive with other automakers and to regain 
market share. 

We have previously reported that in a market economy the federal role 
in aiding industrial sectors should generally be of limited duration 
and establish clear limits on the extent of government involvement. 
Regarding assistance to the auto industry, we have noted that Treasury 
should have a plan for ending its financial involvement with Chrysler 
and GM that indicates how it will both sell its equity and ensure 
adequate repayment for the financial assistance it provided.[Footnote 
5] The current Administration has stated that it is a "reluctant 
shareholder" in Chrysler and GM, but that it would be irresponsible to 
"[give] away the equity stake to which taxpayers were rightly 
entitled."[Footnote 6] As such, Treasury has said that in managing its 
equity it will seek to exit as soon as practicable, maximize return on 
investment, and foster strong companies that can be independently 
viable. 

As part of our statutorily mandated responsibilities for providing 
timely oversight of TARP, we are continuing to monitor Treasury's 
assistance to the auto industry, including how Treasury is managing its 
equity in Chrysler and GM and how it plans to sell this equity. 
[Footnote 7] This report will explore the following issues related to 
Treasury's ownership of Chrysler and GM: (1) steps Chrysler and GM have 
taken since December 2008 to reorganize, (2) Treasury's oversight of 
its financial interests in Chrysler and GM, and (3) important 
considerations for Treasury in monitoring and selling its equity in the 
companies. 

Scope and Methodology: 

To identify steps Chrysler and GM have taken since December 2008 to 
reorganize, we reviewed information on the companies' finances and 
operations, including financial statements, select documents from their 
bankruptcy proceedings, and company-provided data, and interviewed 
representatives of the companies. 

To determine how Treasury will monitor its financial interests in 
Chrysler and GM, we reviewed transaction documents related to the 
restructuring of Chrysler and GM that Treasury was a party to, such as 
the secured credit agreements and shareholders' agreements, which set 
forth Treasury's rights with regard to the companies and certain 
requirements the companies must comply with. We also reviewed 
information on Treasury's plans for overseeing its ownership interests 
in the companies, including White House and Treasury press releases, 
and testimony statements. In addition, we interviewed officials from 
Treasury's Office of Financial Stability (OFS), which was established 
to administer TARP, about their plans to monitor the government's 
financial interests, including Treasury's enforcement of the reporting 
requirements that were established for Chrysler and GM. We did not, 
however, independently verify the processes and procedures Treasury has 
established to monitor and enforce the reporting requirements.[Footnote 
8] 

To identify important considerations for Treasury in monitoring and 
determining how and when to sell its equity in Chrysler and GM, we 
conducted a review of the academic literature on government ownership 
of private entities, including both domestic and international cases of 
private equity investments, privatization, and nationalization, and 
reviewed analyses of the potential future value of Chrysler and GM and 
Treasury's equity stake. We also interviewed individuals with expertise 
in the financial condition of domestic automakers, principles of 
corporate restructuring, and government ownership of private entities. 
The financial and business experts whose opinions are represented in 
this report were selected from a list of experts identified for us by 
the National Academy of Sciences (NAS) for our earlier report on 
challenges facing Chrysler and GM.[Footnote 9] Of the panel of experts 
we interviewed for that report, we contacted a subset whose expertise 
was particularly relevant to structuring an exit strategy. In addition 
to individuals identified by NAS, we spoke with individuals NAS experts 
themselves identified as being knowledgeable in this area. We also 
added two experts with investment experience specifically in the auto 
industry. We chose experts in government management of investments in 
private companies by identifying former federal government officials 
who were involved in well-known cases of government assistance to 
private entities, such as the federal assistance provided to Chrysler 
in 1979. We conducted individual semistructured interviews with these 
individuals, both in person and by telephone. Once this review was 
completed, we analyzed the content of the literature and the interviews 
for recurring themes and summarized these common results. A list of the 
individuals we spoke with is provided in appendix I. 

We conducted this performance audit from August 2009 to November 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 and conclusions based on our audit objectives. We believe that 
the evidence obtained provides a reasonable basis for our findings and 
conclusions based on our audit objectives. 

Background: 

Treasury's decision to provide substantial amounts of funding to the 
auto industry--more than 12 percent of the TARP funds authorized to 
date--and to accept equity in the companies as a form of repayment for 
a portion of the assistance reflects Treasury's view of the importance 
of the industry to the financial health of the United States as a 
whole. The auto industry--including automakers, dealerships, and 
automotive parts suppliers--contributes substantially to the U.S. 
economy by, for example, directly employing about 1.7 million people, 
according to industry and government data.[Footnote 10] To help 
stabilize this industry and avoid economic disruptions, Treasury 
authorized $81.1 billion through AIFP from December 2008 through June 
2009 for the following purposes. 

* Funding to support automakers during restructuring. Treasury has 
provided financial assistance to Chrysler and GM to support their 
restructuring as they attempt to return to profitability. This 
assistance was provided in loans and equity investments in the 
companies. 

* Auto Supplier Support Program. Under this program, Chrysler and GM 
received funding for the purpose of ensuring payment to suppliers. The 
program was designed to ensure that automakers receive the parts and 
components they need to manufacture vehicles and that suppliers have 
access to liquidity on their receivables. 

* Warranty Commitment Program. This program was designed to mitigate 
consumer uncertainty about purchasing vehicles from the restructuring 
automakers by providing funding to guarantee the warranties on new 
vehicles purchased from them. Funds were provided to Chrysler and GM 
under this program but have been repaid in full because both were able 
to continue to honor consumer warranties. 

* Funding to support automotive finance companies. Treasury has 
provided funding to support Chrysler Financial and GMAC LLC, financial 
services companies whose businesses include providing consumer 
financing for vehicle purchases and dealer financing for inventory. 
Chrysler Financial is following Treasury's directive to liquidate its 
business and is planning to wind down its operations by the end of 
2011. GMAC has agreed to provide Chrysler customers and dealers with 
financing for retail and wholesale purchases. 

Table 1 provides information on the funding levels Treasury authorized 
under AIFP, the amounts Chrysler, GM, and the finance companies have 
repaid, and Treasury's plans to be repaid or otherwise compensated for 
the outstanding funds. Treasury officials have said the agency does not 
intend to provide more funding to Chrysler or GM. 

Table 1: TARP Funding Provided to the Auto Industry, as of September 
20, 2009 (Dollars in billions): 

Company: Chrysler; 
Description of funding: Loans to Chrysler for general business purposes 
and restructuring; 
Authorized amount: $12.5; 
Repayments of principal: 0; 
Interest and dividend payments: $0.052; 
Amount and form of future repayments: A total of up to $7.1 billion 
will be repaid as a term loan, including $5.1 billion to be repaid 
within 8 years and $2 billion to be repaid within 2.5 years. Treasury 
also received a 9.85 percent equity share in the new Chrysler. Treasury 
also has $5.4 billion of debt in the old Chrysler, but it is not clear 
at this time whether this amount will be repaid[A]. 

Company: Chrysler; 
Description of funding: Supplier Support Program loan; 
Authorized amount: $1.0; 
Repayments of principal: 0; 
Interest and dividend payments: $0.002; 
Amount and form of future repayments: Amounts provided are due to be 
repaid by April 2010. 

Company: Chrysler; 
Description of funding: Warranty Commitment Program loan; 
Authorized amount: Company: $0.28; 
Repayments of principal: $0.28; 
Interest and dividend payments: $0.003; 
Amount and form of future repayments: Company: All funds have been 
repaid. 

Company: Chrysler; 
Description of funding: Total; 
Authorized amount: $13.8; 
Repayments of principal: $0.28; 
Interest and dividend payments: $0.06. 

Company: General Motors; 
Description of funding: Loans to GM for general business purposes and 
restructuring; 
Authorized amount: $49.5; 
Repayments of principal: 0; 
Interest and dividend payments: $0.168; 
Amount and form of future repayments: A total of $6.7 billion will be 
repaid as a term loan. Treasury also received $2.1 billion in preferred 
stock, and 60.8 percent equity in the new GM. Treasury also has $986 
million debt in the old GM, which it does not expect to be repaid. 

Company: General Motors; 
Description of funding: Supplier Support Program loan; 
Authorized amount: $2.5; 
Repayments of principal: 0; 
Interest and dividend payments: $0.004; 
Amount and form of future repayments: Amounts provided are due to be 
repaid by April 2010. 

Company: General Motors; 
Description of funding: Warranty Commitment Program loan; 
Authorized amount: Company: $0.361; 
Repayments of principal: $0.361; 
Interest and dividend payments: 0; 
Amount and form of future repayments: All funds have been repaid. 

Company: General Motors; 
Description of funding: Loan to participate in GMAC rights offering; 
Authorized amount: $0.884; 
Repayments of principal: 0; 
Interest and dividend payments: $0.009; 
Amount and form of future repayments: Treasury exchanged this loan for 
a portion of GM's equity in GMAC. As a result, Treasury holds a 35.4 
percent common equity interest in GMAC. The GM loan was terminated but 
GM paid $9 million in interest on the loan to participate in GMAC 
rights offering before the loan was terminated. 

