Watchdog questions GM and Chrysler dealer closings

WASHINGTON Sun Jul 18, 2010 6:49pm EDT

The U.S. flag flies at the Burt GM auto dealer in Denver June 1, 2009. RTEUTERS/Rick Wilking

The U.S. flag flies at the Burt GM auto dealer in Denver June 1, 2009. RTEUTERS/Rick Wilking

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WASHINGTON (Reuters) - The Obama administration may have acted hastily in demanding that General Motors Co and Chrysler accelerate the closing of dealerships to ensure their viability, a government watchdog found on Sunday.

A report by the watchdog, the special inspector general for the U.S. Treasury's corporate bailout program, said the task force established to oversee the automakers' restructuring did not sufficiently consider the impact of accelerated dealer closings on job losses.

GM was not always consistent in its approach to determining which franchises to terminate, the report also said.

The automakers' decisions in 2009, which initially affected more than 2,400 GM and Chrysler showrooms, were so controversial that Congress, under pressure from the politically potent dealer lobby, forced the automakers to arbitrate appeals.

As a result, steps have been taken this year to potentially reverse a third of planned closures -- mainly at GM -- with more judgments possible.

Within the task force, there was disagreement over where and how quickly to close the dealerships, the report said.

Initial plans to gradually close 1,600 GM dealerships and 789 at Chrysler over several years were rejected by the task force on grounds the companies needed to be more aggressive in their restructuring to ensure continued government support.

GM and Chrysler, whose bankruptcies in 2009 were facilitated by the task force, received more than $80 billion in bailout and restructuring assistance.

Internal task force memos -- reviewed by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program -- showed that members of the task force "knew there might be difficulties" with accelerating dealership closings, the report said.

But to benefit taxpayers and in the interest of the automakers becoming viable as soon as possible, they wanted the companies to take full advantage of unique laws in expedited bankruptcy to "reject dealership franchise agreements without significant upfront costs."

Barofsky's central criticism of the task force, run by Steve Rattner and Ron Bloom, was that it did not fully weigh the impact that dealer closings would have on job losses.

In one task force memo, GM estimated that short-term job losses could total 43,000, while the task force assumed Chrysler, which at the time did not have a suitor deemed essential for its survival, would probably go out of business with a loss of 72,000 jobs.

Barofsky concluded that the task force's decision conflicted with the administration's multibillion dollar effort to create employment through economic stimulus programs.

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

Treasury should have "taken every reasonable step" to ensure that accelerating dealership closings was "truly necessary" and more closely weighed the impact of job losses on the sagging economy. "The record is not at all clear that Treasury did either," Barofsky concluded.

Treasury officials disagreed strongly with a number of Barofsky's conclusions, saying in a letter that the alternative to aggressive restructuring was "almost certain failure and liquidation" of both companies, and the direct and indirect loss of "hundreds of thousands of jobs."

Senior administration officials, in a conference call with reporters, said the findings took the decision out of context and that tough decisions to save the companies were necessary and consistent with the White House goals of shared sacrifice.

GM responded to the task force's concerns with a new plan that would cut roughly 1,400 dealerships by October 2010 -- down 200 from its original proposal. Chrysler's revised plan would cut 789 dealerships within months with no appeal. Treasury officials approved both approaches.

Dealers complained the decisions were arbitrary, and Barofsky's review found that GM "did not consistently" follow its criteria and provided little or no documentation in an some cases, making it impossible to effectively analyze the company's decision making.

The review found that Chrysler's criteria were more transparent but criticized its decision not to allow appeals, an option adopted by GM. The review did not affirm some complaints that dealership closings were personal score settling or otherwise political in nature.

GM said in a statement the company, at the time, "did its best to develop and implement an objective dealer consolidation process under extraordinary circumstances. Chrysler said it would not comment on the findings.

(Reporting by John Crawley; Editing by Steve Orlofsky)

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