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United States Government Accountability Office

GAO

Report to Congressional Committees

November 2009

TROUBLED ASSET
RELIEF PROGRAM
Continued
Stewardship Needed
as Treasury Develops
Strategies for
Monitoring and
Divesting Financial
Interests in Chrysler
and GM

GAO-10-151

November 2009

TROUBLED ASSET RELIEF PROGRAM
Accountability Integrity Reliability

Highlights
Highlights of GAO-10-151, a report to
congressional committees

Continued Stewardship Needed as Treasury Develops
Strategies for Monitoring and Divesting Financial
Interests in Chrysler and GM

Why GAO Did This Study

What GAO Found

The Department of the Treasury
(Treasury) provided $81.1 billion in
Troubled Asset Relief Program
(TARP) aid to the U.S. auto
industry, including $62 billion in
restructuring loans to Chrysler
Group LLC (Chrysler) and General
Motors Company (GM). In return,
Treasury received 9.85 percent
equity in Chrysler, 60.8 percent
equity and $2.1 billion in preferred
stock in GM, and $13.8 billion in
debt obligations between the two
companies.

Chrysler and GM have made changes since December 2008 to address key
challenges to achieving viability, but the ultimate effect of these changes
remains to be seen. The companies have eliminated a substantial amount of
their long-term debt, reduced the number of brands and models of vehicles
they sell, rationalized their dealership networks, and lowered production
costs and capacities by reducing the number of factories and employees. It is
difficult to fully assess the impact of these changes because of the short
amount of time that has passed since reorganization and the low level of new
vehicle sales. Moreover, Chrysler and GM are revaluing their assets and
liabilities based on their reorganizations in 2009 and expect to prepare
financial statements based on this effort in the coming months.

As part of GAO’s statutory
responsibilities for providing
oversight of TARP, this report
addresses (1) steps Chrysler and
GM have taken since December
2008 to reorganize, (2) Treasury’s
oversight of its financial interest in
the companies, and (3)
considerations for Treasury in
monitoring and selling its equity in
the companies. GAO reviewed
documents on the auto companies’
restructuring and spoke with
officials at Treasury, Chrysler, and
GM, and individuals with expertise
in finance and the auto industry.

What GAO Recommends
GAO recommends that the
Secretary of the Treasury ensure
the expertise needed to monitor
Treasury’s investment in Chrysler
and GM remains in place, report to
Congress on its general approach
for monitoring the companies’
performance, and have a plan for
evaluating the optimal method and
timing for divesting Treasury’s
equity. Treasury generally agreed
with GAO’s findings, conclusions,
and recommendations.
View GAO-10-151 or key components.
For more information, contact Katherine A.
Siggerud (sigguerdk@gao.gov) or A. Nicole
Clowers (clowersa@gao.gov) at
202-512-2834.

Treasury does not plan to be involved in the day-to-day management of
Chrysler and GM, but it plans to monitor the companies’ performance.
Treasury developed several principles to guide its role as a shareholder,
including the commitment that although Treasury reserves the right to set upfront conditions to protect taxpayers and promote financial stability, Treasury
will oversee its financial interests in a hands-off, commercial manner. The
conditions that Treasury set for the companies include requiring that a portion
of their vehicles be manufactured in the United States and that they report to
Treasury on the use of the TARP funding provided. Treasury officials told us
that they are also requiring that Chrysler and GM submit financial information
on a regular basis and that they plan to meet with the companies’ top
management on a regular basis to discuss the companies’ financial condition.
Treasury should make certain that its current approach for monitoring and
selling its equity in Chrysler and GM fully addresses all important
considerations financial and industry experts identified. For example,
Treasury initially hired or consulted with a number of individuals with
experience in investment banking or equity analysis to help assess Chrysler’s
and GM’s financial condition and develop financing packages for the
companies. Many of these individuals have recently left as the restructuring
phase of Treasury’s work has been completed. Treasury will need to ensure
these staff and any staff that depart in the future are replaced as needed with
similarly qualified personnel. Also, Treasury does not currently contract with
or employ outside firms with specialty expertise for its work with the auto
industry but may need to do so in the future, to make sure sufficient expertise
is available to oversee the government’s significant financial interests in
Chrysler and GM. In addition, although Treasury officials told us they are
considering all options for divesting the government’s ownership interests,
including an initial public offering or private sale, they have focused primarily
on a series of public offerings for GM and have not identified criteria for
determining the optimal time and method to sell. Regardless of the option
pursued, however, Treasury is unlikely to recover the entirety of its
investment in Chrysler or GM, given that the companies’ values would have to
grow substantially above what they have been in the past.
United States Government Accountability Office

Contents

Letter

1
Scope and Methodology
Background
Chrysler and GM Have Addressed Some Challenges Important to
Achieving Viability, but the Effect of These Actions Remains to
Be Seen
Treasury Does Not Plan to Be Involved in Chrysler’s or GM’s Dayto-Day Operations or Management, but It Plans to Closely
Monitor the Companies’ Performance
Treasury’s Approach for Monitoring and Selling Its Ownership
Interest in Chrysler and GM Does Not Fully Address All
Important Considerations Experts Identified
Conclusions
Recommendations for Executive Action
Agency Comments and Our Evaluation

3
5

10

14

19
28
29
30

Appendix I

Financial and Industry Experts GAO Interviewed

34

Appendix II

Comments from the Department of the Treasury

35

Appendix III

GAO Contacts and Staff Acknowledgments

36

Tables
Table 1: TARP Funding Provided to the Auto Industry, as of
September 20, 2009
Table 2: Changes to Chrysler’s and GM’s U.S. Production Costs and
Capacity
Table 3: Chrysler’s Financial Reporting Requirements
Table 4: GM’s Financial Reporting Requirements
Table 5: Value of Chrysler and GM Equity Required for Treasury to
Recoup Its Investment

6
12
17
17
27

Figure
Figure 1: Key Events in Treasury’s Assistance to the Auto Industry
and Chrysler’s and GM’s Restructuring

Page i

9

GAO-10-151 Troubled Asset Relief Program

Abbreviations
AIFP
COP
EESA
GM
NAS
OFS
SEC
TARP
UAW

Automotive Industry Financing Program
Congressional Oversight Panel
Emergency Economic Stabilization Act
General Motors Company
National Academy of Sciences
Office of Financial Stability
Securities and Exchange Commission
Troubled Asset Relief Program
International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America

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GAO-10-151 Troubled Asset Relief Program

United States Government Accountability Office
Washington, DC 20548

November 2, 2009
Congressional Committees
After authorizing more than $80 billion in financial assistance to the ailing
domestic automotive industry since December 2008, the Department of the
Treasury (Treasury) is in the unprecedented position of having ownership
stakes in two of the nation’s three largest auto manufacturers—Chrysler
Group LLC (Chrysler) and General Motors Company (GM). 1 Although
most automakers experienced declining sales in the last couple of years as
the economy slipped into a recession, the current economic conditions
have particularly hurt the sales of Chrysler and GM, resulting in significant
financial losses and necessitating the use of billions of dollars of borrowed
money or cash reserves to keep operating. In December 2008, the chief
executive officers of Chrysler and GM testified before Congress that
without federal assistance, their companies would likely run out of the
cash needed to keep operating.
Concerned that the collapse of one, or both, of these companies could
pose a systemic risk to the nation’s economy, the previous Administration
established the Automotive Industry Financing Program (AIFP) under the
Troubled Asset Relief Program (TARP) in December 2008. 2 Through AIFP,
Treasury provided loans to help Chrysler and GM continue operating as
the companies restructured. In exchange for the funding it provided,

1
Prior to bankruptcy reorganization, the companies’ legal names were Chrysler LLC and
General Motors Corporation. Chrysler Group LLC and General Motors Company are new
legal entities that were created through the bankruptcy process to purchase the operating
assets of the pre-reorganization companies. The new companies also received some of the
debts of the pre-reorganization companies, including a portion of the loans Treasury
provided to the companies prior to bankruptcy filing. Throughout this report, in cases
where such a distinction is important, we refer to the pre-reorganization companies as “old
Chrysler” and “old GM,” and the post-reorganization companies as “new Chrysler” and
“new GM.” The third domestic automaker, Ford Motor Company, has not requested
assistance from Treasury.
2
The Emergency Economic Stabilization Act of 2008 (EESA), Pub. L. No. 110-343, 122 Stat.
3765 (2008), codified at 12 U.S.C. §§ 5201 et. seq., originally authorized Treasury to buy or
guarantee up to $700 billion in troubled assets. The Helping Families Save Their Homes Act
of 2009, Pub. L. No. 111-22, Div. A, Title IV, § 402(f), 123 Stat. 1632, 1658 (2009), codified at
12 U.S.C. 5225(a)(3), amended the act and reduced the maximum allowable amount of
outstanding troubled assets under the act by almost $1.3 billion, from $700 billion to
$698.741 billion.

