The Treasury Department's push to have General Motors Corp. and Chrysler Group quickly shrink their dealership networks failed to properly consider economic issues such as lost jobs and lost auto sales and was based on false assumptions of cost savings, according to a report by a federal watchdog released Sunday.
"Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses ... potentially adding tens of thousands of workers to the already lengthy unemployment rolls — all based on a theory and without sufficient consideration of the decisions' broader economic impact," said the audit by the special inspector general for the Troubled Asset Relief Program.
It said the Treasury Department "should have taken special care" to make sure the bail-out deals it crafted with the companies did not lead to more job losses during the "worst economic downturn in generations."
GM and Chrysler underwent bankruptcy reorganization last year and emerged with funding from the $700-billion bailout program, known as TARP.
The TARP inspector's audit "should serve as a wake-up call as to the implications of politically orchestrated bailouts," said Rep. Darrell Issa (R-Calif.).
The White House disagreed with the findings, an Obama administration official said, noting that the auto industry was in a tailspin at the time. He said the government's actions helped save the two automakers and preserve tens of thousands of jobs.
"The approach that dealers and their employees, just one set of stakeholders, should escape the negative effects of the restructuring phased in over a long period of time, was not tenable," said the official, who was familiar with the program but not authorized to speak on the record.
Why, he said, should dealers and their employees get preferential treatment over the thousands of GM workers who lost their jobs because of the company's bankruptcy and reorganization.
According to the report, GM originally planned to shrink its network of more than 5,700 dealerships by about 300 annually through 2014. But at the urging of Treasury officials overseeing the auto industry bailout, GM decided to terminate 1,454 dealerships by this October. Chrysler also had a more gradual plan but then decided to dump 789 dealerships, or 25% of its sales network, nearly all at once.
The audit said it is not clear whether this strategy resulted in significant cost savings for GM or Chrysler. Moreover, it hurt the automakers by closing dealerships in rural areas where the domestic manufacturers had a competitive advantage over import brands.
Dealers and their supporters had complained about the closures, contending that such businesses were important to their communities. The average dealer employs close to 50 people and pumps $16.5 million a year into the local economy, including payroll, taxes, payments to vendors, advertising and charitable giving, according to Paul Taylor, chief economist of the National Automobile Dealers Assn.
Congress stepped in and passed legislation requiring the automakers to set up an arbitration process that would be completed this month. GM subsequently decided to reinstate more than 650 dealerships and Chrysler offered to bring back 50.
In a statement Sunday, GM said that it cooperated with the auditors but that the events recounted in the report have "been overtaken by a new GM and a stronger dealer network to match." Instead of looking back, the company said, "our full focus and energy is directed straight ahead."