Watchdog Report: The Government’s Investment in GM & Chrysler
U.S. Government Accountability Office
May 10, 2011
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From the U.S. Government Accountability Office, www.gao.gov Transcript for: Watchdog Report: The Government’s Investment in GM & Chrysler Audio interview by GAO staff with Nikki Clowers, Director, Financial Management and Community Investment Related GAO Work: GAO-11-471: TARP: Treasury's Exit from GM and Chrysler Highlights Its Competing Goals, and Results of Support to Auto Communities Are Unclear Released on: May 10, 2011 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the Government Accountability Office. It's May 10th, 2011. Since 2008, the U.S. Treasury Department has committed $62 billion in Troubled Asset Relief Program funding to the auto manufacturers General Motors and Chrysler. A group led by Nikki Clowers, a director in GAO’s Financial Management and Community Investment Team, recently reviewed the effect of that funding and the steps Treasury is taking to wind down its investment. GAO’s Jeremy Cluchey sat down with Nikki to learn more. [ Jeremy Cluchey: ] How much of an investment did the U.S. government make in GM and Chrysler and where's that investment stand today? [ Nikki Clowers: ] Through the TARP program Treasury invested about $62 billion in Chrysler and GM, which was about $12.5 billion in Chrysler as well as $49.5 billion in GM. In exchange for that investment, Treasury received about 61 percent in equity in GM and about 10 percent in Chrysler, as well as $2.1 billion in preferred shares in GM as well as about $12 billion in debt between the two companies. In terms of where that investment stands now, the government has recouped about half of its investments, with a big chunk of that coming through GM’s IPO from last fall. [ Jeremy Cluchey: ] Your team looked at the impact of this investment as well. What did you find this investment has accomplished so far? [ Nikki Clowers:] The investment really allowed, helped stabilize both companies and allowed them time to restructure and not go through a disorderly liquidation, which was a potential they were on a path for, for disorderly liquidation. Through restructuring, they've been able to, the companies have been able to reduce their fixed costs by reducing dealerships, reducing the number of plants, reducing workers, among other things, and by reducing the fixed costs this has had an important consequence for the companies and that they've been able to lower their breakeven cost, so, for example, before the restructuring, GM’s breakeven was about 4 million sales in the United States. After restructuring, for them to break even it's about 2 million car sales, vehicle sales in the United States, so this is significant and it has allowed them to cover all their fixed costs at the bottom of the cycle, which has been really important over the past couple of years as auto sales have remained depressed given the current economic conditions. [ Jeremy Cluchey: ] Your report explains the competing priorities the Treasury faces as it looks to divest from these companies. Can you elaborate on this? [ Nikki Clowers: ] Sure, Treasury has established different principles that help guide their management of the investments in the auto companies, and a few of those include managing the companies in a commercial way, trying to maximize the return on investment for taxpayers as well as exiting as soon as possible, and we previously reported that these are sound principles but sometimes they may conflict or compete. For Treasury to fully recoup its investment, it’ll have to sell its remaining shares of about $54 per share, and while the Wall Street analysts we talk to are optimistic that GM shares will increase in value, they project that they'll trade between $40 and $50 over the next year. So for Treasury to maximize its return on investments as one of its principles, they would probably want to hold onto those shares a little bit longer, but this would conflict with their principle of exiting as soon as possible. [ Jeremy Cluchey: ] For taxpayers who are interested in how the government’s investment in GM and Chrysler is going, what's the bottom line from this report? [ Nikki Clowers: ] The government's assistance helps stabilize both auto companies; it put them on the path to achieving financial viability, but they're not out of the woods yet. Both continue to face challenges as they look to launch new products in a continuing weak economy as well as an economy that's experienced volatile fuel prices right now. They also face challenges in maintaining their cost discipline and reducing or maintaining, or controlling costs in the areas of pension and debt. The Treasury has also taken steps to protect the taxpayers’ interest in managing these investments, and although they have recouped about half of the government assistance provided, there's still a significant amount of federal assistance tied up in these companies, so it's important that Treasury remain vigilant in monitoring these investments. Treasury will have to strike the right balance between maximizing the return on investment for taxpayers and exiting as soon as possible. [ Background Music ] [ Narrator: ] To learn more, visit GAO's Web site at GAO.gov and be sure to tune in to the next edition of GAO's Watchdog Report for more from the congressional watchdog, the Government Accountability Office.
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