U.S. Faulted for Pushing GM, Chrysler to Speed Dealer Closings

The Obama administration’s push to accelerate General Motors Co. and Chrysler Group LLC dealership closings, aimed at helping the companies compete, may not have been necessary and added to unemployment, a U.S. watchdog said.

The Treasury Department should have considered whether speeding up the closings was worth the potential loss of tens of thousands of jobs, according to a report released yesterday by Neil Barofsky, special inspector general for the Troubled Asset Relief Program. The U.S. had rejected reorganization plans from the carmakers in March 2009, in part citing a “slow pace” for GM to scale back its dealer network.

“Such dramatic and accelerated dealership closings may not have been necessary and underscores the need for Treasury to tread very carefully when considering such decisions in the future,” Barofsky concluded.

The report may prompt congressional criticism of the administration’s handling of the automaker bailouts. Lawmakers have already complained about the job losses in their districts from dealership closings and the process by which retailers were selected for shutdowns.

“This sobering report should serve as a wake-up call as to the implications of politically orchestrated bailouts,” Representative Darrell Issa, a California Republican and ranking member on the House Committee on Oversight and Government Reform, said yesterday in a statement.

Obama’s Treasury Department, which has spent $80.7 billion on auto assistance under the TARP program, criticized the inspector’s audit and said without government aid both companies faced failure and possible liquidation.

Too Slow

The department’s autos task force in early 2009 found Detroit-based GM’s plan for closing 1,650 dealers by 2014 too slow, according to Barofsky’s report. In response, GM identified 1,454 dealerships to be shut down by October, Barofsky said.

Auburn Hills, Michigan-based Chrysler, which planned to shut almost 1,200 dealerships by 2014, instead decided to immediately close 789 in bankruptcy, after Treasury’s urgings, according to the report.

The Treasury Department, using advice received from industry experts, had encouraged smaller dealer networks to help the carmakers boost sales and better compete with Japan’s Toyota Motor Corp. and Honda Motor Co., according to the report.

GM, which later moved to trim the closures by about half, said in a statement that events described in the report “have since been overtaken by a new GM and a stronger dealer network to match.” The statement added, “The new GM is also moving forward to improve dealer relations and has already reinstated several hundred.”

Chrysler Network

Chrysler’s “optimized dealer network is already contributing to improved vehicle sales for Chrysler and will be a vital part of the company’s success as we continue to deliver outstanding products,” the automaker said in a statement.

General Motors Co. was formed last year out of bankruptcy from the best-performing assets of General Motors Corp., while a group led by Fiat SpA purchased most of the bankrupt Chrysler LLC assets, forming Chrysler Group LLC. Taxpayer aid made the reorganizations possible.

Dealer complaints about closures prompted lawmakers including Senator Jay Rockefeller, a West Virginia Democrat, to ask Barofsky to investigate.

“There is substantial confusion, even among dealers themselves, as to how GM and Chrysler selected dealerships for termination,” Rockefeller, chairman of the Commerce, Science and Transportation Committee, said in the letter to Barofsky.

The report found that Chrysler, which made decisions on a case-by-case basis, followed the criteria for targeting dealers for termination. GM was inconsistent and retained more than 1,300 dealers who would have been shut based on sales, consumer satisfaction and profitability, according to the report.

‘Special Care’

“The fact that Treasury was acting in part as an investor in GM and Chrysler does not insulate Treasury from its responsibility to the broader economy,” Barofsky said. “Treasury should have taken special care given that the auto team’s determinations had the potential to contribute to job losses.”

Herbert Allison, assistant Treasury secretary for financial stability, said in a letter included in the report that the restructuring process “was not easy” and required “deep and painful sacrifices” from all parties.

“We strongly disagree with many of your statements, your conclusions and the lessons learned,” Allison told Barofsky.

President Barack Obama signed a law in December that required the automakers to offer binding arbitration to dealers whose outlets were being closed.

GM said in March it planned to reinstate 661 dealers after the company began re-evaluating the closing of 1,100 retailers.

Chrysler said that same month it was offering new franchises to 50 dealers who applied for arbitration, in addition to 36 previous offers or new agreements. Chrysler terminated 789 dealers last year and said in January that 409 had applied for arbitration.

To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net; Catherine Larkin in Washington at clarkin4@bloomberg.net.

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