	Scope and Methodology

To describe the nature and purpose of the federal assistance provided to  the auto industry, we reviewed Department of the Treasury documents  related to AIFP—including white papers on the Supplier Support Program  and the Warranty Commitment Program, terms and conditions of the loans  provided to Chrysler and GM, and disbursement reports on the amount of  funding allocated and disbursed under the AIFP. We also conducted  interviews with officials from the Departments of Energy and  Transportation to obtain information on their coordination with Treasury  in providing and overseeing assistance to automakers; representatives  from Chrysler, GM, Chrysler Financial Services Americas LLC (Chrysler  Financial) and GMAC LLC (GMAC) to obtain information on how they  determined the level of funding needed and their plans for using the  funding; and representatives from Ford Motor Company and Ford Motor  Credit Company to determine why they have not sought federal  assistance. To identify important factors for Chrysler and GM to address to achieve  long-term viability and the challenges they face to become viable, we  contracted with the National Academy of Sciences (NAS) to identify a  diverse group of individuals with expertise about the past and current  financial condition and operations of the domestic automakers, the  restructuring of distressed companies, labor relations issues, financial  management and analysis of distressed or restructuring companies,  factors influencing competitiveness in the auto industry, and engine and  vehicle technologies that may affect the auto manufacturing industry  today as well as in the near future. To further identify challenges to achieving long-term  viability, we reviewed Treasury’s assessment of the restructuring plans  Chrysler and GM submitted in February. To provide additional information and context on all issues examined in  this report, we conducted interviews with other stakeholders, including a  representative of the International Union, United Automobile, Aerospace  and Agricultural Implement Workers of America (UAW), representatives  of the Association of International Automobile Manufacturers, and other  knowledgeable individuals including financial analysts specializing in the  auto sector, a lawyer knowledgeable about state franchise laws, and an  economist specializing in labor issues. The economic reach of the auto  industry in the United States is broad, with many groups affected by its  downturn and the financial condition of the automakers. This, in turn, could affect the  automakers’ ability to obtain parts needed to manufacture vehicles. We have previously identified three fundamental principles that can serve  as a framework for considering federal government financial assistance to  large firms. According to these principles, the federal government should  (1) identify and define the problem, (2) determine the national interests  and set clear goals and objectives that address the problem, and (3)  protect the government’s interests. Treasury Has Established Programs to Help Stabilize the Auto Industry

In an attempt to help stabilize the U.S. automotive industry and avoid  disruptions that would pose systemic risk to the nation’s economy, in  December 2008 Treasury established AIFP and agreed to provide Chrysler  and GM with loans of $4 billion and $13.4 billion, respectively. As a condition of the December loan agreements, Chrysler and GM were  required to submit restructuring plans to Treasury in February that describe  actions the automakers would take to achieve and sustain long-term viability. Several new initiatives to help stabilize the auto industry and bring relief  to those affected by the industry were announced in March 2009. Supplier Support Program: Under this program, Chrysler and GM will  receive funding for the purpose of ensuring payment to suppliers. Treasury has made up to $5 billion available through this  program. In Providing Assistance to the Auto Industry, Treasury Identified Goals and Objectives for the Assistance and Took Steps to Protect the Government’s Interest

Treasury identified as a problem of national interest the financial  condition of the U.S. automakers and its potential to affect financial  market stability and the economy at large. In developing the terms and conditions of the loans to Chrysler and GM,  Treasury included provisions to manage risk and protect the government’s  interest. Concessions from stakeholders. Treasury also received  junior liens on additional assets from both companies. Chrysler did not propose  collateral options for any additional federal assistance in its restructuring  plan. A potential area of significant financial  exposure is the government’s liability for terminated pension plans. In the event that Chrysler or GM cannot continue to  maintain their pension plans—such as in the case of liquidation or an asset  sale—PBGC may be required to take responsibility for paying the benefits  for the plans, which are currently underfunded by a total of about $29  billion. Automakers Have Addressed Some of the Factors Important for Achieving Viability, and Many Challenges Remain

In general, we found that Chrysler’s and GM’s February restructuring plans  contain some of the key factors our panel of individuals with auto industry  expertise identified as important for achieving viability, such as reducing  the number of models and brands and rationalizing dealerships. However,  the plans do not fully address all of the considerations that members of the  panel identified, which are discussed below. Treasury identified similar  concerns and concluded that Chrysler and GM need to establish a new  strategy for long-term viability in order to justify substantial additional  investment of federal funds. Achieving viability may be difficult because of  a number of challenges facing the automakers, including some outside of  their control. Treasury identified similar challenges related to both Chrysler’s and GM’s  product mixes. Neither  company has reached an agreement with the UAW to reduce cash  contributions to the VEBAs to fund retirees’ healthcare plans, also part of  Chrysler’s and GM’s plans to achieve viability. The poor condition of the U.S. economy will likely continue to affect the  financial health of Chrysler and GM. As figure 2 shows, over the past 30  years, automobile sales almost always decreased during periods of  economic recession. Agency Comments and Our Evaluation