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GAO-10-151 Troubled Asset Relief Program

Treasury received 9.85 percent equity in the new Chrysler, 3 60.8 percent
equity and $2.1 billion in preferred stock in the new GM, and about $13.8
billion in debt obligations between the two companies. 4 The companies
still struggle to remain competitive with other automakers and to regain
market share.
We have previously reported that in a market economy the federal role in
aiding industrial sectors should generally be of limited duration and
establish clear limits on the extent of government involvement. Regarding
assistance to the auto industry, we have noted that Treasury should have a
plan for ending its financial involvement with Chrysler and GM that
indicates how it will both sell its equity and ensure adequate repayment
for the financial assistance it provided. 5 The current Administration has
stated that it is a “reluctant shareholder” in Chrysler and GM, but that it
would be irresponsible to “[give] away the equity stake to which taxpayers
were rightly entitled.” 6 As such, Treasury has said that in managing its
equity it will seek to exit as soon as practicable, maximize return on
investment, and foster strong companies that can be independently viable.
As part of our statutorily mandated responsibilities for providing timely
oversight of TARP, we are continuing to monitor Treasury’s assistance to
the auto industry, including how Treasury is managing its equity in

3

Treasury’s share in the company will become 8 percent if Fiat, another of Chrysler’s
shareholders, meets fuel efficiency-related performance targets and is granted additional
equity.
4

Other parties that received equity stakes in the reorganized companies include the
Canadian government, which provided financial assistance to the companies, and the auto
workers union’s health care trust, which agreed to accept equity in the company in
exchange for future monetary contributions.

5

GAO, Troubled Relief Asset Program: June 2009 Status of Efforts to Address
Transparency and Accountability, GAO-09-658 (Washington, D.C.: June 17, 2009).
6
Ron Bloom, Senior Advisor, U. S. Department of the Treasury, written testimony before
the Congressional Oversight Panel, Regarding Treasury’s Automotive Industry Financing
Program, July 27, 2009.

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GAO-10-151 Troubled Asset Relief Program

Chrysler and GM and how it plans to sell this equity. 7 This report will
explore the following issues related to Treasury’s ownership of Chrysler
and GM: (1) steps Chrysler and GM have taken since December 2008 to
reorganize, (2) Treasury’s oversight of its financial interests in Chrysler
and GM, and (3) important considerations for Treasury in monitoring and
selling its equity in the companies.

Scope and
Methodology

To identify steps Chrysler and GM have taken since December 2008 to
reorganize, we reviewed information on the companies’ finances and
operations, including financial statements, select documents from their
bankruptcy proceedings, and company-provided data, and interviewed
representatives of the companies.
To determine how Treasury will monitor its financial interests in Chrysler
and GM, we reviewed transaction documents related to the restructuring
of Chrysler and GM that Treasury was a party to, such as the secured
credit agreements and shareholders’ agreements, which set forth
Treasury’s rights with regard to the companies and certain requirements
the companies must comply with. We also reviewed information on
Treasury’s plans for overseeing its ownership interests in the companies,
including White House and Treasury press releases, and testimony
statements. In addition, we interviewed officials from Treasury’s Office of
Financial Stability (OFS), which was established to administer TARP,
about their plans to monitor the government’s financial interests, including
Treasury’s enforcement of the reporting requirements that were
established for Chrysler and GM. We did not, however, independently

7

See our previous reports on TARP assistance to the auto industry: GAO, Auto Industry:
Summary of Government Efforts and Automakers’ Restructuring to Date, GAO-09-553
(Washington, D.C.: Apr. 23, 2009); Auto Industry: A Framework for Considering Federal
Financial Assistance, GAO-09-247T (Washington, D.C.: Dec. 5, 2008); Auto Industry: A
Framework for Considering Federal Financial Assistance, GAO-09-242T (Washington,
D.C.: Dec. 4, 2008); and GAO-09-658. EESA requires GAO to report at least every 60 days on
findings resulting from, among other things, oversight of TARP’s performance in meeting
the purposes of the act, the financial condition and internal controls of TARP, the
characteristics of both asset purchases and the disposition of assets acquired, TARP’s
efficiency in using the funds appropriated for the program’s operation, and TARP’s
compliance with applicable laws and regulations. This is the ninth report issued in
compliance with that mandate.

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GAO-10-151 Troubled Asset Relief Program

verify the processes and procedures Treasury has established to monitor
and enforce the reporting requirements. 8
To identify important considerations for Treasury in monitoring and
determining how and when to sell its equity in Chrysler and GM, we
conducted a review of the academic literature on government ownership
of private entities, including both domestic and international cases of
private equity investments, privatization, and nationalization, and
reviewed analyses of the potential future value of Chrysler and GM and
Treasury’s equity stake. We also interviewed individuals with expertise in
the financial condition of domestic automakers, principles of corporate
restructuring, and government ownership of private entities. The financial
and business experts whose opinions are represented in this report were
selected from a list of experts identified for us by the National Academy of
Sciences (NAS) for our earlier report on challenges facing Chrysler and
GM. 9 Of the panel of experts we interviewed for that report, we contacted
a subset whose expertise was particularly relevant to structuring an exit
strategy. In addition to individuals identified by NAS, we spoke with
individuals NAS experts themselves identified as being knowledgeable in
this area. We also added two experts with investment experience
specifically in the auto industry. We chose experts in government
management of investments in private companies by identifying former
federal government officials who were involved in well-known cases of
government assistance to private entities, such as the federal assistance
provided to Chrysler in 1979. We conducted individual semistructured
interviews with these individuals, both in person and by telephone. Once
this review was completed, we analyzed the content of the literature and
the interviews for recurring themes and summarized these common
results. A list of the individuals we spoke with is provided in appendix I.
We conducted this performance audit from August 2009 to November 2009
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our

8

We are currently conducting a coordinated review with the Special Inspector General for
TARP on U.S. government oversight of and interaction with companies in which the
government has provided “exceptional assistance.” As part of this review, we will examine
the internal controls Treasury has established to manage its portfolio of investments and its
interaction with the institutions, which include Chrysler and GM.
9

GAO-09-553.

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GAO-10-151 Troubled Asset Relief Program

findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.

Treasury’s decision to provide substantial amounts of funding to the auto
industry—more than 12 percent of the TARP funds authorized to date—
and to accept equity in the companies as a form of repayment for a portion
of the assistance reflects Treasury’s view of the importance of the industry
to the financial health of the United States as a whole. The auto industry—
including automakers, dealerships, and automotive parts suppliers—
contributes substantially to the U.S. economy by, for example, directly
employing about 1.7 million people, according to industry and government
data. 10 To help stabilize this industry and avoid economic disruptions,
Treasury authorized $81.1 billion through AIFP from December 2008
through June 2009 for the following purposes.

Background

•

Funding to support automakers during restructuring. Treasury has
provided financial assistance to Chrysler and GM to support their
restructuring as they attempt to return to profitability. This assistance was
provided in loans and equity investments in the companies.

•

Auto Supplier Support Program. Under this program, Chrysler and GM
received funding for the purpose of ensuring payment to suppliers. The
program was designed to ensure that automakers receive the parts and
components they need to manufacture vehicles and that suppliers have
access to liquidity on their receivables.

•

Warranty Commitment Program. This program was designed to
mitigate consumer uncertainty about purchasing vehicles from the
restructuring automakers by providing funding to guarantee the
warranties on new vehicles purchased from them. Funds were provided to
Chrysler and GM under this program but have been repaid in full because
both were able to continue to honor consumer warranties.

•

Funding to support automotive finance companies. Treasury has
provided funding to support Chrysler Financial and GMAC LLC, financial

10

See National Automobile Dealers Association, “NADA Data 2009: Economic Impact of
America’s New-Car and New-Truck Dealers” (McLean, Va.: 2009) and United States
Department of Labor, Bureau of Labor Statistics, Table B-12: Employees on Non-farm
Payrolls by Detailed Industry, August 2009.

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GAO-10-151 Troubled Asset Relief Program

services companies whose businesses include providing consumer
financing for vehicle purchases and dealer financing for inventory.
Chrysler Financial is following Treasury’s directive to liquidate its
business and is planning to wind down its operations by the end of 2011.
GMAC has agreed to provide Chrysler customers and dealers with
financing for retail and wholesale purchases.
Table 1 provides information on the funding levels Treasury authorized
under AIFP, the amounts Chrysler, GM, and the finance companies have
repaid, and Treasury’s plans to be repaid or otherwise compensated for
the outstanding funds. Treasury officials have said the agency does not
intend to provide more funding to Chrysler or GM.
Table 1: TARP Funding Provided to the Auto Industry, as of September 20, 2009
(Dollars in billions)
Description of
Company funding
Chrysler Loans to Chrysler for
general business
purposes and
restructuring

General
Motors

Supplier Support
Program loan
Warranty
Commitment
Program loan
Total
Loans to GM for
general business
purposes and
restructuring
Supplier Support
Program loan
Warranty
Commitment
Program loan

Authorized Repayments
amount of principal
$12.5
0

Interest and
dividend
payments
0.052

1.0

0

0.002

0.28

0.28

0.003

$13.8
49.5

0.28
0

0.06
0.168

2.5

0

0.004

0.361

0.361

0

Page 6

Amount and form of future repayments
A total of up to $7.1 billion will be repaid as a term
loan, including $5.1 billion to be repaid within 8
years and $2 billion to be repaid within 2.5 years.
Treasury also received a 9.85 percent equity
share in the new Chrysler. Treasury also has $5.4
billion of debt in the old Chrysler, but it is not clear
at this time whether this amount will be repaid.a
Amounts provided are due to be repaid by April
2010.
All funds have been repaid.

