Taxpayers likely to face losses on auto bailout

A government watchdog panel says it’s unlikely that taxpayers will recover their $81 billion investment in Chrysler and General Motors and that the federal government should consider shifting its stakes in the troubled automakers to an independent trust.

The Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) also charged that taxpayers were “left in the dark” on specifics of the government’s decision to use the $700 billion bailout fund to aid the Michigan-based companies.

The panel, in its latest monthly report released Wednesday, didn’t provide an estimate of the projected losses. But it offered a gloomy outlook on the success of the government’s efforts to recoup its investment in Chrysler Group LLC and General Motors Co.

“Although taxpayers may recover some portion of their investment in Chrysler and GM, it is unlikely they will recover the entire amount,” the report said.

The prospect of recovering the government’s auto investments is heavily dependent on shares of the two companies rising to unprecedented levels, the report said. The government owns 10 percent of Chrysler and 61 percent of GM. The two companies are are expected to issue new stock, in GM’s case by next year.

The shares “will have to appreciate sharply” for taxpayers to get their money back, the report said.

The estimates of losses vary. The Treasury Department calculates that about $23 billion of the initial loans to Chrysler and GM will be subject to “much lower recoveries,” and that about $5.4 billion from Chrysler’s loans is highly unlikely to be recovered.

The independent Congressional Budget Office estimated in June that taxpayers would lose about $40 billion of the first $55 billion in aid.

The use of government money to bail out private companies also raises serious conflict of interest issues, the report said. To lessen this threat and to help ease the transition of the companies back to total private ownership, the Treasury Department should consider placing its Chrysler and GM shares in an independent trust that would be insulated from political pressure and government interference.

Treasury’s financial assistance to the automotive industry differed significantly from its assistance to the banking industry. TARP money was given to financial institutions with far fewer restrictions than those imposed on the automakers, and money was made readily available without a review of business plans or without any demands that shareholders forfeit their stake in the company or top management be replaced.

By contrast, the panel says that Treasury was a “tough negotiator” as it invested taxpayer funds in the automotive industry. The bulk of the funds was made available only after the companies had filed for bankruptcy, wiping out their old shareholders, cutting their labor costs, reducing their debt obligations and replacing some top management.

The panel accused the Treasury Department of providing “little clarity” on its ultimate objective for the auto bailout, saying that the department has offered several reasons at various times to explain its efforts.

The report also questioned the legality of using TARP money for the bailing out the automakers, saying that, due to ambiguity in the TARP legislation, “Treasury has faced no effective challenge to its decision to use TARP funds for this purpose.”