A new report released yesterday by the Congressional Oversight Panel projects that taxpayers will lose billions of dollars on the government’s auto industry bailout programs. The report also raises important questions about the decision to assist automakers with funds from the Troubled Asset Relief Program (TARP), and identifies several potential conflicts of interest stemming from the government’s significant ownership stake in these private companies.
As the report points out, a number of oversight bodies have predicted that the government’s assistance to the automakers will be a losing deal for taxpayers. For instance, the Congressional Budget Office (CBO) estimated in June that taxpayers will effectively provide a 73 percent subsidy rate (equaling $37 billion) on the government’s loans and investments to General Motors, GMAC, Chrysler, and Chrysler Financial. Yesterday’s report is also doubtful that taxpayers will receive a full return on their investment.
The Panel estimates that approximately $5.4 billion of the loans extended to Chrysler are “highly unlikely to be recovered,” and even the Treasury Department estimates that around $23 billion of the initial loans provided to the automakers last year will be subject to “much lower recoveries.” Treasury also concedes that the companies’ stock prices would have to exceed all expectations in order for taxpayers to fully recoup their investment.
The Panel also takes a step back and asks some basic but important questions about the government’s decision to use TARP funds to bail out the automakers. In authorizing the Treasury Secretary to “purchase, and to make and fund commitments to purchase, troubled assets from any financial institution,” the Emergency Economic Stabilization Act (EESA) expanded the definition of “troubled assets” to include “any other financial instrument...the purchase of which is necessary to promote market stability.” The EESA also defined “financial institution” as “any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company...” (Emphasis added.) The Panel argues that the automakers might technically qualify for TARP assistance under these sections of the bill, but it also acknowledges that the “statutory language is ambiguous and, in light of the language and history of EESA, the question is a close one.” The report quotes several Bush officials who argued last fall that the TARP was intended to provide funding to banks, not automakers.
In addition, the Panel points to several conflicts of interest arising from the government’s competing objectives as part-owners of the auto companies (the government now owns 10 percent of Chrysler and 61 percent of GM):
“At times, in the ordinary course of business, natural tensions arise between the interests of a corporation’s management team, its shareholders and the directors who represent them, its creditors, its workers, its regulators, and, and its customers. The government’s investment in the American automotive industry has added a new complication, as the American public now directly or indirectly participates in many of these roles....possibly competing objectives [include] preventing significant job losses across the nation in the midst of an economic crisis against maximizing shareholder profits; changing the culture of these automotive companies against not interfering with day-to-day management; and public accountability against normal commercial operations.”
The Panel argues that Treasury has exacerbated many of these problems by failing to articulate a clear set of objectives for the auto industry bailout programs:
“Was the primary purpose of this intervention to provide bridge funding to the automakers, with the expectation that these were viable companies that could eventually repay taxpayers in full? Was it to prevent an uncontrolled liquidation because such a prospect posed a systemic risk to the financial markets and the overall economy? Was it to advance broader policy goals, such as improving fuel efficiency or sustaining American manufacturing and jobs? Or was it some combination of these? To date, Treasury’s public statements provide little clarity, as each of these objectives has been cited at various times.”
The Government Accountability
Office (GAO) recommended back in January that Treasury needed to take steps
to “more clearly articulate and communicate a strategic vision” for TARP, but
when it comes to the auto bailout programs, the Panel makes a convincing case
that this vision is still sorely lacking.
The Panel calls on Treasury to “provide a full, transparent picture of its actions” as a significant shareholder in the auto companies, and to offer a legal analysis justifying the use of TARP funds for the auto bailout programs. The Panel also recommends that Treasury place its Chrysler and GM shares in an independent trust in order to mitigate political interference and provide greater transparency and oversight.
In a dissenting view, Rep. Jeb Hensarling (R-TX) goes even further than his colleagues on the Panel, directly challenging the legality of the auto bailout programs and calling for an additional investigation by the Special Inspector General for the Troubled Asset Relief Program.
You may view the entire Panel report here.
-- Michael Smallberg