A total of $6.7 billion will be repaid as a term loan.
Treasury also received $2.1 billion in preferred
stock, and 60.8 percent equity in the new GM.
Treasury also has $986 million debt in the old
GM, which it does not expect to be repaid.
Amounts provided are due to be repaid by April
2010.
All funds have been repaid.

GAO-10-151 Troubled Asset Relief Program

Description of
Company funding
Loan to participate in
GMAC rights offering

Chrysler
Financial
GMAC

Total

Total
Loan funded through
Chrysler LB
Receivables Trust
Preferred stock and
convertible preferred
stock

Authorized Repayments
amount of principal
0.884
0

Interest and
dividend
payments
0.009

$53.24
1.5

0.36
1.5

0.18
0.007

12.5

Not
applicable

0.43

$81.1

$2.1

Amount and form of future repayments
Treasury exchanged this loan for a portion of
GM’s equity in GMAC. As a result, Treasury holds
a 35.4 percent common equity interest in GMAC.
The GM loan was terminated but GM paid $9
million in interest on the loan to participate in
GMAC rights offering before the loan was
terminated.

$0.68

Loan repaid in full plus about $7 million in
b
interest.
Treasury may convert $7.5 billion of its preferred
shares to common shares upon specific events
such as public offerings.

Source: GAO analysis of Treasury information.

Note: Numbers are affected by rounding.
a

The $5.4 billion is composed of the original remaining loan and additional amounts provided as
bankruptcy financing. Payment of this amount is contingent on receipt of distributions from Chrysler
Financial in an amount equal to the greater of $1.375 billion or 40 percent of distributions.

b

In lieu of warrants, Treasury received an additional note from Chrysler Financial. The initial
aggregate principal amount of the note was $15 million, which Chrysler Financial has repaid.

As a condition of the initial federal financial assistance provided in
December 2008 and January 2009, the Bush Administration required that
Chrysler and GM develop restructuring plans that would, among other
things, identify how the companies plan to achieve and sustain long-term
financial viability. President Obama rejected the restructuring plans that
Chrysler and GM submitted in February 2009, and required the companies
to develop more aggressive plans. After reviewing the revised plans, the
President announced in April 2009 and June 2009 that the government
would provide additional financial assistance to support Chrysler’s and
GM’s restructuring efforts, respectively. To effectuate the restructuring
plans, both companies filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. Through the bankruptcy process,
the newly organized Chrysler and GM purchased substantially all of the
operating assets of the old companies. In June 2009 and July 2009,
respectively, the new Chrysler and new GM emerged from the bankruptcy
process with substantially less debt and with streamlined operations. The
old companies, which retained very few assets but most of the liabilities,
remain in bankruptcy, where their remaining liabilities are being dealt
with. These liabilities include a portion of the loans Treasury provided to
the companies prior to bankruptcy in the amounts of $5.4 billion for

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GAO-10-151 Troubled Asset Relief Program

Chrysler and $986 million for GM. As noted, Treasury has stated that it has
no plans to provide additional assistance to Chrysler and GM. Figure 1
describes other key events in the funding and restructuring of the auto
companies.

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GAO-10-151 Troubled Asset Relief Program

Figure 1: Key Events in Treasury’s Assistance to the Auto Industry and Chrysler’s and GM’s Restructuring

2008

NOV

DEC

Date
2008
December

Chrysler actions

GM actions

Chrysler and GM chief executive officers testify before Congress that without federal assistance, their companies
will not have the cash necessary to continue operations.

December 19 Treasury announces it will use TARP funds to establish the Auto Industry Financing Program to stabilize the U.S.
automotive industry and avoid disruptions that would pose systemic risk to the nation’s economy.
December 31
2009
January 2

Treasury agrees to provide $13.4 billion in AIFP funding to GM.
Treasury lends $4.0 billion in AIFP funding to Chrysler.

February 17 Chrysler and GM submit restructuring plans to Treasury as required by their loan agreements.
2009
JAN

March 19

Treasury announces the Auto Supplier Support Program.

March 30

White House announces that Chrysler and GM’s restructuring plans do not establish a credible path to viability and do
not merit additional government investment. The companies are given additional time to show greater progress.
White House announces the Warranty Commitment Program.
GM and Treasury execute a credit agreement to lend up
to $3.5 billion to GM for the Auto Supplier Support Program.a

April 3
FEB
April 7

Chrysler and Treasury execute a credit agreement to lend up
to $1.5 billion to Chrysler for the Auto Supplier Support Program.b
Treasury lends $2 billion in additional funding to GM.

April 22
MAR

April 29

Treasury lends $280 million to Chrysler under the
Warranty Commitment Program.

April 30

Chrysler files voluntary petitions under Chapter 11 of the
U.S. Bankruptcy Code.
White House announces it will provide $8.5 billion
through loans and equity investments in the company to
support Chrysler’s restructuring.

APR

May 20
MAY

Treasury lends $4 billion in additional funding to GM.

May 27

Treasury lends $361 million to GM under the Warranty
Commitment Program.

June 1

Bankruptcy judge approves Chrysler’s restructuring
proposal.

June 10

GM files voluntary petitions under Chapter 11 of the U.S.
Bankruptcy Code.
Treasury announces it will provide up to $30.1 billion to
GM through loans and equity investments to support a
bankruptcy proceeding and to transition GM through restructuring.

New Chrysler purchases substantially all of old
Chrysler’s assets.

JUN

JUL

Treasury executes a $7.1 billion credit agreement with
new Chrysler.
July 5

AUG

Bankruptcy judge approves GM’s restructuring proposal.

July 10

New GM acquires substantially all of old GM’s assets.
Source: GAO analysis of Treasury information.
a

This amount was subsequently reduced to $2.5 billion.

b

This amount was subsequently reduced to $1 billion.

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GAO-10-151 Troubled Asset Relief Program

Chrysler and GM
Have Addressed Some
Challenges Important
to Achieving Viability,
but the Effect of
These Actions
Remains to Be Seen

Since the condition of the domestic auto industry first came to the
forefront of national attention in December 2008, Chrysler and GM have
made changes to address key challenges to achieving viability, but the
effect that these actions will have on the companies remains to be seen. As
we previously reported, a number of operational and financial challenges
stand in the way of Chrysler’s and GM’s return to profitability. 11 Some of
these challenges are beyond the companies’ control, such as current
economic conditions and limited credit availability. However, other
factors the companies can exert more control over include the companies’
debt levels, dealership networks, and production costs and capacity. Aided
by substantial government assistance and bankruptcy reorganization, they
have begun to address a number of these challenges. Although the
companies’ restructuring efforts started before receiving government
assistance under TARP, our analysis focuses on the period between first
receiving TARP assistance (around the end of 2008) and after bankruptcy
reorganization (June 2009 and July 2009 for Chrysler and GM,
respectively). The following are some key challenges that Chrysler and GM
have begun to address.

•

Reducing debt. Through the bankruptcy process, Chrysler and GM
eliminated a substantial amount of their long-term financial liabilities,
including debt owed to bank lenders and bondholders. In our previous
work, we discussed the importance of reducing debt for companies to
achieve long-term viability. By reducing the amount the companies pay in
interest expense, cash flow is improved, freeing up more money for
research and development and other activities that can help the businesses
prosper. The precise amount of the companies’ total debt reduction is not
known because the value of some debts will not be determined until the
companies’ post-reorganization accounting is complete. However, some
reduced or eliminated debts whose values are known include $6.9 billion
of secured bank debt owed by old Chrysler, of which $2 billion was repaid
and none carried forward to new Chrysler; $5.9 billion of secured bank
debt owed by old GM, substantially all of which was repaid by old GM,
leaving new GM with none of this debt; substantial reductions of the
companies’ monetary obligations to the trusts established to provide
health care benefits to retirees of the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America
(UAW); and about $27 billion in unsecured GM bondholder debt and $2
billion in unsecured Chrysler obligations, which stayed as a liability of the

11

GAO-09-553.

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old GM and old Chrysler, leaving new GM and new Chrysler with none of
this debt.
•

Reducing the number of brands and models. GM is reducing its North
American brands from eight to four. 12 In November 2007, Chrysler
announced it would eliminate four models within its three primary
brands—Chrysler, Dodge, and Jeep—and in October 2009 it announced
that it would create a fourth brand by splitting the Ram brand out of the
Dodge brand. As we have previously reported, advantages of reducing
brands and models include eliminating costs such as factory tooling and
product development, reducing intracompany competition for sales of
similar models, and allowing more focus and resources on the remaining
models’ quality, image, and performance.

•

Rationalizing dealership networks to align with sales volumes. Both
Chrysler and GM have made cuts to their dealership networks since yearend 2008. As we reported in April, the companies’ dealer networks were
too large to be supported by recent sales levels. As of April 2009, Chrysler,
Ford, and GM dealerships—most of which are independently owned and
operated—were more numerous and, in general, sold half or fewer
vehicles per dealership than dealerships selling vehicles from foreign
automakers. Higher sales per store allow for a greater return on the
dealer’s fixed costs of running the business, allowing for more investment
in facilities and advertising—which ultimately benefits the automaker by
improving the price for which its cars are sold. As of June 30, 2009, shortly
after the new Chrysler emerged from bankruptcy, Chrysler had reduced its
U.S. dealerships to 2,382, a reduction of about 28 percent from the yearend 2008 level of 3,298. 13 As of July 2009, when the new GM emerged from
bankruptcy, its number of dealers had declined to 6,039 through normal
attrition, down from 6,375 at year-end 2008. GM is executing “wind-down”
agreements with another approximately 1,300 dealerships and expects
another 600 Saturn, Saab, or Hummer dealerships to be transferred to
another manufacturer or be phased out. With additional normal attrition,
GM expects to have between 3,600 and 3,800 dealerships by the end of
2010, which will represent a 44 percent reduction from 2008 year-end
numbers.