Company: General Motors; 
Description of funding: Total; 
Authorized amount: $53.24; 
Repayments of principal: $0.36; 
Interest and dividend payments: $0.18. 

Company: Chrysler Financial; 
Description of funding: Loan funded through Chrysler LB Receivables 
Trust; 
Authorized amount: $1.5; 
Repayments of principal: $1.5; 
Interest and dividend payments: $0.007; 
Amount and form of future repayments: Loan repaid in full plus about $7 
million in interest[B]. 

Company: GMAC; 
Description of funding: Preferred stock and convertible preferred 
stock; 
Authorized amount: $12.5; 
Repayments of principal: Not applicable; 
Interest and dividend payments: $0.43; 
Amount and form of future repayments: Treasury may convert $7.5 billion 
of its preferred shares to common shares upon specific events such as 
public offerings. 

Company: Total; 
Authorized amount: $81.1; 
Repayments of principal: $2.1; 
Interest and dividend payments: $0.68. 

Source: GAO analysis of Treasury information. 

Note: Numbers are affected by rounding. 

[A] The $5.4 billion is composed of the original remaining loan and 
additional amounts provided as bankruptcy financing. Payment of this 
amount is contingent on receipt of distributions from Chrysler 
Financial in an amount equal to the greater of $1.375 billion or 40 
percent of distributions. 

[B] In lieu of warrants, Treasury received an additional note from 
Chrysler Financial. The initial aggregate principal amount of the note 
was $15 million, which Chrysler Financial has repaid. 

[End of table] 

As a condition of the initial federal financial assistance provided in 
December 2008 and January 2009, the Bush Administration required that 
Chrysler and GM develop restructuring plans that would, among other 
things, identify how the companies plan to achieve and sustain long- 
term financial viability. President Obama rejected the restructuring 
plans that Chrysler and GM submitted in February 2009, and required the 
companies to develop more aggressive plans. After reviewing the revised 
plans, the President announced in April 2009 and June 2009 that the 
government would provide additional financial assistance to support 
Chrysler's and GM's restructuring efforts, respectively. To effectuate 
the restructuring plans, both companies filed voluntary petitions for 
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Through 
the bankruptcy process, the newly organized Chrysler and GM purchased 
substantially all of the operating assets of the old companies. In June 
2009 and July 2009, respectively, the new Chrysler and new GM emerged 
from the bankruptcy process with substantially less debt and with 
streamlined operations. The old companies, which retained very few 
assets but most of the liabilities, remain in bankruptcy, where their 
remaining liabilities are being dealt with. These liabilities include a 
portion of the loans Treasury provided to the companies prior to 
bankruptcy in the amounts of $5.4 billion for Chrysler and $986 million 
for GM. As noted, Treasury has stated that it has no plans to provide 
additional assistance to Chrysler and GM. Figure 1 describes other key 
events in the funding and restructuring of the auto companies. 

Figure 1: Key Events in Treasury's Assistance to the Auto Industry and 
Chrysler's and GM's Restructuring: 

[Refer to PDF for image: timeline] 

Date: December 2008; 
Chrysler actions/GM Actions: Chrysler and GM chief executive officers 
testify before Congress that without federal assistance, their 
companies will not have the cash necessary to continue operations. 

Date: December 19, 2008; 
Chrysler actions/GM Actions: Treasury announces it will use TARP funds 
to establish the Auto Industry Financing Program to stabilize the U.S. 
automotive industry and avoid disruptions that would pose systemic risk 
to the nation’s economy. 

Date: December 31, 2008; 
GM Actions: Treasury agrees to provide $13.4 billion in AIFP funding to 
GM. 

Date: January 2, 2009; 
Chrysler actions: Treasury lends $4.0 billion in AIFP funding to 
Chrysler. 

Date: February 17, 2009; 
Chrysler actions/GM Actions: Chrysler and GM submit restructuring plans 
to Treasury as required by their loan agreements. 

Date: March 19, 2009; 
Chrysler actions/GM Actions: Treasury announces the Auto Supplier 
Support Program. 

Date: March 30, 2009; 
Chrysler actions/GM Actions: White House announces that Chrysler and GM’
s restructuring plans do not establish a credible path to viability and 
do not merit additional government investment. The companies are given 
additional time to show greater progress. White House announces the 
Warranty Commitment Program. 

Date: April 3, 2009; 
GM Actions: GM and Treasury execute a credit agreement to lend up to 
$3.5 billion to GM for the Auto Supplier Support Program.[A] 

Date: April 7, 2009; 
Chrysler actions: Chrysler and Treasury execute a credit agreement to 
lend up to $1.5 billion to Chrysler for the Auto Supplier Support 
Program.[B] 

Date: April 22, 2009; 
GM Actions: Treasury lends $2 billion in additional funding to GM. 

Date: April 29, 2009; 
Chrysler actions: Treasury lends $280 million to Chrysler under the 
Warranty Commitment Program. 

Date: April 30, 2009; 
Chrysler actions: Chrysler files voluntary petitions under Chapter 11 
of the U.S. Bankruptcy Code. White House announces it will provide $8.5 
billion through loans and equity investments in the company to support 
Chrysler’s restructuring. 

Date: May 20, 2009; 
GM Actions: Treasury lends $4 billion in additional funding to GM. 

Date: May 27, 2009; 
GM Actions: Treasury lends $361 million to GM under the Warranty 
Commitment Program. 

Date: June 1, 2009; 
Chrysler actions: Bankruptcy judge approves Chrysler’s restructuring 
proposal. 
GM Actions: GM files voluntary petitions under Chapter 11 of the U.S. 
Bankruptcy Code. Treasury announces it will provide up to $30.1 billion 
to GM through loans and equity investments to support a bankruptcy 
proceeding and to transition GM through restructuring. 

Date: June 10, 2009; 
Chrysler actions: New Chrysler purchases substantially all of old 
Chrysler’s assets. Treasury executes a $7.1 billion credit agreement 
with new Chrysler. 

Date: July 5, 2009; 
GM Actions: Bankruptcy judge approves GM’s restructuring proposal. 

Date: July 20, 1009; 
GM Actions: New GM acquires substantially all of old GM’s assets. 

Source: GAO analysis of Treasury information. 

[A] This amount was subsequently reduced to $2.5 billion. 

[B] This amount was subsequently reduced to $1 billion. 

[End of figure] 

Chrysler and GM Have Addressed Some Challenges Important to Achieving 
Viability, but the Effect of These Actions Remains to Be Seen: 

Since the condition of the domestic auto industry first came to the 
forefront of national attention in December 2008, Chrysler and GM have 
made changes to address key challenges to achieving viability, but the 
effect that these actions will have on the companies remains to be 
seen. As we previously reported, a number of operational and financial 
challenges stand in the way of Chrysler's and GM's return to 
profitability.[Footnote 11] Some of these challenges are beyond the 
companies' control, such as current economic conditions and limited 
credit availability. However, other factors the companies can exert 
more control over include the companies' debt levels, dealership 
networks, and production costs and capacity. Aided by substantial 
government assistance and bankruptcy reorganization, they have begun to 
address a number of these challenges. Although the companies' 
restructuring efforts started before receiving government assistance 
under TARP, our analysis focuses on the period between first receiving 
TARP assistance (around the end of 2008) and after bankruptcy 
reorganization (June 2009 and July 2009 for Chrysler and GM, 
respectively). The following are some key challenges that Chrysler and 
GM have begun to address. 

* Reducing debt. Through the bankruptcy process, Chrysler and GM 
eliminated a substantial amount of their long-term financial 
liabilities, including debt owed to bank lenders and bondholders. In 
our previous work, we discussed the importance of reducing debt for 
companies to achieve long-term viability. By reducing the amount the 
companies pay in interest expense, cash flow is improved, freeing up 
more money for research and development and other activities that can 
help the businesses prosper. The precise amount of the companies' total 
debt reduction is not known because the value of some debts will not be 
determined until the companies' post-reorganization accounting is 
complete. However, some reduced or eliminated debts whose values are 
known include $6.9 billion of secured bank debt owed by old Chrysler, 
of which $2 billion was repaid and none carried forward to new 
Chrysler; $5.9 billion of secured bank debt owed by old GM, 
substantially all of which was repaid by old GM, leaving new GM with 
none of this debt; substantial reductions of the companies' monetary 
obligations to the trusts established to provide health care benefits 
to retirees of the International Union, United Automobile, Aerospace 
and Agricultural Implement Workers of America (UAW); and about $27 
billion in unsecured GM bondholder debt and $2 billion in unsecured 
Chrysler obligations, which stayed as a liability of the old GM and old 
Chrysler, leaving new GM and new Chrysler with none of this debt. 

* Reducing the number of brands and models. GM is reducing its North 
American brands from eight to four.[Footnote 12] In November 2007, 
Chrysler announced it would eliminate four models within its three 
primary brands--Chrysler, Dodge, and Jeep--and in October 2009 it 
announced that it would create a fourth brand by splitting the Ram 
brand out of the Dodge brand. As we have previously reported, 
advantages of reducing brands and models include eliminating costs such 
as factory tooling and product development, reducing intracompany 
competition for sales of similar models, and allowing more focus and 
resources on the remaining models' quality, image, and performance. 

