	Scope and Methodology

To identify steps Chrysler and GM have taken since December 2008 to  reorganize, we reviewed information on the companies’ finances and  operations, including financial statements, select documents from their  bankruptcy proceedings, and company-provided data, and interviewed  representatives of the companies. Chrysler and GM Have Addressed Some Challenges Important to Achieving Viability, but the Effect of These Actions Remains to Be Seen

Since the condition of the domestic auto industry first came to the  forefront of national attention in December 2008, Chrysler and GM have  made changes to address key challenges to achieving viability, but the  effect that these actions will have on the companies remains to be seen. Through the bankruptcy process, Chrysler and GM  eliminated a substantial amount of their long-term financial liabilities,  including debt owed to bank lenders and bondholders. Reducing the number of brands and models. Rationalizing dealership networks to align with sales volumes. Reducing production costs and capacity. Moreover, whether enough time has passed for the impact of the structural  changes to be seen is unlikely, especially given that the automakers have  not completed restructuring, the economy is still recovering, and new  vehicle purchases remain at low levels. Treasury Does Not Plan to Be Involved in Chrysler’s or GM’s Day-to-Day Operations or Management, but It Plans to Closely Monitor the Companies’ Performance

Treasury, which has a sizable financial stake in Chrysler and GM, does not  plan to be involved in the day-to-day management of the companies, but it  has established certain requirements that will be in effect as long as it  holds debt or equity in the companies. Treasury developed  several principles to guide its role as an equity owner, including the  commitment that, although Treasury reserves the right to set up-front  conditions to protect taxpayers and promote financial stability, Treasury  plans to oversee its financial interests in a commercial manner, in which it  will focus primarily on maximizing its return and take a hands-off  approach to day-to-day management. According to the agreements, Chrysler and GM must  do the following:    Produce a portion of their vehicles in the United States. Report to Treasury on the use of government funds. Have internal controls to ensure compliance with the  requirements. Treasury’s Approach for Monitoring and Selling Its Ownership Interest in Chrysler and GM Does Not Fully Address All Important Considerations Experts Identified

Treasury’s general goals of exiting as soon as practicable, maximizing  return on investment, and improving the strength and viability of Chrysler  and GM are reasonable but possibly competing, according to the group of   financial and industry experts we spoke with. In assessing Chrysler’s and GM’s financial condition and future prospects  and putting together financing packages for the companies, Treasury hired  or consulted with a number of individuals with experience in investment  banking, equity analysis, and the auto industry, but it has not established a  program office to oversee its investment in the auto companies. Because of the particular needs of the auto companies and the  unprecedented nature of providing such assistance, Treasury hired or  contracted with a number of individuals with expertise in the auto  industry, equity investment, and relevant areas of law throughout the first  half of calendar year 2009 as Treasury assessed Chrysler’s and GM’s  financial condition, assembled financing packages for the companies, and  helped with restructuring efforts. Some experts also noted that Treasury should assign an  individual with expertise in investment banking or private equity to be in  charge of monitoring these metrics, which Treasury officials told us they  had done. To the extent possible, determine the optimal time and method to  divest. Although Treasury officials said they plan  to consider all options for selling the government’s ownership stakes in  Chrysler and GM, they noted that they believe the most likely scenario for  GM is to dispose of Treasury’s equity in the company through a series of  public offerings. Treasury officials told us they  believe their planned approach for managing Treasury’s equity in Chrysler and  GM is sufficient for now. However, most of the original staff on  Treasury’s auto team either have left Treasury or may do so in the future. Given the substantial decline in the number of staff and lack of  dedicated staff for this oversight moving forward, however, we are  concerned whether Treasury will continue to have the needed expertise to  provide oversight of the use of government funds, assess the financial  condition of the auto companies, and develop strategies to divest the  government’s interests.
Why GAO Did This Study

The Department of the Treasury (Treasury) provided $81.1 billion in Troubled Asset Relief Program (TARP) aid to the U.S. auto industry, including $62 billion in restructuring loans to Chrysler Group LLC (Chrysler) and General Motors Company (GM). In return, Treasury received 9.85 percent equity in Chrysler, 60.8 percent equity and $2.1 billion in preferred stock in GM, and $13.8 billion in debt obligations between the two companies. As part of Government Accountability Office's (GAO) statutory responsibilities for providing oversight of TARP, this report addresses (1) steps Chrysler and GM have taken since December 2008 to reorganize, (2) Treasury's oversight of its financial interest in the companies, and (3) considerations for Treasury in monitoring and selling its equity in the companies. GAO reviewed documents on the auto companies' restructuring and spoke with officials at Treasury, Chrysler, and GM, and individuals with expertise in finance and the auto industry.

What GAO Found

Chrysler and GM have made changes since December 2008 to address key challenges to achieving viability, but the ultimate effect of these changes remains to be seen. The companies have eliminated a substantial amount of their long-term debt, reduced the number of brands and models of vehicles they sell, rationalized their dealership networks, and lowered production costs and capacities by reducing the number of factories and employees. It is difficult to fully assess the impact of these changes because of the short amount of time that has passed since reorganization and the low level of new vehicle sales. Moreover, Chrysler and GM are revaluing their assets and liabilities based on their reorganizations in 2009 and expect to prepare financial statements based on this effort in the coming months. Treasury does not plan to be involved in the day-to-day management of Chrysler and GM, but it plans to monitor the companies' performance. Treasury developed several principles to guide its role as a shareholder, including the commitment that although Treasury reserves the right to set up-front conditions to protect taxpayers and promote financial stability, Treasury will oversee its financial interests in a hands-off, commercial manner. The conditions that Treasury set for the companies include requiring that a portion of their vehicles be manufactured in the United States and that they report to Treasury on the use of the TARP funding provided. Treasury officials told us that they are also requiring that Chrysler and GM submit financial information on a regular basis and that they plan to meet with the companies' top management on a regular basis to discuss the companies' financial condition. Treasury should make certain that its current approach for monitoring and selling its equity in Chrysler and GM fully addresses all important considerations financial and industry experts identified. For example, Treasury initially hired or consulted with a number of individuals with experience in investment banking or equity analysis to help assess Chrysler's and GM's financial condition and develop financing packages for the companies. Many of these individuals have recently left as the restructuring phase of Treasury's work has been completed. Treasury will need to ensure these staff and any staff that depart in the future are replaced as needed with similarly qualified personnel. Also, Treasury does not currently contract with or employ outside firms with specialty expertise for its work with the auto industry but may need to do so in the future, to make sure sufficient expertise is available to oversee the government's significant financial interests in Chrysler and GM. In addition, although Treasury officials told us they are considering all options for divesting the government's ownership interests, including an initial public offering or private sale, they have focused primarily on a series of public offerings for GM and have not identified criteria for determining the optimal time and method to sell. Regardless of the option pursued, however, Treasury is unlikely to recover the entirety of its investment in Chrysler or GM, given that the companies' values would have to grow substantially above what they have been in the past.