12

Most recently, in October 2009, GM reached an agreement to sell its Hummer brand to a
Chinese company, which is slated to take over operations in 2012.

13

Chrysler began downsizing its operations prior to filing for bankruptcy. For instance, at
year-end 2006, it had 3,749 dealerships.

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GAO-10-151 Troubled Asset Relief Program

•

Reducing production costs and capacity. Both companies have made
reductions in their production costs and capacity since year-end 2008,
according to company-provided information. In our April report, we noted
such reductions are important because the companies’ pre-reorganization
cost structures were not sustainable given the decline in their sales and
market shares in recent years. 14 Table 2 shows the reductions the
companies made between year-end 2008 and the dates they emerged from
bankruptcy. In addition to the reductions made during these time periods,
the companies implemented restructuring efforts prior to 2008 and plan
additional reductions in the future. For instance, Chrysler closed two
factories, reduced a number of shifts, and cut nearly 29,000 hourly,
salaried, and supplemental employees between year-end 2006 and yearend 2008. GM announced in September 2009 that it will add a third shift at
three U.S. assembly plants as part of a plan to close other plants to
increase the efficiency of its manufacturing operations. Chrysler and GM
have also reached agreements with the UAW, in accordance with the terms
of the companies’ prebankruptcy loans from Treasury, which will result in
further reductions in production costs. Under these terms, the companies
were required to use their best efforts to reduce total compensation paid
to U.S. employees, including wages and benefits, to be comparable with
the total compensation Honda, Nissan, or Toyota pays to employees at
their U.S. facilities. The companies were also required to use their best
efforts to make changes to work rules to be comparable with the work
rules of Honda’s, Nissan’s, or Toyota’s U.S. facilities. Changes the UAW
agreed to as part of restructuring included cancellation of cost-of-living
adjustments for current workers and restructuring of skilled trade
classifications, among other things.

Table 2: Changes to Chrysler’s and GM’s U.S. Production Costs and Capacity
Chrysler

GM

Year-end 2008

After
reorganization

Percent
reduction

Year-end 2008

After
reorganization

Percent
reduction

21

20b

4.8%

47

34

27.7%

Hourly employees

24,135

21,082

12.6%

61,999

54,391

12.3%

Salaried employees

10,691

10,307

3.6%

29,655

27,091

8.6%

Production capacitya
Factories

Source: GAO presentation of Chrysler and GM data.
a

According to Treasury, these numbers will likely continue to change in the future, since the
companies’ restructuring efforts are not complete.

b

Four additional factories that remain with old Chrysler are planned for future closure.

14

GAO-09-553.

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Whether and to what extent these changes will improve Chrysler’s and
GM’s profitability and long-term viability remains to be seen. Many
elements of a company’s financial statements are also used in measures of
financial health, but neither Chrysler nor GM has finalized new financial
statements based on their reorganization. Chrysler and GM have agreed to
provide certain financial information, as outlined in agreements between
Chrysler and its shareholders, including Treasury, and between GM and
the Securities and Exchange Commission (SEC). Consistent with the
agreements, Chrysler and GM plan to complete the process of determining
the fair value of the assets and liabilities transferred to the new companies
for their audited 2009 year-end financial statements, which they expect to
complete by April 2010 and March 2010, respectively. 15 Chrysler will
provide its 2009 audited annual financial statement to Treasury and its
other shareholders, and GM will provide its 2009 audited annual financial
statement to SEC, where it will also be available to the public. Chrysler
will begin filing quarterly and annual financial reports with SEC beginning
with its 2010 audited annual financial statements, which will be publicly
available through SEC. Before audited annual financial statements are
filed with SEC, Chrysler and GM will make other select information
publicly available.
Moreover, whether enough time has passed for the impact of the structural
changes to be seen is unlikely, especially given that the automakers have
not completed restructuring, the economy is still recovering, and new
vehicle purchases remain at low levels. For instance, although the federal
Car Allowance Rebate System program resulted in a sales spike in
August, 16 September sales returned to historically low levels. These and
other challenges are likely to delay the companies’ recovery beyond what
it would be under more favorable economic circumstances.

15

Under an agreement between new GM and the Securities and Exchange Commission
(SEC), new GM will file by March 31, 2010, a quarterly financial report for the third quarter
of 2009 and an annual financial report for 2009. According to SEC, because GM is a newly
formed entity with only five shareholders, it is not required to file periodic or current
reports. Also, according to SEC, it does not have any written or oral agreements with
Chrysler, which was not a public company prior to its reorganization and is not currently a
public company, on future filing requirements.

16

The Car Allowance Rebate System is more commonly referred to as Cash for Clunkers.

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Treasury Does Not
Plan to Be Involved in
Chrysler’s or GM’s
Day-to-Day
Operations or
Management, but It
Plans to Closely
Monitor the
Companies’
Performance

Treasury, which has a sizable financial stake in Chrysler and GM, does not
plan to be involved in the day-to-day management of the companies, but it
has established certain requirements that will be in effect as long as it
holds debt or equity in the companies. 17 Treasury has distinct rights as
both a creditor and an equity owner. Its rights as a creditor are
documented in the secured credit agreements, which set forth the terms
and provisions of the loans Treasury provided to new Chrysler and new
GM. Its rights as an equity owner are documented in a number of
transactional documents related to the formation of the new Chrysler and
the new GM, including shareholders’ agreements, equity registration rights
agreements, and organizational documents. Treasury’s role as an equity
owner focuses on monitoring the financial health of the companies in
order to protect the value of Treasury’s equity stake. 18 Treasury developed
several principles to guide its role as an equity owner, including the
commitment that, although Treasury reserves the right to set up-front
conditions to protect taxpayers and promote financial stability, Treasury
plans to oversee its financial interests in a commercial manner, in which it
will focus primarily on maximizing its return and take a hands-off
approach to day-to-day management. Treasury plans to reserve its
involvement for major transactions such as the sale of a controlling share
of the companies. Treasury’s role as a creditor is not as clearly delineated,
but much like in its role as equity owner, Treasury has said it will focus on
monitoring the companies’ financial health.
Conditions set by Treasury in the credit agreements include requiring that
the companies comply with provisions applicable to companies receiving
TARP assistance, in accordance with the Emergency Economic
Stabilization Act (EESA), as well as other requirements that are specific to

17

Our discussion focuses on the financial assistance Treasury provided to fund the
companies’ operations and restructuring because it represents the most substantial portion
of the assistance the companies received. It does not address the conditions of the smaller
amounts provided under the Supplier Support Program and the Warranty Commitment
Program.

18

The Congressional Oversight Panel was created as part of TARP to review the current
state of financial markets and the regulatory system. The panel is empowered to hold
hearings, review official data, and write reports on actions taken by Treasury and financial
institutions and their effect on the economy. The Congressional Oversight Panel issued a
report on federal assistance provided to the auto industry in September 2009. See
Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in
the Support and Reorganization of the Domestic Automotive Industry (Washington, D.C.:
Sept. 9, 2009).

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Chrysler and GM. 19 According to the agreements, Chrysler and GM must
do the following:
•

Produce a portion of their vehicles in the United States. Chrysler
must either manufacture 40 percent of its U.S. sales volume in the United
States or its U.S. production volume must be at least 90 percent of its 2008
U.S. production volume. GM agrees to use its commercially reasonable
best efforts to ensure that the volume of manufacturing conducted in the
United States is consistent with at least 90 percent of the level envisioned
in GM’s business plan.

•

Comply with the executive compensation requirements of EESA. 20
These requirements state that bonuses or incentive compensation paid to
any of the senior executive officers or the next 20 most highly
compensated employees based on materially inaccurate earnings must be
repaid, no golden parachute payments may be made to a senior executive
officer or any of the next five most highly compensated employees,
compensation in excess of $500,000 per executive may not be deducted for
tax purposes, and the companies must establish a compensation
committee of independent directors to review employee compensation
plans and the risks posed by these plans.

•

Have an expense policy that is in compliance with TARP standards
for compensation and corporate governance. The policy must govern
hosting and sponsoring for conferences and events, travel
accommodations and expenditures, office or facility renovations and
relocations, and entertainment and holiday parties, among other things.

•

Report to Treasury on the use of government funds. The companies
are to provide Treasury with a report each quarter setting forth in
reasonable detail the actual use of the TARP funding they received upon
exiting from bankruptcy.

19
As noted, GAO and the Special Inspector General for the Troubled Asset Relief Program
are conducting coordinated work on Treasury’s oversight of Chrysler’s and GM’s
compliance with these requirements.
20

Section 111 of EESA, as amended by the American Recovery and Reinvestment Act of
2009, Pub. L. No. 111-5, Div. B, Title VII, 123 Stat. 115, 516-520 (2009), codified at 12 U.S.C §
5221, prescribes certain standards for executive compensation and corporate governance
for recipients of financial assistance under TARP. Treasury published an interim final rule
setting forth the applicable compensation and corporate governance standards (74 Fed.
Reg. 28,394, June 15, 2009, codified at 31 C.F.R. Part 30).