* Rationalizing dealership networks to align with sales volumes. Both 
Chrysler and GM have made cuts to their dealership networks since year-
end 2008. As we reported in April, the companies' dealer networks were 
too large to be supported by recent sales levels. As of April 2009, 
Chrysler, Ford, and GM dealerships--most of which are independently 
owned and operated--were more numerous and, in general, sold half or 
fewer vehicles per dealership than dealerships selling vehicles from 
foreign automakers. 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 are sold. As of 
June 30, 2009, shortly after the new Chrysler emerged from bankruptcy, 
Chrysler had reduced its U.S. dealerships to 2,382, a reduction of 
about 28 percent from the year-end 2008 level of 3,298.[Footnote 13] As 
of July 2009, when the new GM emerged from bankruptcy, its number of 
dealers had declined to 6,039 through normal attrition, down from 6,375 
at year-end 2008. GM is executing "wind-down" agreements with another 
approximately 1,300 dealerships and expects another 600 Saturn, Saab, 
or Hummer dealerships to be transferred to another manufacturer or be 
phased out. With additional normal attrition, GM expects to have 
between 3,600 and 3,800 dealerships by the end of 2010, which will 
represent a 44 percent reduction from 2008 year-end numbers. 

* Reducing production costs and capacity. Both companies have made 
reductions in their production costs and capacity since year-end 2008, 
according to company-provided information. In our April report, we 
noted such reductions are important because the companies' pre- 
reorganization cost structures were not sustainable given the decline 
in their sales and market shares in recent years.[Footnote 14] Table 2 
shows the reductions the companies made between year-end 2008 and the 
dates they emerged from bankruptcy. In addition to the reductions made 
during these time periods, the companies implemented restructuring 
efforts prior to 2008 and plan additional reductions in the future. For 
instance, Chrysler closed two factories, reduced a number of shifts, 
and cut nearly 29,000 hourly, salaried, and supplemental employees 
between year-end 2006 and year-end 2008. GM announced in September 2009 
that it will add a third shift at three U.S. assembly plants as part of 
a plan to close other plants to increase the efficiency of its 
manufacturing operations. Chrysler and GM have also reached agreements 
with the UAW, in accordance with the terms of the companies' 
prebankruptcy loans from Treasury, which will result in further 
reductions in production costs. Under these terms, the companies were 
required to use their best efforts to reduce total compensation paid to 
U.S. employees, including wages and benefits, to be comparable with the 
total compensation Honda, Nissan, or Toyota pays to employees at their 
U.S. facilities. The companies were also required to use their best 
efforts to make changes to work rules to be comparable with the work 
rules of Honda's, Nissan's, or Toyota's U.S. facilities. Changes the 
UAW agreed to as part of restructuring included cancellation of cost- 
of-living adjustments for current workers and restructuring of skilled 
trade classifications, among other things. 

Table 2: Changes to Chrysler's and GM's U.S. Production Costs and 
Capacity: 

Production capacity[A]: Factories; 
Chrysler: Year-end 2008: 21; 
Chrysler: After reorganization: 20[B]; 
Chrysler: Percent reduction: 4.8%; 
GM: Year-end 2008: 47; 
GM: After reorganization: 34; 
GM: Percent reduction: 27.7%. 

Production capacity[A]: Hourly employees; 
Chrysler: Year-end 2008: 24,135; 
Chrysler: After reorganization: 21,082; 
Chrysler: Percent reduction: 12.6%; 
GM: Year-end 2008: 61,999; GM: 
After reorganization: 54,391; 
GM: Percent reduction: 12.3%. 

Production capacity[A]: Salaried employees; 
Chrysler: Year-end 2008: 10,691; 
Chrysler: After reorganization: 10,307; 
Chrysler: Percent reduction: 3.6%; 
GM: Year-end 2008: 29,655; 
GM: After reorganization: 27,091; 
GM: Percent reduction: 8.6%. 

Source: GAO presentation of Chrysler and GM data. 

[A] According to Treasury, these numbers will likely continue to change 
in the future, since the companies' restructuring efforts are not 
complete. 

[B] Four additional factories that remain with old Chrysler are planned 
for future closure. 

[End of table] 

Whether and to what extent these changes will improve Chrysler's and 
GM's profitability and long-term viability remains to be seen. Many 
elements of a company's financial statements are also used in measures 
of financial health, but neither Chrysler nor GM has finalized new 
financial statements based on their reorganization. Chrysler and GM 
have agreed to provide certain financial information, as outlined in 
agreements between Chrysler and its shareholders, including Treasury, 
and between GM and the Securities and Exchange Commission (SEC). 
Consistent with the agreements, Chrysler and GM plan to complete the 
process of determining the fair value of the assets and liabilities 
transferred to the new companies for their audited 2009 year-end 
financial statements, which they expect to complete by April 2010 and 
March 2010, respectively.[Footnote 15] Chrysler will provide its 2009 
audited annual financial statement to Treasury and its other 
shareholders, and GM will provide its 2009 audited annual financial 
statement to SEC, where it will also be available to the public. 
Chrysler will begin filing quarterly and annual financial reports with 
SEC beginning with its 2010 audited annual financial statements, which 
will be publicly available through SEC. Before audited annual financial 
statements are filed with SEC, Chrysler and GM will make other select 
information publicly available. 

Moreover, whether enough time has passed for the impact of the 
structural changes to be seen is unlikely, especially given that the 
automakers have not completed restructuring, the economy is still 
recovering, and new vehicle purchases remain at low levels. For 
instance, although the federal Car Allowance Rebate System program 
resulted in a sales spike in August,[Footnote 16] September sales 
returned to historically low levels. These and other challenges are 
likely to delay the companies' recovery beyond what it would be under 
more favorable economic circumstances. 

Treasury Does Not Plan to Be Involved in Chrysler's or GM's Day-to-Day 
Operations or Management, but It Plans to Closely Monitor the 
Companies' Performance: 

Treasury, which has a sizable financial stake in Chrysler and GM, does 
not plan to be involved in the day-to-day management of the companies, 
but it has established certain requirements that will be in effect as 
long as it holds debt or equity in the companies.[Footnote 17] Treasury 
has distinct rights as both a creditor and an equity owner. Its rights 
as a creditor are documented in the secured credit agreements, which 
set forth the terms and provisions of the loans Treasury provided to 
new Chrysler and new GM. Its rights as an equity owner are documented 
in a number of transactional documents related to the formation of the 
new Chrysler and the new GM, including shareholders' agreements, equity 
registration rights agreements, and organizational documents. 
Treasury's role as an equity owner focuses on monitoring the financial 
health of the companies in order to protect the value of Treasury's 
equity stake.[Footnote 18] Treasury developed several principles to 
guide its role as an equity owner, including the commitment that, 
although Treasury reserves the right to set up-front conditions to 
protect taxpayers and promote financial stability, Treasury plans to 
oversee its financial interests in a commercial manner, in which it 
will focus primarily on maximizing its return and take a hands-off 
approach to day-to-day management. Treasury plans to reserve its 
involvement for major transactions such as the sale of a controlling 
share of the companies. Treasury's role as a creditor is not as clearly 
delineated, but much like in its role as equity owner, Treasury has 
said it will focus on monitoring the companies' financial health. 

Conditions set by Treasury in the credit agreements include requiring 
that the companies comply with provisions applicable to companies 
receiving TARP assistance, in accordance with the Emergency Economic 
Stabilization Act (EESA), as well as other requirements that are 
specific to Chrysler and GM.[Footnote 19] According to the agreements, 
Chrysler and GM must do the following: 

* Produce a portion of their vehicles in the United States. Chrysler 
must either manufacture 40 percent of its U.S. sales volume in the 
United States or its U.S. production volume must be at least 90 percent 
of its 2008 U.S. production volume. GM agrees to use its commercially 
reasonable best efforts to ensure that the volume of manufacturing 
conducted in the United States is consistent with at least 90 percent 
of the level envisioned in GM's business plan. 

* Comply with the executive compensation requirements of EESA.[Footnote 
20] These requirements state that bonuses or incentive compensation 
paid to any of the senior executive officers or the next 20 most highly 
compensated employees based on materially inaccurate earnings must be 
repaid, no golden parachute payments may be made to a senior executive 
officer or any of the next five most highly compensated employees, 
compensation in excess of $500,000 per executive may not be deducted 
for tax purposes, and the companies must establish a compensation 
committee of independent directors to review employee compensation 
plans and the risks posed by these plans. 

* Have an expense policy that is in compliance with TARP standards for 
compensation and corporate governance. The policy must govern hosting 
and sponsoring for conferences and events, travel accommodations and 
expenditures, office or facility renovations and relocations, and 
entertainment and holiday parties, among other things. 

* Report to Treasury on the use of government funds. The companies are 
to provide Treasury with a report each quarter setting forth in 
reasonable detail the actual use of the TARP funding they received upon 
exiting from bankruptcy. 

