WASHINGTON, D.C. — The U.S. Treasury's decision-making process regarding the dealership network reductions at General Motors and Chrysler has come under fire in an audit released Sunday by the Office of the Special Inspector General for the Troubled Asset Relief Program.

And the automakers themselves were not spared from critique, either.

The report from SIGTARP — titled "Factors Affecting the Decision of General Motors and Chrysler to Reduce their Dealership Networks" — criticized the Treasury for demanding the automakers put in place such rapid wind-downs and argued that the Treasury has a lot to learn from how this process was handled.

The report — which was sent by Special Inspector General Neil Barofsky to Secretary of the Treasury Timothy Geithner — suggested that the "Treasury should have taken special care given that its determinations had the potential to lead to job losses, particularly given that one goal of the loan agreements was to ‘preserve and promote jobs of American workers employed directly by the automakers and subsidiaries and in related industries.'

"Here, before the Auto Team rejected GM's original, more gradual termination plan as an obstacle to its continued viability and then encouraged the companies to accelerate their planned dealership closures in order to take advantage of bankruptcy proceedings, Treasury (a) should have taken every reasonable step to ensure that accelerating the dealership terminations was truly necessary for the long-term viability of the companies, and (b) should have at least considered whether the benefits to the companies from the accelerated terminations outweighed the costs to the economy that would result from potentially tens of thousands of job losses," it continued. "The record is not at all clear that Treasury did either."

Not to mention, the Treasury apparently needs to do a better job in the future of making sure that the "actions" of those whom it gives TARP funds are "carried out in a fair and transparent manner," the report indicated.

As far as how the automakers actually chose which stores would be cut, SIGTARP noted that while Chrysler's criteria was "subjective" and didn't provide dealers the ability to appeal, the automaker did follow the criteria it outlined.

GM's two-phased strategy was found to be more "objective" and did give dealers a way to appeal, but the automaker "did not consistently follow its stated criteria." Moreover, it was discovered that GM "failed to set the criteria or process for appeals or to document its reasoning for granting or denying appeals."

Automakers React

Upon the release of the report, GM offered a statement that essentially points to the automaker looking to the future.

"The events depicted in the SIGTARP's report have since been overtaken by a new GM and a stronger dealer network to match. More than a year since its bankruptcy, GM is showing substantial progress," management stated.

The team later added, "The new GM is also moving forward to improve dealer relations and has already reinstated several hundred dealers and completed the arbitration hearings for the remaining dealers who filed cases. With the right-size dealer network, GM expects to continue to realize greater operating efficiencies and increased dealer throughput and profitability and overall cost savings."

GM said it "cooperated fully" to with the SIGTARP review to provide documentation of its efforts and the "criteria and numerous business factors" the automaker considered in the wind-down and appeals processes.  

"The GM which existed at that time did its best to develop and implement an objective dealer consolidation process under extraordinary circumstances," GM claimed. "As former GM officials noted in various public comments, business conditions required GM to undertake difficult and urgent actions that would require sacrifice among all stakeholders. Since then, GM, its employees and dealers have a renewed sense of confidence in a bright future."

Chrysler, meanwhile, did not offer comments specific to the report's findings but emphasized that its dealer network is right-sized, which has helped to push the automaker to stronger sales.

"Chrysler Group has just received the report and cannot comment on its conclusions at this time," the automaker said in a statement sent to Auto Remarketing. "However, 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 to our customers.

"What is needed are more profitable, better performing dealers to provide better customer service. Indeed, (the) plan to place all our brands under one roof in well-located facilities has already resulted in enhanced dealer profitability and greater investment by existing dealerships on track with the $500 (million) investment plan Chrysler announced on Nov. 4, 2009," the statement added.

Treasury Said It Made the Right Decision

As far as the U.S. Treasury, it was given a chance to respond to the findings and this was included at the end of the audit report. Basically, Assistant Secretary for Financial Stability Herbert Allison wrote a letter to Barofsky emphasizing the department's disagreement with much of what the report found.

He stressed that "certain failure and liquidation" were imminent for Chrysler and GM without government help. Substantial and widespread job loss would have been the outcome of such a scenario, he argued.

"Instead, both companies worked with their stakeholders and underwent fair, open and successful bankruptcies," Allison noted. "Today, both GM and Chrysler have emerged as stronger, global companies. Of course, this process was not easy. It required deep and painful sacrifices from all stakeholders — including workers, retirees, suppliers, dealers, creditors, and the countless communities that rely on a vibrant American auto industry.

"Nonetheless, the outcome under the restructuring plans is far better than the likely alternatives had the administration not stood behind the companies," he continued. "The administration's actions not only avoided a potentially catastrophic collapse and brought needed stability to the entire auto industry, but they also saved hundreds of thousands of American jobs and gave GM and Chrysler a chance to reemerge as viable, competitive American businesses."

NADA Says It Was Always Against Dealer Terminations
In a statement sent to Auto Remarketing Monday, the National Automobile Dealers Association argued that the SIGTARP findings reflect what it has been saying all along.

"The SIGTARP report confirms what was said in NADA's testimony presented to Congress in several hearings and to the Auto Task Force in multiple meetings: ‘We do not see how these cuts make economic sense — not for the companies, not for the dealers, not for local communities and certainly not for the struggling U.S. economy,'" said NADA chairman Ed Tonkin.

"Similarly confirmed by the report was NADA's unwavering position — also presented to Congress on multiple occasions — that ‘rapid dealer reductions increase unemployment, threaten communities and decrease state and local tax revenue without any material corresponding decrease in the automaker's costs,'" he continued.

"Importantly, the Inspector General's report also validates the Congressional efforts which gave thousands of dealers the opportunity to have a neutral arbitrator review their cases and possibly save thousands of jobs," Tonkin added. "Finally, the report demonstrates what NADA has maintained for many years — that the franchised automobile dealership is and will continue to be the most powerful job-creating entity on Main Streets all across America and that NADA's 17,000 members provide long-term economic opportunity for nearly 1 million Americans." 

Analyzing the Audit 

Offering a response on the analytical side of things, James Bell, of Kelley Blue Book's Kbb.com, said he found the timing of the report to be a bit unfavorable. He suggests it could quell some of the progress made in the market.

"News of a recently released audit, which calls into question the motivation of some of the dealer terminations processed as part of 2009's GM and Chrysler bankruptcies, is unfortunate and disruptive. The automotive industry is on the cusp of a semi-solid recovery, or at least a return to a market with predictable sales and shopping activity, and this news may disrupt momentum at this a critical juncture," Bell commented.

"The closings obviously were a painful and uncomfortable process, especially for the dealers and employees that were terminated, but it serves to remind all of us how much the market has shifted since many of these dealer points were first assigned," he added.

Pointing out data for the Big 3, Bell said market share for these automakers was around 43 percent at the end of 2009, a significant decline from 1970, when they commanded 81 percent of the market.  

However, besides the "natural" ebb-and-flow of typical dealership closures, that 40-year window saw a "reasonably static" Big 3 dealer network, Bell added.

"Meanwhile, Toyota, Honda, Mercedes-Benz and others were able to sweep up this lost share with far fewer dealers per brand. Our compassion and concern for the terminated dealers is real and we wish them the best," Bell shared. "However, in certain cases, to force these fragile companies into a protracted fight while their expected market share is not set to return to historical levels seems like a case of very bad timing."