We provided a draft of this report to the Departments of the Treasury,  Transportation, and Energy for review and comment. These agencies  provided technical clarifications, which we incorporated as appropriate. We also made a draft of this report available to Chrysler and GM officials for  their review and comment. Chrysler and GM officials provided technical  corrections and clarifications, which we incorporated as appropriate.
Why GAO Did This Study

The turmoil in financial markets and the economic downturn has brought significant financial stress to the auto manufacturing industry. The economic reach of the auto industry in the United States is broad, affecting autoworkers, auto suppliers, stock and bondholders, dealers, and certain states. To help stabilize the U.S. auto industry and avoid disruptions that could pose systemic risk to the nation's economy, in December 2008 the Department of the Treasury established the Automotive Industry Financing Program (AIFP) under the Troubled Asset Relief Program (TARP). From December 2008 through March 2009, Treasury has allocated about $36 billion to this program, including loans to Chrysler Holding LLC (Chrysler) and General Motors (GM). GAO has previously identified three principles to guide federal assistance to large firms: define the problem, determine the national interests and set goals and objectives, and protect the government's interests. As part of GAO's statutorily mandated responsibilities to provide timely oversight of TARP activities, this report discusses the (1) nature and purpose of assistance to the auto industry, (2) how the assistance addresses the three principles, and (3) important factors for Chrysler and GM to address in achieving long-term viability and the challenges that they face to become viable. To address these objectives, GAO reviewed Chrysler's and GM's restructuring plans and financial statements, as well as Treasury documents related to AIFP. GAO also reviewed the terms and conditions of the federal loans to identify risks to the government and compared these loan provisions to GAO's principles for providing federal financial assistance to large firms. In addition, GAO interviewed representatives of Chrysler, GM, Ford Motor Company (Ford) and the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America (UAW), and officials from the Departments of the Treasury, Transportation, and Energy. GAO also conducted semistructured interviews with a panel of individuals identified by the National Academy of Sciences for their expertise in the fields of auto industry trends and data, labor relations, vehicle manufacturing, and corporate restructuring. GAO provided a draft of this report to the Departments of the Treasury, Transportation, and Energy for their review and comment. These agencies provided technical clarifications, which GAO incorporated as appropriate. GAO also made a draft of this report available to Chrysler and GM officials for their review and comment. Chrysler and GM officials provided technical corrections and clarifications, which GAO incorporated as appropriate. GAO is not making recommendations in this report.

What GAO Found

From December 2008 through March 2009, the Treasury Department established a series of programs to help bring relief to the U.S. auto industry and prevent the economic disruptions that a sudden collapse of Chrysler and GM could create. In December 2008, Treasury provided bridge loans of $4 billion to Chrysler and $13.4 billion to GM and required both automakers to submit restructuring plans in February 2009. In March, Treasury determined that the automakers' restructuring plans were not sufficient to achieve long-term viability and required that they take more aggressive action as a condition of receiving additional federal assistance. At the same time, Treasury also established programs to ensure payments to suppliers of parts and components needed to manufacture cars and to guarantee warranties of cars Chrysler and GM sell during the restructuring period. In addition to these programs, the President announced a new White House initiative to help communities and workers affected by the downturn in the industry. In the coming weeks, Treasury will determine whether the additional steps Chrysler and GM have taken or plan to take are sufficient to warrant further assistance. If the companies are successful in implementing the additional steps toward restructuring, then Treasury may provide additional assistance. In providing assistance to the auto industry, Treasury identified goals and objectives and took steps to protect the government's interest. Provisions to protect the government's interest include requiring automakers to submit periodic financial reports and to gain concessions from stakeholders such as the UAW, creditors, and bondholders. To date, however, Chrysler and GM have not reached agreements with these stakeholders. In addition, Treasury included provisions to secure collateral from the automakers. However, because many of Chrysler's and GM's assets were already encumbered by other creditors, the amount of assets on which Treasury could secure senior liens was limited. An additional area of risk is the financial health of the automakers' pension plans. In the event that Chrysler or GM cannot continue to maintain its pension plans--such as in the case of liquidation--the Pension Benefit Guaranty Corporation, a government corporation, may be required to take responsibility for paying the benefits for the plans, which are not fully funded. GAO's panel of individuals with auto industry expertise identified a number of factors for achieving viability, including reducing the number of brands, reassessing the scope and size of dealership networks, reducing production capacity and costs, and obtaining labor concessions. However, Chrysler's and GM's restructuring plans submitted in February do not fully address these factors, according to GAO's panelists. In its assessment of the plans, Treasury identified concerns similar to those identified by the panelists, and concluded that Chrysler and GM need to establish a new strategy for long-term viability in order to justify a substantial additional investment of federal funds. Achieving viability is made more difficult because of many additional challenges facing the automakers, some of which are outside their control--such as the weak economy and the limited availability of credit. The condition of the U.S. economy will likely continue to affect the financial health of Chrysler and GM, as historically automobile sales almost always decrease during periods of economic recession. Given these challenges, Treasury, Chrysler, and GM are considering a range of options available for the automakers to achieve viability, including restructuring under the bankruptcy code.