* Have internal controls to ensure compliance with the requirements. 
The companies are to promptly establish internal controls to provide 
reasonable assurance of compliance in all material respects with each 
of the credit agreement's requirements for executive privileges and 
compensation, aircraft, expenses, and the Employ American Workers Act. 
[Footnote 21] The companies must also have documentation of these 
controls and the companies' compliance with them. 

* Report on events related to pension plans. The companies must report 
to Treasury if actions occur that could result in the companies failing 
to meet the minimum funding requirements for their pension plans, or if 
the companies plan to terminate any of their plans.[Footnote 22] 

To protect the value of its equity share and the likelihood of loan 
repayment, Treasury has also established requirements under which the 
companies must report financial information, and it intends to use this 
information to closely monitor the financial condition of Chrysler and 
GM. The financial reporting requirements are set forth in Treasury's 
credit agreements with the companies and other agreements that specify 
the rights of the companies and their shareholders, which include 
Treasury and other parties.[Footnote 23] GM is also subject to 
additional reporting requirements related to the reserve portion of its 
loan from Treasury that is being held in escrow.[Footnote 24] Treasury 
has agreed with the companies on additional financial, managerial, and 
operating information, which the companies will provide in monthly 
reporting packages, along with items specified in the agreements. 
Tables 3 and 4 provide details on Chrysler's and GM's reporting 
requirements. 

Table 3: Chrysler's Financial Reporting Requirements: 

Requirements Treasury established as creditor: 

Until repayment of the loan, Chrysler must provide to Treasury; 
* its consolidated balance sheet and the related consolidated 
statements of income and cash flow, on a quarterly and annual basis, 
and; 
* updates to its schedules of real property, mortgaged property, 
pledged equity and notes, subsidiaries, and mortgage filing offices 
(beginning in 2010). 

Requirements Treasury established as equity owner: 

As long as Treasury holds its initial membership shares in Chrysler, 
Chrysler must provide; 
* public reports containing quarterly and annual financial information, 
and; 
* quarterly and annual financial reports to the Securities and Exchange 
Commission (beginning with its 2010 audited annual financial 
statements). 
As long as Treasury holds more than 5 percent equity, Chrysler must 
provide to Treasury; 
* monthly, quarterly, and annual management financial reports 
summarizing results of the company for the period and comparing these 
results with the annual budget, and; 
* unaudited quarterly and audited annual balance sheets and related 
statements of income and cash flow. 

Source: GAO presentation of Treasury information. 

[End of table] 

Table 4: GM's Financial Reporting Requirements: 

Requirements Treasury established as creditor: 

Until repayment of the loan, GM must provide to Treasury: 
* its consolidated balance sheet and the related consolidated 
statements of income and cash flow, on an annual (audited) and 
quarterly basis (unaudited); 
* copies of any financial statements or reports GM is required to file 
with the Securities and Exchange Commission, and; 
* other information that Treasury might periodically request. 

Until the balance of GM's escrow account reaches zero or the escrow 
account's expiration on June 30, 2010, GM must provide to Treasury: 
* biweekly 13-week forecasts; 
* monthly liquidity status reports, and; 
* monthly budgets covering a 5-year period. 

Requirements Treasury established as equity owner: 

As long as Treasury owns at least 10 percent of GM's common stock, GM 
must provide to Treasury: 
* all financial statements, budgets, reports, liquidity statements, 
materials, data, and other information pursuant to Section 5 of the 
credit agreement, and; 
* a monthly report, the format and content of which Treasury has the 
right to specify. 

Source: GAO presentation of Treasury information. 

[End of table] 

According to Treasury officials, they plan to review and analyze the 
reports they receive under creditor and equity owner requirements to 
identify areas of concern, such as actual market share lagging behind 
the projected market share, an excess of inventory, or other signs that 
business is foundering. Treasury does not have authority to direct the 
companies to take specific actions to address such findings, but 
Treasury said it plans to notify the companies' management and the 
Secretary of the Treasury if it sees any cause for concern in the 
financial reports. In addition to reviewing financial information, 
Treasury's team of staff responsible for overseeing AIFP (subsequently 
referred to as the auto team) plans to meet monthly via teleconference 
and quarterly in person with the companies' top management to discuss 
the companies' progress against their restructuring plans. Important 
findings that result from the review of financial reports or management 
meetings will also be conveyed to key staff in OFS and other Treasury 
offices with responsibilities for managing TARP investments. Treasury 
also intends to use financial reports as a basis for decisions on how 
and when to sell its equity in the companies, as discussed below. 

While Treasury has stated that it plans to manage its investments in 
Chrysler and GM in a hands-off manner and will not interfere in day-to-
day operations of the companies, Chrysler and GM will be subject to 
requirements regarding compensation, expenses, and reporting that other 
auto companies are not. For example, as discussed above, each company 
is subject to certain requirements about the vehicles it is to produce, 
such as the requirement to produce a portion of its vehicles in the 
United States. In addition, Chrysler's shareholders, including 
Treasury, have agreed that Fiat's equity stake in Chrysler will 
increase if Chrysler meets certain benchmarks, such as producing a 
vehicle that achieves a fuel economy of 40 miles per gallon or 
producing a new engine in the United States.[Footnote 25] Treasury 
officials stated that they established such up-front conditions not 
solely to protect Treasury's financial interests as a creditor and 
equity owner but also to reflect the Administration's views on 
responsibly utilizing taxpayer resources for these companies. While 
Treasury has stated it does not plan to manage its stake in Chrysler or 
GM to achieve social policy goals, these requirements and covenants to 
which the companies are subject indicate the challenges Treasury has 
faced and likely will face in balancing its roles. 

Treasury's Approach for Monitoring and Selling Its Ownership Interest 
in Chrysler and GM Does Not Fully Address All Important Considerations 
Experts Identified: 

Treasury's general goals of exiting as soon as practicable, maximizing 
return on investment, and improving the strength and viability of 
Chrysler and GM are reasonable but possibly competing, according to the 
group of financial and industry experts we spoke with. For example, if 
Treasury sells its stake as soon as practicable, it may not maximize 
its return because too little time may have elapsed to demonstrate to 
investors the companies' potential for future profitability. Similarly, 
maximizing return on investment might require actions that do not 
contribute to making the companies strong and viable--for example, if 
Chrysler or GM does not return to profitability, Treasury may need to 
act to liquidate the companies, with the proceeds divided among its 
shareholders and creditors, to maximize its return on investment. 
Treasury will ultimately have to address these inherent trade-offs, 
decide which goal is most important, and then manage its interest in a 
way that prioritizes that goal over others. Treasury officials told us 
that they have considered these trade-offs and scenarios, including the 
worst-case scenario of Chrysler and GM not attaining long-term 
viability, and that they intend to balance these competing goals when 
deciding when and how to exit. 

Treasury's current approach for monitoring its equity in Chrysler and 
GM does not fully address the considerations that our group of experts 
identified as important. In particular: 

* Retain necessary expertise. Experts stressed that it is critical for 
Treasury to employ or contract with individuals with experience 
managing and selling equity in private companies. Individuals with 
investment, equity, and capital market backgrounds should be available 
to provide advice and expertise on the oversight and sale of Treasury's 
equity. This is crucial because prior to TARP, Treasury did not 
typically buy and sell stakes in private companies, so it has needed to 
employ appropriate personnel and to retain consultants, such as 
investment bankers and private equity analysts and firms, who are 
knowledgeable about such investment decisions. One expert we 
interviewed noted that housing such individuals in a program office 
created specifically and solely to oversee the government's investment 
in the companies could be beneficial. Program staff would be devoted 
solely to this purpose, and staff turnover would be low so that 
institutional knowledge would be preserved over the life of the 
program. The literature also stressed the importance of designating 
staff to oversee equity sales. 

In assessing Chrysler's and GM's financial condition and future 
prospects and putting together financing packages for the companies, 
Treasury hired or consulted with a number of individuals with 
experience in investment banking, equity analysis, and the auto 
industry, but it has not established a program office to oversee its 
investment in the auto companies. As with the rest of the TARP 
programs, OFS oversees the investment in the auto companies. Some OFS 
employees work exclusively on the automotive companies, while others 
divide their time among multiple TARP programs. While the auto team has 
experienced a significant decline in its number of staff, and presently 
has limited engagements with outside firms with specialty expertise 
such as investment banking or equity analysis to assist in its 
management of its investment in the auto companies, Treasury officials 
stated that the rest of OFS is available to "backfill" as necessary and 
acts as a program office for Treasury's investment in the auto 
industry. However, OFS is not a dedicated program office for overseeing 
Treasury's investment in Chrysler and GM, in that it has 
responsibilities for Treasury's investments in other companies. 
Treasury officials also stated that the reduction in the number of 
staff on the auto team has been a reflection of the team's reduced 
workload now that the intensive process of restructuring the companies 
is over and that the size of the team required for monitoring the 
government's investment is smaller than for a restructuring process. 

