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Audit Criticizes Task Force, OEMs for Dealer Terminations

July 20, 2010

WASHINGTON — An audit prepared by a watchdog agency says last year’s decision by General Motors Co., Chrysler LLC and the Obama administration’s Auto Task Force to terminate franchise agreements with hundreds of dealers was made in haste. Officials with the Treasury and both OEMs have defended their actions, saying the cuts were made in order to ensure the survival of the automakers at a time when both appeared to be in a free fall.

The terminations were intended to speed the companies through federal bankruptcy, as the process allowed the manufacturers to operate outside the auspices of various state laws that can make breaking franchise agreements prohibitively expensive. The report was prepared by the office of the independent inspector general for the Troubled Asset Relief Program (TARP).

The audit’s criticisms largely echo those voiced by affected dealers and industry associations throughout the process; namely, that federal officials pushed the manufacturers into trimming their dealer rosters without considering the long-term impact on jobless rates and the economy as a whole.

“[The] Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses and thereby potentially adding tens of thousands of workers to the already lengthy unemployment rolls — all based on a theory and without sufficient consideration of the decisions’ broader economic impact,” the report stated, in part. 

Ed Tonkin, chairman of the National Automobile Dealers Association (NADA), agreed.

“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,” Tonkin said Monday. “‘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.’”

The audit further stated that GM demonstrated inconsistency in its decisions to retain or terminate individual dealers and found documentation for those decisions lacking. In response to the report, the OEMs both released statements defending decisions made in 2009 and shifting their focus toward rebuilding.

“The GM which existed at that time did its best to develop and implement an objective dealer consolidation process under extraordinary circumstances,” the GM statement read, in part. “We appreciate the SIGTARP’s important work to examine the past. But for all of us at GM, our full focus and energy is directed straight ahead.”

Treasury Department officials also went on the defensive, saying job losses should be blamed on the economy, not on dealer closings.

“The Administration’s actions not only avoided a potential 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 re-emerge as viable, competitive American businesses,” said Herbert Allison, assistant secretary for financial stability at the Treasury Department.

Allison pointed to numbers from the U.S. Bureau of Labor Statistics, which found that 35,300 jobs have been lost in the automotive retail sector since February 2009, a decline of just over 3 percent. The industry lost nearly the same number of workers on the manufacturing side: 32,700 jobs lost in the same period for a decline of 4.5 percent.

Meanwhile, hundreds of disenfranchised dealers have applied for reinstatement with varying degrees of success. Their channel is an arbitration process created by legislation signed by President Obama several months into the bankruptcy proceedings, a move that the audit characterized as second-guessing on the administration’s part.

“Job losses at terminated dealerships were apparently not a substantial factor in the Auto Team’s consideration of the dealership termination issue,” the report says. “Although there is some controversy over how many jobs will be lost per terminated dealership, it is clear that tens of thousands of dealership jobs were immediately put in jeopardy as a result of the terminations by GM and Chrysler.”

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