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•

Have internal controls to ensure compliance with the
requirements. The companies are to promptly establish internal controls
to provide reasonable assurance of compliance in all material respects
with each of the credit agreement’s requirements for executive privileges
and compensation, aircraft, expenses, and the Employ American Workers
Act. 21 The companies must also have documentation of these controls and
the companies’ compliance with them.

•

Report on events related to pension plans. The companies must
report to Treasury if actions occur that could result in the companies
failing to meet the minimum funding requirements for their pension plans,
or if the companies plan to terminate any of their plans. 22
To protect the value of its equity share and the likelihood of loan
repayment, Treasury has also established requirements under which the
companies must report financial information, and it intends to use this
information to closely monitor the financial condition of Chrysler and GM.
The financial reporting requirements are set forth in Treasury’s credit
agreements with the companies and other agreements that specify the
rights of the companies and their shareholders, which include Treasury
and other parties. 23 GM is also subject to additional reporting requirements
related to the reserve portion of its loan from Treasury that is being held in
escrow. 24 Treasury has agreed with the companies on additional financial,
managerial, and operating information, which the companies will provide
in monthly reporting packages, along with items specified in the
agreements. Tables 3 and 4 provide details on Chrysler’s and GM’s
reporting requirements.

21

The Employ American Workers Act was included in the American Recovery and Reinvestment
Act of 2009, Pub. L. No. 111-5, Div. A, Title XVI, § 1611, 123 Stat. 115, 305 (2009).

22
GAO has ongoing work reviewing the state of the automakers’ pension plans and the
potential liabilities to the federal government should the plans be terminated. We plan to
issue this report in early 2010.
23

In the case of Chrysler, the corresponding document is the Amended and Restated
Limited Liability Company Operating Agreement of Chrysler Group LLC, and in the case of
GM, the corresponding document is the Shareholders Agreement by and among General
Motors Company, United States Department of the Treasury, 7176384 Canada Inc., and
UAW Retiree Medical Benefits Trust. Chrysler’s and GM’s reporting requirements are not
identical because each agreement was negotiated separately and, in the case of the
operating and shareholders’ agreements, with the input of the shareholders.

24

Of the $30.1 billion that Treasury provided to GM at its bankruptcy filing, $16.4 billion was
held in escrow to be accessed by GM on an as-needed basis with the consent of Treasury.
As of October 5, 2009, GM had requested and received $3 billion from the escrow account.

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Table 3: Chrysler’s Financial Reporting Requirements
Requirements Treasury established as creditor
Until repayment of the loan, Chrysler must provide to Treasury
•
its consolidated balance sheet and the related consolidated statements of income
and cash flow, on a quarterly and annual basis, and
•
updates to its schedules of real property, mortgaged property, pledged equity and
notes, subsidiaries, and mortgage filing offices (beginning in 2010).
Requirements Treasury established as equity owner
As long as Treasury holds its initial membership shares in Chrysler, Chrysler must
provide
•
public reports containing quarterly and annual financial information, and
•
quarterly and annual financial reports to the Securities and Exchange Commission
(beginning with its 2010 audited annual financial statements).
As long as Treasury holds more than 5 percent equity, Chrysler must provide to Treasury
•
monthly, quarterly, and annual management financial reports summarizing results of
the company for the period and comparing these results with the annual budget, and
•
unaudited quarterly and audited annual balance sheets and related statements of
income and cash flow.
Source: GAO presentation of Treasury information.

Table 4: GM’s Financial Reporting Requirements
Requirements Treasury established as creditor
Until repayment of the loan, GM must provide to Treasury
•
its consolidated balance sheet and the related consolidated statements of income
and cash flow, on an annual (audited) and quarterly basis (unaudited),
•
copies of any financial statements or reports GM is required to file with the
Securities and Exchange Commission, and
•
other information that Treasury might periodically request.
Until the balance of GM’s escrow account reaches zero or the escrow account’s
expiration on June 30, 2010, GM must provide to Treasury
•
biweekly 13-week forecasts,
•
monthly liquidity status reports, and
•
monthly budgets covering a 5-year period.
Requirements Treasury established as equity owner
As long as Treasury owns at least 10 percent of GM’s common stock, GM must provide
to Treasury
•
all financial statements, budgets, reports, liquidity statements, materials, data, and
other information pursuant to Section 5 of the credit agreement, and
•
a monthly report, the format and content of which Treasury has the right to specify.
Source: GAO presentation of Treasury information.

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According to Treasury officials, they plan to review and analyze the
reports they receive under creditor and equity owner requirements to
identify areas of concern, such as actual market share lagging behind the
projected market share, an excess of inventory, or other signs that
business is foundering. Treasury does not have authority to direct the
companies to take specific actions to address such findings, but Treasury
said it plans to notify the companies’ management and the Secretary of the
Treasury if it sees any cause for concern in the financial reports. In
addition to reviewing financial information, Treasury’s team of staff
responsible for overseeing AIFP (subsequently referred to as the auto
team) plans to meet monthly via teleconference and quarterly in person
with the companies’ top management to discuss the companies’ progress
against their restructuring plans. Important findings that result from the
review of financial reports or management meetings will also be conveyed
to key staff in OFS and other Treasury offices with responsibilities for
managing TARP investments. Treasury also intends to use financial
reports as a basis for decisions on how and when to sell its equity in the
companies, as discussed below.
While Treasury has stated that it plans to manage its investments in
Chrysler and GM in a hands-off manner and will not interfere in day-to-day
operations of the companies, Chrysler and GM will be subject to
requirements regarding compensation, expenses, and reporting that other
auto companies are not. For example, as discussed above, each company
is subject to certain requirements about the vehicles it is to produce, such
as the requirement to produce a portion of its vehicles in the United States.
In addition, Chrysler’s shareholders, including Treasury, have agreed that
Fiat’s equity stake in Chrysler will increase if Chrysler meets certain
benchmarks, such as producing a vehicle that achieves a fuel economy of
40 miles per gallon or producing a new engine in the United States. 25
Treasury officials stated that they established such up-front conditions not

25

As part of its reorganization, Chrysler arranged an alliance with the Italian automaker
Fiat, whereby Fiat is contributing intellectual property and “know-how” to Chrysler in
exchange for a 20 percent equity share in the reorganized company. Fiat will have the right
to earn up to 15 percent in additional equity in three tranches of 5 percent each in exchange
for meeting performance metrics, including introducing a vehicle produced at a Chrysler
factory in the United States that performs at 40 miles per gallon; providing Chrysler with a
distribution network in numerous foreign jurisdictions; and manufacturing state-of-the-art,
next-generation engines at a U.S. Chrysler facility. Fiat will also hold an option to acquire
up to an additional 16 percent fully diluted equity interest in the restructured Chrysler. Fiat
may exercise this option and exceed 50 percent ownership in Chrysler once Treasury’s loan
has been repaid in full.

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GAO-10-151 Troubled Asset Relief Program

solely to protect Treasury’s financial interests as a creditor and equity
owner but also to reflect the Administration's views on responsibly
utilizing taxpayer resources for these companies. While Treasury has
stated it does not plan to manage its stake in Chrysler or GM to achieve
social policy goals, these requirements and covenants to which the
companies are subject indicate the challenges Treasury has faced and
likely will face in balancing its roles.

Treasury’s general goals of exiting as soon as practicable, maximizing
return on investment, and improving the strength and viability of Chrysler
and GM are reasonable but possibly competing, according to the group of
financial and industry experts we spoke with. For example, if Treasury
sells its stake as soon as practicable, it may not maximize its return
because too little time may have elapsed to demonstrate to investors the
companies’ potential for future profitability. Similarly, maximizing return
on investment might require actions that do not contribute to making the
companies strong and viable—for example, if Chrysler or GM does not
return to profitability, Treasury may need to act to liquidate the
companies, with the proceeds divided among its shareholders and
creditors, to maximize its return on investment. Treasury will ultimately
have to address these inherent trade-offs, decide which goal is most
important, and then manage its interest in a way that prioritizes that goal
over others. Treasury officials told us that they have considered these
trade-offs and scenarios, including the worst-case scenario of Chrysler and
GM not attaining long-term viability, and that they intend to balance these
competing goals when deciding when and how to exit.