Because of the particular needs of the auto companies and the 
unprecedented nature of providing such assistance, Treasury hired or 
contracted with a number of individuals with expertise in the auto 
industry, equity investment, and relevant areas of law throughout the 
first half of calendar year 2009 as Treasury assessed Chrysler's and 
GM's financial condition, assembled financing packages for the 
companies, and helped with restructuring efforts. When Treasury was 
heavily involved in the restructuring of the companies, Treasury's auto 
team consisted of 12 professional staff and 4 administrative staff, and 
it used the services of investment banking, consulting, and law firms. 
Since those agreements have been finalized and the workload has 
declined, two-thirds of the original professional staff has left, 
leaving Treasury with 4 of the original professional staff dedicated to 
auto issues, other OFS staff who have also helped monitor these 
investments, and limited use of investment or industry consultants. The 
leader of the auto team, who also serves as a senior adviser to the 
President on the auto industry, was recently appointed Senior Counselor 
for Manufacturing Policy, requiring him to split his time between the 
auto team and his new role. Moreover, Treasury officials told us that 
there will likely be additional staff reductions in the future because 
they plan to disband the auto team over time as other OFS staff assume 
the role of monitoring the financial condition of the companies. In 
commenting on a draft of this report, Treasury officials stated that in 
light of recent and expected staff turnover, they are prepared to hire 
personnel from within Treasury or externally to fill Treasury's 
monitoring function. Nonetheless, given the wind-down of the auto team--
and the associated loss of dedicated staff with industry-and company- 
specific knowledge and expertise--we are concerned that Treasury may 
not have sufficient expertise to actively oversee and protect the 
government's ownership interests, including determining when and how to 
divest these interests. 

In general, Treasury has faced challenges hiring the full complement of 
staff necessary to administer the TARP programs, in part because 
qualified candidates can often find a more competitive salary with a 
financial regulator, which has the authority to establish its own 
compensation programs without regard to certain requirements applicable 
to executive branch agencies. We have reported on the importance of 
Treasury documenting the skills and competencies it needs to administer 
the program and continuing to expeditiously hire personnel.[Footnote 
26] The quality of human capital policies and practices including, but 
not limited to, hiring affects the control environment. A strong 
control environment will depend, in part, on the managerial and other 
staff hired.[Footnote 27] Treasury has made progress in hiring staff to 
administer TARP duties, but Treasury officials have not formally 
evaluated whether the staffing level to oversee AIFP is appropriate for 
their current and projected needs. Officials said that they had 
considered future needs and determined that Treasury's monitoring role 
could be achieved with fewer staff. In response to a request for 
documentation of their evaluation of staffing needs, Treasury provided 
us with a document showing the current and projected number of staff 
working on AIFP, but this document did not show how Treasury determined 
the appropriate number of staff or areas of expertise that would be 
needed for future workloads. In commenting on a draft of this report, 
Treasury officials stated that they had not had difficulty hiring 
qualified professionals to work on the auto team and did not anticipate 
having difficulties finding qualified staff in the future should the 
need arise for additional hiring. 

* Monitor and communicate company, industry, and economic indicators. 
All of the experts we spoke with emphasized the importance of 
monitoring company indicators such as financial and operating 
performance, automotive industry-wide indicators such as vehicle sales, 
and broader economic indicators such as interest rates and consumer 
spending. Monitoring these indicators allows investors, including 
Treasury, to determine how well the companies, and in turn the 
investment, are performing in relation to the rest of the industry. It 
also allows an investor to determine how receptive the market would be 
to an equity sale, something that contributes to the price at which the 
investor can sell. Some experts also noted that Treasury should assign 
an individual with expertise in investment banking or private equity to 
be in charge of monitoring these metrics, which Treasury officials told 
us they had done. In addition to monitoring the investment, 
communicating a clearly articulated vision for TARP programs is 
important, as we have previously reported. Understanding the different 
TARP programs and the distinct rationale for each can be difficult for 
Congress, the markets, and the public, because many of the programs 
address specific developments and have similar guidelines and terms. 
Specifically for AIFP, what Treasury's goals are for its investment in 
Chrysler and GM, and in turn, which indicators and metrics are 
necessary to determine progress in achieving these goals, is important 
information for Congress and the public to have. Although Treasury 
provides public information on activities in the TARP programs, 
including AIFP, through its legally mandated monthly reports to 
Congress, transaction reports, and others, these reports do not provide 
information on the indicators Treasury plans to use in assessing its 
goals for its auto investments. Identifying these indicators for 
Congress, and sharing as much of this information as possible, while 
still respecting the need for certain business sensitive information 
not to be released, could help Congress and the public better 
understand whether the investment in the auto companies has been 
successful. 

Treasury's auto team plans to closely monitor the performance of 
Chrysler and GM by way of financial reports from the companies such as 
balance sheets and liquidity statements, which, in general, measure the 
financial health of a company at the time of the statement. It also 
plans to monitor industry and broader economic indicators. The auto 
team plans to use this information to alert Chrysler and GM management 
to any problematic areas in the companies, and to help determine the 
best time and strategy for divesting the government's interest. 
Finally, Treasury officials have not informed Congress which components 
of the reporting package will be shared or how they plan to use the 
information contained in these packages to assess and monitor the 
companies' performance. In commenting on a draft of this report, 
Treasury noted that it will not make the components of these reports 
public because the release of certain information could put Chrysler 
and GM at a competitive disadvantage, thereby harming the potential 
recovery of taxpayer funds. Treasury further noted that the companies 
will publicly report on certain financial information--similar to what 
publicly traded companies report--in the future. 

* To the extent possible, determine the optimal time and method to 
divest. One of the key components of an exit strategy is determining 
how and when to sell the investment. Given the many different ways to 
dispose of equity--through public sales, private negotiated sales, all 
at once, or in batches--experts noted that the seller's needs should 
inform decisions on which approach is most appropriate. For example, if 
an investor is interested in selling quickly but the company has not 
demonstrated the level of performance necessary for a successful 
initial public offering (IPO), in which the company first sells stock 
to the public, the investor should consider other sale options, such as 
a private sale. According to experts, a successful IPO requires that 
the companies show signs of earnings growth and future profitability, 
something that will take a considerable amount of time for Chrysler and 
GM, as they only recently emerged from bankruptcy. Attracting investors 
to the market is essential because lack of sufficient investor interest 
may result in depressed value of shares. Experts noted that a 
convergence of factors related both to financial markets and to the 
company itself create an ideal window for an IPO; this window can 
quickly open and close and cannot easily be predicted. This requires 
constant monitoring of up-to-date company, industry, and economic 
indicators when an investor is considering when and how to sell. As 
Treasury evaluates these indicators, considering all possible sale 
strategies is important. 

Members of the auto team said that they plan to consider indicators 
such as profitability and prospects, cash flow, market share, and 
market conditions to determine the optimal time and method of sale. The 
ultimate decision on when and how to sell will be made by the Secretary 
of the Treasury, but auto team staff will be in charge of monitoring 
these indicators and recommending a strategy to the Secretary and 
Assistant Secretary for Financial Stability. Although Treasury 
officials said they plan to consider all options for selling the 
government's ownership stakes in Chrysler and GM, they noted that they 
believe the most likely scenario for GM is to dispose of Treasury's 
equity in the company through a series of public offerings. Treasury 
has publicly discussed the possibility of selling part of its equity in 
the company through an IPO that would occur sometime in 2010. However, 
by publicly discussing a method and a time for a sale of GM shares now, 
the extent to which Treasury is using the indicators to inform method 
and timing decisions is unclear. Moreover, two of the experts we spoke 
with said GM might not be ready for a successful IPO by 2010, because 
it may be too early for the company to have demonstrated sufficient 
progress to attract investor interest, and two other experts noted that 
2010 would be the earliest possible time for an IPO. For Chrysler, 
Treasury officials noted that the department is more likely to consider 
a private sale because its equity stake is smaller, and several of the 
experts we interviewed noted that non-IPO options could be possible for 
Chrysler, given the relatively smaller stake Treasury has in the 
company (9.85 percent, versus its 60.8 percent stake in GM) and the 
relative affordability of the company. In commenting on a draft of this 
report, Treasury officials stated that they were aware of the diversity 
of opinions on divesting the government's interest in the auto 
companies and would make an appropriate determination to maximize the 
taxpayers' return. To achieve the maximum return for taxpayers, 
Treasury also said it plans not to disclose more information about its 
strategy to divest its ownership interests than is necessary. 

Treasury officials said that on the basis of their analysis of the 
companies' future profitability, they believe that Chrysler and GM will 
be able to attract sufficient investor interest for Treasury to sell 
its equity. With regard to the possibility that there may not be 
sufficient investor interest, Treasury officials said they would 
monitor the financial markets and the companies' operations in order to 
identify any issues that could affect profitability, and work with the 
companies' boards of directors and management to address them. In the 
event that the companies do not return to profitability in the time 
frame Treasury has projected, Treasury officials said that they will 
consider all commercial options for disposing of Treasury's equity, 
including liquidation. 

