New TARP Report Questions Taxpayer Bailouts of Chrysler, GM

Photo: TARP Report Raises Questions about Automaker Bailout.ABC News Photo Illustration
Prof. Elizabeth Warren, chairman of the Congressional Oversight Panel, set up to oversee the TARP program, is seen in this Apr. 2009 file photo in Washington, DC. The Obama administration's bailouts of General Motors and Chrysler raise a wide variety of unanswered questions according to the oversight group in a report to be released Wednesday.

The Obama administration's bailouts of General Motors and Chrysler raise a wide variety of unanswered questions according to the congressionally-appointed TARP oversight group report to be released Wednesday.

"The decision to provide financing for the automotive industry raises a number of questions about TARP and its use, including the decision to fund the automotive industry, the government as tough negotiator, the conflicts of interest that arise when the government owns a substantial stake in a private company and the exit strategy," finds the report from the Congressional Oversight Panel chaired by Harvard law professor Elizabeth Warren.

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The report raises a series of issues including shareholder losses, conflicts of interest, repayment of taxpayer dollars and even the Treasury Department's communications strategy.

"Treasury must be clearer, more transparent, and more accountable in its TARP dealings, providing the American public with the information needed to determine the effectiveness of Treasury's efforts," the panel adds.

The watchdog also notes a double standard for the automakers' bailouts compared to ones received by the financial sector.

"Assistance given to the banks has carried less stringent conditions, and money was made readily available without a review of business plans or without any demands that shareholders forfeit their stake in the company or top management forfeit their jobs.

By contrast, Treasury was a tough negotiator as it invested taxpayer funds in the automotive industry. The bulk of the funds were available only after the companies had filed for bankruptcy, wiping out their old shareholders, cutting their labor costs, reducing their debt obligations and replacing some top management."

American taxpayers now own 61 percent of post-bankruptcy GM and 10 percent of post-bankruptcy Chrysler. However, the panel says, they run the risk of losing money on these investments.

"Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount."

Chrysler GM Bailout

Treasury has estimated that around $23 billion of the initial loans made to the automakers will yield much lower recoveries. Also, the department has said it is unlikely that taxpayers will recoup about $5.4 billion of loans to the old Chrysler.

The panel's report also suggests a series of recommendations going forward.

"The panel recommends that Treasury use its role as a significant shareholder in Chrysler and GM to ensure that these companies fully disclose their financial status and that the compensation of their executives is aligned to clear measures of long-term success.

"To limit the impact of conflicts of interest and to facilitate an effective exit strategy, Treasury should also consider placing its Chrysler and GM shares in an independent trust that would be insulated from political pressure and government interference.

"Finally, because of the unprecedented nature of the assistance provided to the automotive industry, the panel also recommends that Treasury provide its legal analysis justifying the use of TARP funds for this purpose.

"This analysis will inform policymakers' and taxpayers' understanding of the potential for Treasury to use its authority to assist other struggling industries."

At one point, President Obama said, "I refuse to kick the can down the road."

The report from the panel, however, warns that, "The government-orchestrated bankruptcies of Chrysler and GM did not resolve the complex underlying problems facing the domestic automotive industry in the United States. It is, therefore, unclear whether the new entities will be able to overcome the historical shortcomings that led to their predecessors' failure.

"If they are unable to do so, either the government will need to step in again, or the companies will need to liquidate, with much of the attendant misery that the government sought to avoid in 2008 and 2009."

On Thursday, Treasury Secretary Tim Geithner will testify before the panel.

The full report can be found online at www.cop.senate.gov.

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