Treasury’s Approach
for Monitoring and
Selling Its Ownership
Interest in Chrysler
and GM Does Not
Fully Address All
Important
Considerations
Experts Identified

Treasury’s current approach for monitoring its equity in Chrysler and GM
does not fully address the considerations that our group of experts
identified as important. In particular:
•

Retain necessary expertise. Experts stressed that it is critical for
Treasury to employ or contract with individuals with experience managing
and selling equity in private companies. Individuals with investment,
equity, and capital market backgrounds should be available to provide
advice and expertise on the oversight and sale of Treasury’s equity. This is
crucial because prior to TARP, Treasury did not typically buy and sell
stakes in private companies, so it has needed to employ appropriate
personnel and to retain consultants, such as investment bankers and
private equity analysts and firms, who are knowledgeable about such
investment decisions. One expert we interviewed noted that housing such
individuals in a program office created specifically and solely to oversee

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the government’s investment in the companies could be beneficial.
Program staff would be devoted solely to this purpose, and staff turnover
would be low so that institutional knowledge would be preserved over the
life of the program. The literature also stressed the importance of
designating staff to oversee equity sales.
In assessing Chrysler’s and GM’s financial condition and future prospects
and putting together financing packages for the companies, Treasury hired
or consulted with a number of individuals with experience in investment
banking, equity analysis, and the auto industry, but it has not established a
program office to oversee its investment in the auto companies. As with
the rest of the TARP programs, OFS oversees the investment in the auto
companies. Some OFS employees work exclusively on the automotive
companies, while others divide their time among multiple TARP programs.
While the auto team has experienced a significant decline in its number of
staff, and presently has limited engagements with outside firms with
specialty expertise such as investment banking or equity analysis to assist
in its management of its investment in the auto companies, Treasury
officials stated that the rest of OFS is available to “backfill” as necessary
and acts as a program office for Treasury’s investment in the auto
industry. However, OFS is not a dedicated program office for overseeing
Treasury’s investment in Chrysler and GM, in that it has responsibilities for
Treasury’s investments in other companies. Treasury officials also stated
that the reduction in the number of staff on the auto team has been a
reflection of the team’s reduced workload now that the intensive process
of restructuring the companies is over and that the size of the team
required for monitoring the government’s investment is smaller than for a
restructuring process.
Because of the particular needs of the auto companies and the
unprecedented nature of providing such assistance, Treasury hired or
contracted with a number of individuals with expertise in the auto
industry, equity investment, and relevant areas of law throughout the first
half of calendar year 2009 as Treasury assessed Chrysler’s and GM’s
financial condition, assembled financing packages for the companies, and
helped with restructuring efforts. When Treasury was heavily involved in
the restructuring of the companies, Treasury’s auto team consisted of 12
professional staff and 4 administrative staff, and it used the services of
investment banking, consulting, and law firms. Since those agreements
have been finalized and the workload has declined, two-thirds of the
original professional staff has left, leaving Treasury with 4 of the original
professional staff dedicated to auto issues, other OFS staff who have also
helped monitor these investments, and limited use of investment or

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industry consultants. The leader of the auto team, who also serves as a
senior adviser to the President on the auto industry, was recently
appointed Senior Counselor for Manufacturing Policy, requiring him to
split his time between the auto team and his new role. Moreover, Treasury
officials told us that there will likely be additional staff reductions in the
future because they plan to disband the auto team over time as other OFS
staff assume the role of monitoring the financial condition of the
companies. In commenting on a draft of this report, Treasury officials
stated that in light of recent and expected staff turnover, they are prepared
to hire personnel from within Treasury or externally to fill Treasury’s
monitoring function. Nonetheless, given the wind-down of the auto team—
and the associated loss of dedicated staff with industry- and companyspecific knowledge and expertise—we are concerned that Treasury may
not have sufficient expertise to actively oversee and protect the
government’s ownership interests, including determining when and how to
divest these interests.
In general, Treasury has faced challenges hiring the full complement of
staff necessary to administer the TARP programs, in part because qualified
candidates can often find a more competitive salary with a financial
regulator, which has the authority to establish its own compensation
programs without regard to certain requirements applicable to executive
branch agencies. We have reported on the importance of Treasury
documenting the skills and competencies it needs to administer the
program and continuing to expeditiously hire personnel. 26 The quality of
human capital policies and practices including, but not limited to, hiring
affects the control environment. A strong control environment will
depend, in part, on the managerial and other staff hired. 27 Treasury has
made progress in hiring staff to administer TARP duties, but Treasury
officials have not formally evaluated whether the staffing level to oversee
AIFP is appropriate for their current and projected needs. Officials said
that they had considered future needs and determined that Treasury’s
monitoring role could be achieved with fewer staff. In response to a
request for documentation of their evaluation of staffing needs, Treasury
provided us with a document showing the current and projected number
of staff working on AIFP, but this document did not show how Treasury

26

GAO, Troubled Asset Relief Program: Status of Efforts to Address Transparency and
Accountability Issues, GAO-09-296 (Washington, D.C.: Jan. 30, 2009).

27

GAO, Standards for Internal Control in the Federal Government, GAO/AIMD-00-21.3.1
(Washington, D.C.: November 1999).

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determined the appropriate number of staff or areas of expertise that
would be needed for future workloads. In commenting on a draft of this
report, Treasury officials stated that they had not had difficulty hiring
qualified professionals to work on the auto team and did not anticipate
having difficulties finding qualified staff in the future should the need arise
for additional hiring.
•

Monitor and communicate company, industry, and economic
indicators. All of the experts we spoke with emphasized the importance
of monitoring company indicators such as financial and operating
performance, automotive industry-wide indicators such as vehicle sales,
and broader economic indicators such as interest rates and consumer
spending. Monitoring these indicators allows investors, including
Treasury, to determine how well the companies, and in turn the
investment, are performing in relation to the rest of the industry. It also
allows an investor to determine how receptive the market would be to an
equity sale, something that contributes to the price at which the investor
can sell. Some experts also noted that Treasury should assign an
individual with expertise in investment banking or private equity to be in
charge of monitoring these metrics, which Treasury officials told us they
had done. In addition to monitoring the investment, communicating a
clearly articulated vision for TARP programs is important, as we have
previously reported. Understanding the different TARP programs and the
distinct rationale for each can be difficult for Congress, the markets, and
the public, because many of the programs address specific developments
and have similar guidelines and terms. Specifically for AIFP, what
Treasury’s goals are for its investment in Chrysler and GM, and in turn,
which indicators and metrics are necessary to determine progress in
achieving these goals, is important information for Congress and the
public to have. Although Treasury provides public information on
activities in the TARP programs, including AIFP, through its legally
mandated monthly reports to Congress, transaction reports, and others,
these reports do not provide information on the indicators Treasury plans
to use in assessing its goals for its auto investments. Identifying these
indicators for Congress, and sharing as much of this information as
possible, while still respecting the need for certain business sensitive
information not to be released, could help Congress and the public better
understand whether the investment in the auto companies has been
successful.
Treasury’s auto team plans to closely monitor the performance of Chrysler
and GM by way of financial reports from the companies such as balance
sheets and liquidity statements, which, in general, measure the financial
health of a company at the time of the statement. It also plans to monitor

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industry and broader economic indicators. The auto team plans to use this
information to alert Chrysler and GM management to any problematic
areas in the companies, and to help determine the best time and strategy
for divesting the government’s interest. Finally, Treasury officials have not
informed Congress which components of the reporting package will be
shared or how they plan to use the information contained in these
packages to assess and monitor the companies’ performance. In
commenting on a draft of this report, Treasury noted that it will not make
the components of these reports public because the release of certain
information could put Chrysler and GM at a competitive disadvantage,
thereby harming the potential recovery of taxpayer funds. Treasury
further noted that the companies will publicly report on certain financial
information—similar to what publicly traded companies report—in the
future.
•

To the extent possible, determine the optimal time and method to
divest. One of the key components of an exit strategy is determining how
and when to sell the investment. Given the many different ways to dispose
of equity—through public sales, private negotiated sales, all at once, or in
batches—experts noted that the seller’s needs should inform decisions on
which approach is most appropriate. For example, if an investor is
interested in selling quickly but the company has not demonstrated the
level of performance necessary for a successful initial public offering
(IPO), in which the company first sells stock to the public, the investor
should consider other sale options, such as a private sale. According to
experts, a successful IPO requires that the companies show signs of
earnings growth and future profitability, something that will take a
considerable amount of time for Chrysler and GM, as they only recently
emerged from bankruptcy. Attracting investors to the market is essential
because lack of sufficient investor interest may result in depressed value
of shares. Experts noted that a convergence of factors related both to
financial markets and to the company itself create an ideal window for an
IPO; this window can quickly open and close and cannot easily be
predicted. This requires constant monitoring of up-to-date company,
industry, and economic indicators when an investor is considering when
and how to sell. As Treasury evaluates these indicators, considering all
possible sale strategies is important.
Members of the auto team said that they plan to consider indicators such
as profitability and prospects, cash flow, market share, and market
conditions to determine the optimal time and method of sale. The ultimate
decision on when and how to sell will be made by the Secretary of the
Treasury, but auto team staff will be in charge of monitoring these