* Manage investments in a commercial manner. Experts emphasized the 
importance of Treasury resisting external pressures to focus on public 
policy goals over focusing on its role as a commercial investor. For 
example, some experts said that Treasury should not let public policy 
goals such as job retention interfere with its goals of maximizing its 
return on investment and making Chrysler and GM strong and viable 
companies. They said that this is especially important because making 
the companies financially strong and competitive may require reducing 
the number of employees. Nevertheless, one expert suggested that 
Treasury should consider public policy goals and include the value of 
jobs saved and other economic benefits from its investment when 
calculating its return, since these goals, though not important to a 
private investor, are critical to the economy. 

As long as Treasury maintains ownership interests in Chrysler and GM, 
it will likely be pressured to influence the companies' business 
decisions. Treasury has said that it plans to manage its investment in 
Chrysler and GM in a commercial way. Yet Treasury faces external 
pressures, such as to prioritize jobs over maximizing its return. For 
example, Congress is currently considering a number of bills to restore 
automotive dealers' contracts terminated in restructuring, and Treasury 
officials noted that they receive frequent calls from Members of 
Congress expressing concern about dealership closings. To protect 
Treasury's investment from these external pressures, a recent 
Congressional Oversight Panel report recommended that Treasury hold its 
equity interests in the auto companies in a trust managed by an 
independent trustee.[Footnote 28] Treasury officials told us they 
cannot currently establish a trust managed by independent trustees 
because of a requirement in EESA that states that troubled assets are 
subject to the supervision of the Secretary of the Treasury.[Footnote 
29] The officials stated that if Treasury created a trust with the 
assets managed by independent trustees, the Secretary would not be able 
to exercise his authority over the assets as required by law. Congress 
is considering legislation that would authorize and require the 
Secretary to transfer to a limited liability company all equity in TARP 
recipients in which the government has a certain equity interest as a 
result of TARP assistance. The bills further provide that the equity is 
to be managed in trust for the benefit of taxpayers.[Footnote 30] 
Treasury officials told us they believe their planned approach for 
managing Treasury's equity in Chrysler and GM is sufficient for now. 

Regardless of the sales strategies used, the companies will have to 
grow substantially in order to reach values at which Treasury would 
recover the entirety of its equity investment upon sale of its equity, 
which Treasury and others consider to be unlikely. On the basis of our 
analysis, shown in table 5, we estimate that Chrysler and GM would need 
to have a market capitalization of $54.8 billion and $66.9 billion, 
respectively, for Treasury to earn enough on the sale of its equity to 
break even.[Footnote 31] A recent Congressional Oversight Panel report 
reached similar conclusions on what the companies would have to be 
worth.[Footnote 32] As a point of reference for these values, in 1997, 
the last year Chrysler was a publicly traded company, its market 
capitalization value ranged between $23.1 billion and $31.7 billion, 
and in 1998, when it merged with Daimler, it was valued at an estimated 
$37 billion. GM, at its peak in 2000, had a market capitalization of 
$57 billion.[Footnote 33] In commenting on a draft of this report, 
Treasury officials noted that the companies' past equity values are not 
comparable to today's equity values because the companies have 
substantially restructured their balance sheets through bankruptcy. 
Although we recognize the changes the companies have experienced in 
recent years, we believe this information provides a sense of the 
magnitude of growth that will be required of the companies. 

Treasury's own analysis suggests that the circumstances necessary for 
the companies to reach market capitalizations high enough for Treasury 
to fully recover its equity investment are unlikely. Treasury officials 
also noted that considering the companies' enterprise values--a measure 
of a business's total value, including the value of equity and debt--in 
addition to equity value is important, because enterprise value takes 
into account the likelihood of repayment of loans and other obligations 
extended to the companies as well as the value of equity stakes. 
[Footnote 34] 

Table 5: Value of Chrysler and GM Equity Required for Treasury to 
Recoup Its Investment (Dollars in billions): 

Description of funding: Total loans to Chrysler; 
Treasury investment: $12.5; 
Amount in term loans and preferred stock: $7.1; 
Equity stake (percent): 9.85; 
Amount equity stake must be worth to recoup equity investment 
(investment-loans and preferred stock): $5.4[A]; 
Equity value of company necessary to recoup investment (amount equity 
must be worth/60.8 percent for GM and 9.85 percent for Chrysler): 
$54.8. 

Description of funding: Loans to Chrysler prior to bankruptcy; 
Treasury investment: $4.0. 

Description of funding: Loans to Chrysler after bankruptcy; 
Treasury investment: $8.5. 

Description of funding: Total loans to GM; 
Treasury investment: $49.5; 
Amount in term loans and preferred stock: $8.8; 
Equity stake (percent): 60.8; 
Amount equity stake must be worth to recoup equity investment 
(investment-loans and preferred stock): $40.7; 
Equity value of company necessary to recoup investment (amount equity 
must be worth/60.8 percent for GM and 9.85 percent for Chrysler): 
$66.9. 

Description of funding: Loans GM prior to bankruptcy; 
Treasury investment: $19.4. 

Description of funding: Loans to GM after bankruptcy; 
Treasury investment: $30.1. 

Source: GAO analysis of Treasury information. 

[A] This value does not take into account any repayments Treasury will 
receive from the payment-in-kind interest that will accumulate over the 
life of the $7.1 billion loan, ($17 million per quarter), the 
additional $288 million note, or the value of Treasury's interest in 
Chrysler Financial's equity (the greater of $1.375 billion or 40 
percent of the equity). These figures together would be worth $833 
million, thereby reducing the amount Treasury's equity stake would have 
to be worth from $5.4 billion to $4.6 billion, and reducing the equity 
value Chrysler would have to attain from $54.8 billion to $46.7 
billion. 

[End of table] 

However, these estimates do not take into account other benefits and 
costs that are more difficult to measure, such as the impact of 
Treasury's investment on jobs and local and national economies and the 
opportunity costs Treasury incurred in providing financial assistance. 
The impact on the economy is difficult to measure because, according to 
the Council of Economic Advisors, it involves predicting what 
employment and economic performance would have been without government 
investment. Nevertheless, a more comprehensive analysis that takes 
these effects into account would yield a richer picture of the value of 
Treasury's net investment and net return, especially given that the 
government's goal upon first providing assistance to the auto industry 
was to prevent economic disruption. 

Conclusions: 

Treasury's substantial investment and other assistance, including loans 
from the Canadian government and concessions from the UAW, have 
contributed to the current stability of Chrysler and GM. However, 
because of the challenges continuing to face the auto industry-- 
including the still recovering economy and weak demand for new 
vehicles--the ultimate impact that the assistance will have on the 
companies' profitability and long-term viability is uncertain. Although 
the immediate crisis of helping Chrysler and GM maintain solvency has 
passed for now and Treasury has no plans for further financial 
assistance to the companies, the significant sums of taxpayer dollars 
that are invested in these companies warrant continued oversight. It is 
critical that Treasury remain focused on protecting the government's 
interest in the coming months as Chrysler and GM work to become 
profitable. However, most of the original staff on Treasury's auto team 
either have left Treasury or may do so in the future. Treasury 
officials told us that OFS personnel will continue to provide 
oversight. Given the substantial decline in the number of staff and 
lack of dedicated staff for this oversight moving forward, however, we 
are concerned whether Treasury will continue to have the needed 
expertise to provide oversight of the use of government funds, assess 
the financial condition of the auto companies, and develop strategies 
to divest the government's interests. Monitoring industry conditions 
and determining when to divest will require a certain expertise, 
including a robust monitoring function through which detailed financial 
data from Chrysler and GM are reviewed on a regular basis. Transparency 
as to how the companies are being monitored also will be important to 
ensuring accountability and providing assurances that the taxpayers' 
investment--including both the loans to and equity in the companies--is 
being appropriately safeguarded. While we recognize that not all 
information that the companies report to Treasury should be made public 
because of concerns about disclosing proprietary information in a 
competitive market, Treasury's approach for evaluating the success of 
the AIFP should be as transparent as possible, given the large taxpayer 
investment. 

While Treasury has stated that it plans to review all possible options 
for divesting itself of its ownership interest in Chrysler and GM, 
Treasury officials have focused primarily on an IPO for GM, both in our 
discussions with them and in their public statements. However, given 
the complexity of the economy and the financial markets, considering 
all of the options in the context of the companies' financial progress 
and current financial conditions will be important for Treasury. The 
past year has indicated the extent to which a company's financial 
situation can change within a period as short as a few months. Given 
the fluidity of conditions and the number of factors that will need to 
be considered when determining how and when to divest, it is important 
that Treasury identify the criteria it will use to evaluate the optimal 
method and timing for selling the government's ownership stake. 
Determining when and how to divest the government's ownership stake 
will be one of the most important decisions Treasury will have to make 
regarding the federal assistance provided to the domestic automakers, 
as this decision will affect the overall return on investment that 
taxpayers will realize from aiding these companies. Currently, the 
value of the companies would have to grow tremendously for Treasury to 
approach breaking even on its investment, requiring that Treasury 
temper any desire to exit as quickly as possible with the need to 
maintain its ownership interest long enough for the companies to 
demonstrate sufficient financial progress. Therefore, it is important 
that Treasury be able to explain why and how it decided to divest when 
the time arrives, and clearly established criteria will help Treasury 
communicate this decision to Congress and the public at the appropriate 
time to prevent this disclosure from negatively affecting the full 
recovery for taxpayers. 

