After holding a hearing on the topic this past July, the Congressional Oversight Panel (COP) released a report earlier this week entitled, “The Use of TARP Funds in Support and Reorganization of the Domestic Automotive Industry,” examining how TARP funds have been used to support and reorganize both General Motors and Chrysler through the bankruptcy process. The report generally discusses the use of TARP funds to fund the auto industry, Treasury’s role in the bankruptcies of GM and Chrysler, the conflicts of interest that arise when the government owns a stake in private companies, how Treasury intends to maximize taxpayer returns and its exit strategy.
After setting forth a historical overview of the turmoil faced by the auto industry during the past year, the report analyzed various public statements of both the Bush and Obama administrations in an effort to determine “under which circumstances and upon which conditions the government might intervene in failing industries.” The report concluded that the “commitment to assist the companies with the restructuring processes and procedures necessary to help them achieve long-term viability has been a central underlying component of every aspect of the Treasury auto team’s decision-making.” However, the COP concludes that the authority of Treasury to use TARP funds for support of the auto industry “seems unclear,” and recommends that Treasury provide a legal opinion justifying its use of TARP funds for the auto industry.
The report also tracked the expenditures of TARP funds with respect to the auto industry, and found that “of the federal government’s $81 billion exposure to the automotive industry, $76.9 billion had actually been disbursed as of Aug. 5, 2009.” According to the report, some Treasury officials have acknowledged that the full amount of the taxpayer investment in the auto companies may not be recouped.
With regard to Treasury’s involvement with GM and Chrysler, the COP concluded that Treasury had “conducted extensive and thorough due diligence on the viability plans, asked the companies to consider other variables, criticized the companies’ plans and questioned their assumptions.” However, the COP also concluded that Treasury’s disclosures “did not go far enough.” With regard to Treasury’s conduct in the bankruptcy proceedings of each company, the COP found that allegations that statutory bankruptcy law priorities were overturned were “not accurate.”
Furthermore, the report examined the potential for conflicts that could arise if the government decided to use its position in these companies to promote public policy initiatives, in violation of its fiduciary duties as a controlling shareholder of a publicly held corporation. The tension between Treasury’s intention to not become involved in specific business decisions and its intention to change the culture of these auto companies is also discussed, and the COP concludes that how Treasury “manages these responsibilities without overstepping, however, is an area that needs careful and continued monitoring.” The COP recommends that that Treasury clearly articulate the duration of its investment in these companies, consider structuring the compensation of management to be more performance-based, articulate a transparent strategy for the companies, establish a system for reporting and disclosures, leave the business under the charge of management and hold Treasury’s interest in a trust managed by an independent trustee to separate management from politics. The report notes that Treasury officials have maintained that disclosure of specific timetables regarding Treasury’s exit strategy could negatively impact taxpayer interests, while the COP recommended that “divestment take place as soon as commercially reasonable.”