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indicators and recommending a strategy to the Secretary and Assistant
Secretary for Financial Stability. Although Treasury officials said they plan
to consider all options for selling the government’s ownership stakes in
Chrysler and GM, they noted that they believe the most likely scenario for
GM is to dispose of Treasury’s equity in the company through a series of
public offerings. Treasury has publicly discussed the possibility of selling
part of its equity in the company through an IPO that would occur
sometime in 2010. However, by publicly discussing a method and a time
for a sale of GM shares now, the extent to which Treasury is using the
indicators to inform method and timing decisions is unclear. Moreover,
two of the experts we spoke with said GM might not be ready for a
successful IPO by 2010, because it may be too early for the company to
have demonstrated sufficient progress to attract investor interest, and two
other experts noted that 2010 would be the earliest possible time for an
IPO. For Chrysler, Treasury officials noted that the department is more
likely to consider a private sale because its equity stake is smaller, and
several of the experts we interviewed noted that non-IPO options could be
possible for Chrysler, given the relatively smaller stake Treasury has in the
company (9.85 percent, versus its 60.8 percent stake in GM) and the
relative affordability of the company. In commenting on a draft of this
report, Treasury officials stated that they were aware of the diversity of
opinions on divesting the government’s interest in the auto companies and
would make an appropriate determination to maximize the taxpayers’
return. To achieve the maximum return for taxpayers, Treasury also said it
plans not to disclose more information about its strategy to divest its
ownership interests than is necessary.
Treasury officials said that on the basis of their analysis of the companies’
future profitability, they believe that Chrysler and GM will be able to
attract sufficient investor interest for Treasury to sell its equity. With
regard to the possibility that there may not be sufficient investor interest,
Treasury officials said they would monitor the financial markets and the
companies’ operations in order to identify any issues that could affect
profitability, and work with the companies’ boards of directors and
management to address them. In the event that the companies do not
return to profitability in the time frame Treasury has projected, Treasury
officials said that they will consider all commercial options for disposing
of Treasury’s equity, including liquidation.
•

Manage investments in a commercial manner. Experts emphasized the
importance of Treasury resisting external pressures to focus on public policy
goals over focusing on its role as a commercial investor. For example, some
experts said that Treasury should not let public policy goals such as job

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GAO-10-151 Troubled Asset Relief Program

retention interfere with its goals of maximizing its return on investment and
making Chrysler and GM strong and viable companies. They said that this is
especially important because making the companies financially strong and
competitive may require reducing the number of employees. Nevertheless,
one expert suggested that Treasury should consider public policy goals and
include the value of jobs saved and other economic benefits from its
investment when calculating its return, since these goals, though not
important to a private investor, are critical to the economy.
As long as Treasury maintains ownership interests in Chrysler and GM, it will
likely be pressured to influence the companies’ business decisions. Treasury
has said that it plans to manage its investment in Chrysler and GM in a
commercial way. Yet Treasury faces external pressures, such as to prioritize
jobs over maximizing its return. For example, Congress is currently considering
a number of bills to restore automotive dealers’ contracts terminated in
restructuring, and Treasury officials noted that they receive frequent calls from
Members of Congress expressing concern about dealership closings. To protect
Treasury’s investment from these external pressures, a recent Congressional
Oversight Panel report recommended that Treasury hold its equity interests in
the auto companies in a trust managed by an independent trustee.28 Treasury
officials told us they cannot currently establish a trust managed by independent
trustees because of a requirement in EESA that states that troubled assets are
subject to the supervision of the Secretary of the Treasury.29 The officials stated
that if Treasury created a trust with the assets managed by independent
trustees, the Secretary would not be able to exercise his authority over the
assets as required by law. Congress is considering legislation that would
authorize and require the Secretary to transfer to a limited liability company all
equity in TARP recipients in which the government has a certain equity interest
as a result of TARP assistance. The bills further provide that the equity is to be
managed in trust for the benefit of taxpayers.30 Treasury officials told us they

28

Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in
the Support and Reorganization of the Domestic Automotive Industry (Washington, D.C.:
Sept. 9, 2009).

29

“In order to provide the Secretary with flexibility to manage troubled assets in a manner
designed to minimize cost to taxpayers, the Secretary is authorized to establish vehicles,
subject to supervision by the Secretary, to purchase, hold, and sell troubled assets and
issue obligations.” Pub. L. No. 110-343, Sec. 101(c)(4), codified at 12 U.S.C. § 5211(c)(4).

30

In order for a trust to be established, the government would have to have at least a 15
percent ownership in the company as a result of TARP assistance in the House bill and at
least a 20 percent ownership interest as a result of TARP assistance in the Senate bill. See
H.R. 3594, 111th Cong. (2009) and S. 1280, 111th Cong. (2009).

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GAO-10-151 Troubled Asset Relief Program

believe their planned approach for managing Treasury’s equity in Chrysler and
GM is sufficient for now.
Regardless of the sales strategies used, the companies will have to grow
substantially in order to reach values at which Treasury would recover the
entirety of its equity investment upon sale of its equity, which Treasury
and others consider to be unlikely. On the basis of our analysis, shown in
table 5, we estimate that Chrysler and GM would need to have a market
capitalization of $54.8 billion and $66.9 billion, respectively, for Treasury
to earn enough on the sale of its equity to break even. 31 A recent
Congressional Oversight Panel report reached similar conclusions on what
the companies would have to be worth. 32 As a point of reference for these
values, in 1997, the last year Chrysler was a publicly traded company, its
market capitalization value ranged between $23.1 billion and $31.7 billion,
and in 1998, when it merged with Daimler, it was valued at an estimated
$37 billion. GM, at its peak in 2000, had a market capitalization of $57
billion. 33 In commenting on a draft of this report, Treasury officials noted that
the companies’ past equity values are not comparable to today’s equity values
because the companies have substantially restructured their balance sheets
through bankruptcy. Although we recognize the changes the companies have
experienced in recent years, we believe this information provides a sense of
the magnitude of growth that will be required of the companies.

31

Our analysis included all funds Treasury has provided to the auto companies that will be
repaid through a combination of debt and equity. We assume that new Chrysler and new
GM will repay all debts, and that the debts of old Chrysler and old GM will not be repaid,
including $5.4 billion to old Chrysler and $986 million to old GM. As a result, Treasury’s
equity will have to be worth its total investments minus projected repayments of principal
and preferred stock. This analysis excludes funds provided for the Supplier Support
Program and the Warranty Commitment Program, since these funds were issued as loans
and will be paid back as such. In addition, this analysis does not take into account the cost
or opportunity cost to Treasury of lending, any interest Treasury should or could charge to
the automakers on the portion of its investment that has been converted into equity, the
present value of the investment, or the value of any social costs or benefits resulting from
the investment. If Fiat achieves its operating goals and earns an additional 15 percent
equity, Treasury’s equity stake will decline to 8 percent, meaning that Chrysler’s total equity
value would need to reach $57 billion for Treasury to recoup its investment.
32

Congressional Oversight Panel, September Oversight Report: The Use of TARP Funds in
the Support and Reorganization of the Domestic Automotive Industry.

33

Evercore Group, LLC, the financial services company that estimated GM’s future value for
the bankruptcy court, concluded that new GM would be worth between $59 billion and $77
billion in 2012.

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GAO-10-151 Troubled Asset Relief Program

Treasury’s own analysis suggests that the circumstances necessary for the
companies to reach market capitalizations high enough for Treasury to fully
recover its equity investment are unlikely. Treasury officials also noted that
considering the companies’ enterprise values—a measure of a business’s total
value, including the value of equity and debt—in addition to equity value is
important, because enterprise value takes into account the likelihood of
repayment of loans and other obligations extended to the companies as well
as the value of equity stakes. 34
Table 5: Value of Chrysler and GM Equity Required for Treasury to Recoup Its Investment
(Dollars in billions)

Description of funding
Total loans to Chrysler
Loans to Chrysler prior to
bankruptcy
Loans to Chrysler after
bankruptcy
Total loans to GM
Loans GM prior to bankruptcy
Loans to GM after bankruptcy

Amount in
Treasury term loans and
investment preferred stock
$12.5
$7.1
4.0

Equity stake
(percent)
9.85

Equity value of
Amount equity stake company necessary to
must be worth to
recoup investment
recoup equity (amount equity must be
investment
worth/60.8 percent for
(investment–loans and
GM and 9.85 percent
for Chrysler)
preferred stock)
$5.4a
$54.8

8.5
49.5
19.4
30.1

8.8

60.8

40.7

66.9

Source: GAO analysis of Treasury information.
a

This value does not take into account any repayments Treasury will receive from the payment-in-kind
interest that will accumulate over the life of the $7.1 billion loan, ($17 million per quarter), the
additional $288 million note, or the value of Treasury’s interest in Chrysler Financial’s equity (the
greater of $1.375 billion or 40 percent of the equity). These figures together would be worth $833
million, thereby reducing the amount Treasury’s equity stake would have to be worth from $5.4 billion
to $4.6 billion, and reducing the equity value Chrysler would have to attain from $54.8 billion to $46.7
billion.

However, these estimates do not take into account other benefits and costs
that are more difficult to measure, such as the impact of Treasury’s
investment on jobs and local and national economies and the opportunity

34
In June, the Congressional Budget Office (CBO) estimated that the federal government
would recoup only 27 percent of its initial investment in the auto industry. CBO’s analysis
relies on data from the auto companies prior to bankruptcy to estimate the likelihood of
repayment in the future. Chrysler and GM had poor credit ratings and significant debts
prior to bankruptcy, so the average projected repayment is only 27 cents on the dollar.

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GAO-10-151 Troubled Asset Relief Program

costs Treasury incurred in providing financial assistance. The impact on the
economy is difficult to measure because, according to the Council of
Economic Advisors, it involves predicting what employment and economic
performance would have been without government investment. Nevertheless,
a more comprehensive analysis that takes these effects into account would
yield a richer picture of the value of Treasury’s net investment and net return,
especially given that the government’s goal upon first providing assistance to
the auto industry was to prevent economic disruption.