Recommendations for Executive Action: 

To improve the stewardship of the federal government's substantial 
financial investment in the auto industry, we recommend that the 
Secretary of the Treasury take the following three actions: 

* Ensure that the department has the expertise needed to adequately 
monitor and divest the government's investment in Chrysler and GM, and 
obtain needed expertise in areas where gaps are identified. In 
addressing any existing or future expertise gaps, Treasury should 
consider both in-house and external expertise. 

* Report to Congress on how it plans to assess and monitor the 
companies' performance to help ensure the companies are on track to 
repay their loans and to return to profitability. In reporting to 
Congress, Treasury should balance the need for transparency with the 
need to protect certain proprietary information that would put the 
companies at a competitive disadvantage or negatively affect Treasury's 
ability to recover the taxpayers' investments. 

* Develop criteria for evaluating the optimal method and timing for 
divesting the government's ownership stake in Chrysler and GM. In 
applying these criteria, Treasury should evaluate the full range of 
available options, such as IPOs or private sales. 

Agency Comments and Our Evaluation: 

We provided a draft of this report to the Department of the Treasury 
for review and comment. Treasury generally agreed with the report's 
findings, conclusions, and recommendations, and provided written 
comments, which are reprinted in appendix II. Treasury also provided 
technical comments and clarifications via e-mail, which we incorporated 
as appropriate. In their technical comments, Treasury officials 
emphasized that they believe they have individuals within OFS who can 
provide the needed oversight of the government's investments in 
Chrysler and GM. We added Treasury's views on its current staffing and 
expertise levels to the final report. While we recognize that OFS 
employs a number of qualified individuals who have worked on the 
government's efforts to stabilize the auto industry, we nevertheless 
remain concerned about the loss of industry-and company-specific 
knowledge and expertise that Treasury has experienced and will continue 
to experience with the wind-down of the auto team. Such knowledge and 
expertise will be critical as Treasury monitors the financial health of 
Chrysler and GM and develops plans to divest its ownership interests in 
these companies. We are pleased that Treasury--in both its written and 
technical comments--commits to continue to take steps to assess and 
maintain the expertise required to monitor and manage Treasury's 
investments in these companies. 

In their written and technical comments, Treasury officials also 
stressed the need to strike a balance between the goal of transparency 
and the need to avoid compromising the competitive positions of 
Chrysler and GM or the government's ability to recover its investments. 
We recognize the need to strike this balance and added language to the 
final report, including one of our recommendations, to acknowledge this 
difficult trade-off. We believe our revised recommendation that 
Treasury report to Congress on its plans to monitor the performance of 
the companies provides Treasury with sufficient flexibility to strike 
the appropriate balance. 

We also provided relevant portions of a draft of this report to SEC, 
Chrysler, and GM for their review and comment. SEC, Chrysler, and GM 
provided technical comments and clarifications that we incorporated as 
appropriate. 

We are sending copies of this report to other interested congressional 
committees and members, the Department of the Treasury, and others. The 
report also is available at no charge on the GAO Web site at 
[hyperlink, http://www.gao.gov]. 

If you or your staff have any questions about this report, please 
contact Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov or A. 
Nicole Clowers at (202) 512-2843 or clowersa@gao.gov. 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 III. 

Signed by: 

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

List of Committees: 

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

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

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

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

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

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

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

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

[End of section] 

Appendix I: Financial and Industry Experts GAO Interviewed: 

Name: John Casesa; 
Affiliation: Casesa Shapiro Group. 

Name: Justin Mirro; 
Affiliation: Moelis & Company. 

Name: Thomas Maloney; 
Affiliation: Deutsche Bank. 

Name: Warren Estey; 
Affiliation: Deutsche Bank. 

Name: Rod Lache; 
Affiliation: Deutsche Bank. 

Name: Henry Miller; 
Affiliation: Miller Buckfire. 

Name: Durc Savini; 
Affiliation: Miller Buckfire. 

Name: Eric Selle; 
Affiliation: J.P.Morgan. 

Name: Himanshu Patel; 
Affiliation: J.P.Morgan. 

Name: Charles Bowsher; 
Affiliation: Former Comptroller General of the United States. 

Name: William Isaac; 
Affiliation: Former Chairman of the Federal Deposit Insurance 
Corporation. 

Source: GAO. 

[End of table] 

[End of section] 

Appendix II: Comments from the Department of the Treasury: 

Department Of The Treasury: 
Washington, D.C. 20220: 

October 23, 2009: 

Thomas J. McCool: 
Director, Center for Economics Applied Research and Methods: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. McCool: 

The Treasury Department (Treasury) appreciates the opportunity to 
review the GAO's latest report on Treasury's Troubled Asset Relief 
Program (TARP), entitled Auto Industry: Continued Stewardship Needed as 
Treasury Develops Strategies for Monitoring and Divesting Financial 
Interests in Chrysler and GM. Treasury welcomes the recognition by the 
GAO that Treasury through TARP investments has "contributed to the 
stability of Chrysler and GM." There is important work ahead and the 
GAO's recommendations are constructive as Treasury continues to 
implement its Auto Industry Financing Program. 

Treasury continues to assess and take steps to maintain the expertise 
required to adequately monitor and manage Treasury's interests in 
Chrysler and GM. In addition, Treasury will continue to monitor and 
evaluate the performance of Chrysler and GM with a view toward 
determining the appropriate method and timing for divesting Treasury's 
interests in the auto companies. Treasury also intends to develop an 
approach for reporting on its investments in the auto industry that 
strikes an appropriate balance between our goal of transparency and the 
need to avoid compromising either the competitive positions of these 
companies or Treasury's ability to recover funds for taxpayers. 

Once again, Treasury appreciates the opportunity to review this report 
and the GAO's thoughtful recommendations. Treasury also appreciates the 
GAO's close oversight of TARP as Treasury develops and implements its 
policies to stabilize the financial system. We look forward to 
continuing this constructive dialogue. 

Sincerely, 

Signed by: 

Duane Morse: 
Chief Risk and Compliance Officer: 
Office of Financial Stability: 

[End of section] 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov: 

A. Nicole Clowers, (202) 512-2834 or clowersa@gao.gov: 

Staff Acknowledgments: 

In addition to the contacts named above, Raymond Sendejas, Assistant 
Director; Orice Williams Brown; Sarah Farkas; Timothy Guinane; Heather 
Halliwell; Terence Lam; Matthew McDonald; Susan Michal-Smith; Joshua 
Ormond; and Susan Sawtelle made important contributions to this report. 

[End of section] 

Footnotes: 

[1] Prior to bankruptcy reorganization, the companies' legal names were 
Chrysler LLC and General Motors Corporation. Chrysler Group LLC and 
General Motors Company are new legal entities that were created through 
the bankruptcy process to purchase the operating assets of the pre- 
reorganization companies. The new companies also received some of the 
debts of the pre-reorganization companies, including a portion of the 
loans Treasury provided to the companies prior to bankruptcy filing. 
Throughout this report, in cases where such a distinction is important, 
we refer to the pre-reorganization companies as "old Chrysler" and "old 
GM," and the post-reorganization companies as "new Chrysler" and "new 
GM." The third domestic automaker, Ford Motor Company, has not 
requested assistance from Treasury. 

[2] The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. 
No. 110-343, 122 Stat. 3765 (2008), codified at 12 U.S.C. §§ 5201 et. 
seq., originally authorized Treasury to buy or guarantee up to $700 
billion in troubled assets. The Helping Families Save Their Homes Act 
of 2009, Pub. L. No. 111-22, Div. A, Title IV, § 402(f), 123 Stat. 
1632, 1658 (2009), codified at 12 U.S.C. 5225(a)(3), amended the act 
and reduced the maximum allowable amount of outstanding troubled assets 
under the act by almost $1.3 billion, from $700 billion to $698.741 
billion. 

[3] Treasury's share in the company will become 8 percent if Fiat, 
another of Chrysler's shareholders, meets fuel efficiency-related 
performance targets and is granted additional equity. 

[4] Other parties that received equity stakes in the reorganized 
companies include the Canadian government, which provided financial 
assistance to the companies, and the auto workers union's health care 
trust, which agreed to accept equity in the company in exchange for 
future monetary contributions. 

[5] GAO, Troubled Relief Asset Program: June 2009 Status of Efforts to 
Address Transparency and Accountability, [hyperlink, 
http://www.gao.gov/products/GAO-09-658] (Washington, D.C.: June 17, 
2009). 

[6] Ron Bloom, Senior Advisor, U. S. Department of the Treasury, 
written testimony before the Congressional Oversight Panel, Regarding 
Treasury's Automotive Industry Financing Program, July 27, 2009. 