Conclusions

Treasury’s substantial investment and other assistance, including loans
from the Canadian government and concessions from the UAW, have
contributed to the current stability of Chrysler and GM. However, because
of the challenges continuing to face the auto industry—including the still
recovering economy and weak demand for new vehicles—the ultimate
impact that the assistance will have on the companies’ profitability and
long-term viability is uncertain. Although the immediate crisis of helping
Chrysler and GM maintain solvency has passed for now and Treasury has
no plans for further financial assistance to the companies, the significant
sums of taxpayer dollars that are invested in these companies warrant
continued oversight. It is critical that Treasury remain focused on
protecting the government’s interest in the coming months as Chrysler and
GM work to become profitable. However, most of the original staff on
Treasury’s auto team either have left Treasury or may do so in the future.
Treasury officials told us that OFS personnel will continue to provide
oversight. Given the substantial decline in the number of staff and lack of
dedicated staff for this oversight moving forward, however, we are
concerned whether Treasury will continue to have the needed expertise to
provide oversight of the use of government funds, assess the financial
condition of the auto companies, and develop strategies to divest the
government’s interests. Monitoring industry conditions and determining
when to divest will require a certain expertise, including a robust
monitoring function through which detailed financial data from Chrysler
and GM are reviewed on a regular basis. Transparency as to how the
companies are being monitored also will be important to ensuring
accountability and providing assurances that the taxpayers’ investment—
including both the loans to and equity in the companies—is being
appropriately safeguarded. While we recognize that not all information
that the companies report to Treasury should be made public because of
concerns about disclosing proprietary information in a competitive
market, Treasury’s approach for evaluating the success of the AIFP should
be as transparent as possible, given the large taxpayer investment.

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GAO-10-151 Troubled Asset Relief Program

While Treasury has stated that it plans to review all possible options for
divesting itself of its ownership interest in Chrysler and GM, Treasury
officials have focused primarily on an IPO for GM, both in our discussions
with them and in their public statements. However, given the complexity
of the economy and the financial markets, considering all of the options in
the context of the companies’ financial progress and current financial
conditions will be important for Treasury. The past year has indicated the
extent to which a company’s financial situation can change within a period
as short as a few months. Given the fluidity of conditions and the number
of factors that will need to be considered when determining how and
when to divest, it is important that Treasury identify the criteria it will use
to evaluate the optimal method and timing for selling the government’s
ownership stake. Determining when and how to divest the government’s
ownership stake will be one of the most important decisions Treasury will
have to make regarding the federal assistance provided to the domestic
automakers, as this decision will affect the overall return on investment
that taxpayers will realize from aiding these companies. Currently, the
value of the companies would have to grow tremendously for Treasury to
approach breaking even on its investment, requiring that Treasury temper
any desire to exit as quickly as possible with the need to maintain its
ownership interest long enough for the companies to demonstrate
sufficient financial progress. Therefore, it is important that Treasury be
able to explain why and how it decided to divest when the time arrives,
and clearly established criteria will help Treasury communicate this
decision to Congress and the public at the appropriate time to prevent this
disclosure from negatively affecting the full recovery for taxpayers.

Recommendations for
Executive Action

To improve the stewardship of the federal government’s substantial
financial investment in the auto industry, we recommend that the
Secretary of the Treasury take the following three actions:

•

Ensure that the department has the expertise needed to adequately
monitor and divest the government’s investment in Chrysler and GM, and
obtain needed expertise in areas where gaps are identified. In addressing
any existing or future expertise gaps, Treasury should consider both inhouse and external expertise.

•

Report to Congress on how it plans to assess and monitor the companies’
performance to help ensure the companies are on track to repay their
loans and to return to profitability. In reporting to Congress, Treasury
should balance the need for transparency with the need to protect certain
proprietary information that would put the companies at a competitive

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GAO-10-151 Troubled Asset Relief Program

disadvantage or negatively affect Treasury’s ability to recover the
taxpayers’ investments.
•

Agency Comments
and Our Evaluation

Develop criteria for evaluating the optimal method and timing for
divesting the government’s ownership stake in Chrysler and GM. In
applying these criteria, Treasury should evaluate the full range of available
options, such as IPOs or private sales.

We provided a draft of this report to the Department of the Treasury for
review and comment. Treasury generally agreed with the report’s findings,
conclusions, and recommendations, and provided written comments,
which are reprinted in appendix II. Treasury also provided technical
comments and clarifications via e-mail, which we incorporated as
appropriate. In their technical comments, Treasury officials emphasized
that they believe they have individuals within OFS who can provide the
needed oversight of the government’s investments in Chrysler and GM.
We added Treasury’s views on its current staffing and expertise levels to
the final report. While we recognize that OFS employs a number of
qualified individuals who have worked on the government’s efforts to
stabilize the auto industry, we nevertheless remain concerned about the
loss of industry- and company-specific knowledge and expertise that
Treasury has experienced and will continue to experience with the winddown of the auto team. Such knowledge and expertise will be critical as
Treasury monitors the financial health of Chrysler and GM and develops
plans to divest its ownership interests in these companies. We are pleased
that Treasury—in both its written and technical comments—commits to
continue to take steps to assess and maintain the expertise required to
monitor and manage Treasury’s investments in these companies.
In their written and technical comments, Treasury officials also stressed
the need to strike a balance between the goal of transparency and the need
to avoid compromising the competitive positions of Chrysler and GM or
the government’s ability to recover its investments. We recognize the need
to strike this balance and added language to the final report, including one
of our recommendations, to acknowledge this difficult trade-off. We
believe our revised recommendation that Treasury report to Congress on
its plans to monitor the performance of the companies provides Treasury
with sufficient flexibility to strike the appropriate balance.
We also provided relevant portions of a draft of this report to SEC,
Chrysler, and GM for their review and comment. SEC, Chrysler, and GM

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GAO-10-151 Troubled Asset Relief Program

provided technical comments and clarifications that we incorporated as
appropriate.

We are sending copies of this report to other interested congressional
committees and members, the Department of the Treasury, and others.
The report also is available at no charge on the GAO Web site at
http://www.gao.gov.
If you or your staff have any questions about this report, please contact
Katherine Siggerud at (202) 512-2834 or siggerudk@gao.gov or A. Nicole
Clowers at (202) 512-2843 or clowersa@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on the
last page of this report. GAO staff who made major contributions to this
report are listed in appendix III.

Gene L. Dodaro
Acting Comptroller General
of the United States

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GAO-10-151 Troubled Asset Relief Program

List of Committees
The Honorable Daniel K. Inouye
Chairman
The Honorable Thad Cochran
Vice Chairman
Committee on Appropriations
United States Senate
The Honorable Christopher J. Dodd
Chairman
The Honorable Richard C. Shelby
Ranking Member
Committee on Banking, Housing,
and Urban Affairs
United States Senate
The Honorable Kent Conrad
Chairman
The Honorable Judd Gregg
Ranking Member
Committee on the Budget
United States Senate
The Honorable Max Baucus
Chairman
The Honorable Charles E. Grassley
Ranking Member
Committee on Finance
United States Senate
The Honorable David R. Obey
Chairman
The Honorable Jerry Lewis
Ranking Member
Committee on Appropriations
House of Representatives

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GAO-10-151 Troubled Asset Relief Program

The Honorable John M. Spratt, Jr.
Chairman
The Honorable Paul Ryan
Ranking Member
Committee on the Budget
House of Representatives
The Honorable Barney Frank
Chairman
The Honorable Spencer Bachus
Ranking Member
Committee on Financial Services
House of Representatives
The Honorable Charles B. Rangel
Chairman
The Honorable Dave Camp
Ranking Member
Committee on Ways and Means
House of Representatives

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GAO-10-151 Troubled Asset Relief Program

Appendix I: Financial and Industry Experts
GAO Interviewed

Appendix I: Financial and Industry Experts
GAO Interviewed

Name

Affiliation

John Casesa

Casesa Shapiro Group

Justin Mirro

Moelis & Company

Thomas Maloney

Deutsche Bank

Warren Estey

Deutsche Bank

Rod Lache

Deutsche Bank

Henry Miller

Miller Buckfire

Durc Savini

Miller Buckfire

Eric Selle

J.P.Morgan

Himanshu Patel

J.P.Morgan

Charles Bowsher

Former Comptroller General of the United States

William Isaac

Former Chairman of the Federal Deposit Insurance
Corporation

Source: GAO.

Page 34

GAO-10-151 Troubled Asset Relief Program

Appendix II: Comments from the Department
of the Treasury

Appendix II: Comments from the Department
of the Treasury

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GAO-10-151 Troubled Asset Relief Program

Appendix III: GAO Contacts and
Staff Acknowledgments

Appendix III: GAO Contacts and Staff
Acknowledgments
GAO Contacts

Katherine A. Siggerud, (202) 512-2834 or siggerudk@gao.gov
A. Nicole Clowers, (202) 512-2834 or clowersa@gao.gov

Staff
Acknowledgments

In addition to the contacts named above, Raymond Sendejas, Assistant
Director; Orice Williams Brown; Sarah Farkas; Timothy Guinane; Heather
Halliwell; Terence Lam; Matthew McDonald; Susan Michal-Smith; Joshua
Ormond; and Susan Sawtelle made important contributions to this report.
.

(544156)

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GAO-10-151 Troubled Asset Relief Program

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