[7] See our previous reports on TARP assistance to the auto industry: 
GAO, Auto Industry: Summary of Government Efforts and Automakers' 
Restructuring to Date, [hyperlink, 
http://www.gao.gov/products/GAO-09-553] (Washington, D.C.: Apr. 23, 
2009); Auto Industry: A Framework for Considering Federal Financial 
Assistance, [hyperlink, http://www.gao.gov/products/GAO-09-247T] 
(Washington, D.C.: Dec. 5, 2008); Auto Industry: A Framework for 
Considering Federal Financial Assistance, [hyperlink, 
http://www.gao.gov/products/GAO-09-242T] (Washington, D.C.: Dec. 4, 
2008); and [hyperlink, http://www.gao.gov/products/GAO-09-658]. 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. This is the ninth report issued in 
compliance with that mandate. 

[8] We are currently conducting a coordinated review with the Special 
Inspector General for TARP on U.S. government oversight of and 
interaction with companies in which the government has provided 
"exceptional assistance." As part of this review, we will examine the 
internal controls Treasury has established to manage its portfolio of 
investments and its interaction with the institutions, which include 
Chrysler and GM. 

[9] [hyperlink, http://www.gao.gov/products/GAO-09-553]. 

[10] See National Automobile Dealers Association, "NADA Data 2009: 
Economic Impact of America's New-Car and New-Truck Dealers" (McLean, 
Va.: 2009) and United States Department of Labor, Bureau of Labor 
Statistics, Table B-12: Employees on Non-farm Payrolls by Detailed 
Industry, August 2009. 

[11] [hyperlink, http://www.gao.gov/products/GAO-09-553]. 

[12] Most recently, in October 2009, GM reached an agreement to sell 
its Hummer brand to a Chinese company, which is slated to take over 
operations in 2012. 

[13] Chrysler began downsizing its operations prior to filing for 
bankruptcy. For instance, at year-end 2006, it had 3,749 dealerships. 

[14] [hyperlink, http://www.gao.gov/products/GAO-09-553]. 

[15] Under an agreement between new GM and the Securities and Exchange 
Commission (SEC), new GM will file by March 31, 2010, a quarterly 
financial report for the third quarter of 2009 and an annual financial 
report for 2009. According to SEC, because GM is a newly formed entity 
with only five shareholders, it is not required to file periodic or 
current reports. Also, according to SEC, it does not have any written 
or oral agreements with Chrysler, which was not a public company prior 
to its reorganization and is not currently a public company, on future 
filing requirements. 

[16] The Car Allowance Rebate System is more commonly referred to as 
Cash for Clunkers. 

[17] Our discussion focuses on the financial assistance Treasury 
provided to fund the companies' operations and restructuring because it 
represents the most substantial portion of the assistance the companies 
received. It does not address the conditions of the smaller amounts 
provided under the Supplier Support Program and the Warranty Commitment 
Program. 

[18] The Congressional Oversight Panel was created as part of TARP to 
review the current state of financial markets and the regulatory 
system. The panel is empowered to hold hearings, review official data, 
and write reports on actions taken by Treasury and financial 
institutions and their effect on the economy. The Congressional 
Oversight Panel issued a report on federal assistance provided to the 
auto industry in September 2009. See Congressional Oversight Panel, 
September Oversight Report: The Use of TARP Funds in the Support and 
Reorganization of the Domestic Automotive Industry (Washington, D.C.: 
Sept. 9, 2009). 

[19] As noted, GAO and the Special Inspector General for the Troubled 
Asset Relief Program are conducting coordinated work on Treasury's 
oversight of Chrysler's and GM's compliance with these requirements. 

[20] Section 111 of EESA, as amended by the American Recovery and 
Reinvestment Act of 2009, Pub. L. No. 111-5, Div. B, Title VII, 123 
Stat. 115, 516-520 (2009), codified at 12 U.S.C § 5221, prescribes 
certain standards for executive compensation and corporate governance 
for recipients of financial assistance under TARP. Treasury published 
an interim final rule setting forth the applicable compensation and 
corporate governance standards (74 Fed. Reg. 28,394, June 15, 2009, 
codified at 31 C.F.R. Part 30). 

[21] The Employ American Workers Act was included in the American 
Recovery and Reinvestment Act of 2009, Pub. L. No. 111-5, Div. A, Title 
XVI, § 1611, 123 Stat. 115, 305 (2009). 

[22] GAO has ongoing work reviewing the state of the automakers' 
pension plans and the potential liabilities to the federal government 
should the plans be terminated. We plan to issue this report in early 
2010. 

[23] In the case of Chrysler, the corresponding document is the Amended 
and Restated Limited Liability Company Operating Agreement of Chrysler 
Group LLC, and in the case of GM, the corresponding document is the 
Shareholders Agreement by and among General Motors Company, United 
States Department of the Treasury, 7176384 Canada Inc., and UAW Retiree 
Medical Benefits Trust. Chrysler's and GM's reporting requirements are 
not identical because each agreement was negotiated separately and, in 
the case of the operating and shareholders' agreements, with the input 
of the shareholders. 

[24] Of the $30.1 billion that Treasury provided to GM at its 
bankruptcy filing, $16.4 billion was held in escrow to be accessed by 
GM on an as-needed basis with the consent of Treasury. As of October 5, 
2009, GM had requested and received $3 billion from the escrow account. 

[25] As part of its reorganization, Chrysler arranged an alliance with 
the Italian automaker Fiat, whereby Fiat is contributing intellectual 
property and "know-how" to Chrysler in exchange for a 20 percent equity 
share in the reorganized company. Fiat will have the right to earn up 
to 15 percent in additional equity in three tranches of 5 percent each 
in exchange for meeting performance metrics, including introducing a 
vehicle produced at a Chrysler factory in the United States that 
performs at 40 miles per gallon; providing Chrysler with a distribution 
network in numerous foreign jurisdictions; and manufacturing state-of- 
the-art, next-generation engines at a U.S. Chrysler facility. Fiat will 
also hold an option to acquire up to an additional 16 percent fully 
diluted equity interest in the restructured Chrysler. Fiat may exercise 
this option and exceed 50 percent ownership in Chrysler once Treasury's 
loan has been repaid in full. 

[26] GAO, Troubled Asset Relief Program: Status of Efforts to Address 
Transparency and Accountability Issues, [hyperlink, 
http://www.gao.gov/products/GAO-09-296] (Washington, D.C.: Jan. 30, 
2009). 

[27] GAO, Standards for Internal Control in the Federal Government, 
[hyperlink, http://www.gao.gov/products/GAO/AIMD-00-21.3.1] 
(Washington, D.C.: November 1999). 

[28] Congressional Oversight Panel, September Oversight Report: The Use 
of TARP Funds in the Support and Reorganization of the Domestic 
Automotive Industry (Washington, D.C.: Sept. 9, 2009). 

[29] "In order to provide the Secretary with flexibility to manage 
troubled assets in a manner designed to minimize cost to taxpayers, the 
Secretary is authorized to establish vehicles, subject to supervision 
by the Secretary, to purchase, hold, and sell troubled assets and issue 
obligations." Pub. L. No. 110-343, Sec. 101(c)(4), codified at 12 
U.S.C. § 5211(c)(4). 

[30] In order for a trust to be established, the government would have 
to have at least a 15 percent ownership in the company as a result of 
TARP assistance in the House bill and at least a 20 percent ownership 
interest as a result of TARP assistance in the Senate bill. See H.R. 
3594, 111th Cong. (2009) and S. 1280, 111th Cong. (2009). 

[31] Our analysis included all funds Treasury has provided to the auto 
companies that will be repaid through a combination of debt and equity. 
We assume that new Chrysler and new GM will repay all debts, and that 
the debts of old Chrysler and old GM will not be repaid, including $5.4 
billion to old Chrysler and $986 million to old GM. As a result, 
Treasury's equity will have to be worth its total investments minus 
projected repayments of principal and preferred stock. This analysis 
excludes funds provided for the Supplier Support Program and the 
Warranty Commitment Program, since these funds were issued as loans and 
will be paid back as such. In addition, this analysis does not take 
into account the cost or opportunity cost to Treasury of lending, any 
interest Treasury should or could charge to the automakers on the 
portion of its investment that has been converted into equity, the 
present value of the investment, or the value of any social costs or 
benefits resulting from the investment. If Fiat achieves its operating 
goals and earns an additional 15 percent equity, Treasury's equity 
stake will decline to 8 percent, meaning that Chrysler's total equity 
value would need to reach $57 billion for Treasury to recoup its 
investment. 

[32] Congressional Oversight Panel, September Oversight Report: The Use 
of TARP Funds in the Support and Reorganization of the Domestic 
Automotive Industry. 

[33] Evercore Group, LLC, the financial services company that estimated 
GM's future value for the bankruptcy court, concluded that new GM would 
be worth between $59 billion and $77 billion in 2012. 

[34] In June, the Congressional Budget Office (CBO) estimated that the 
federal government would recoup only 27 percent of its initial 
investment in the auto industry. CBO's analysis relies on data from the 
auto companies prior to bankruptcy to estimate the likelihood of 
repayment in the future. Chrysler and GM had poor credit ratings and 
significant debts prior to bankruptcy, so the average projected 
repayment is only 27 cents on the dollar. 

[End of section] 

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