Watchdog: Auto dealers shut down too fast

NEW YORK (CNNMoney.com) -- Automakers GM and Chrysler were pressured to close hundreds of dealerships quickly by the Treasury department without regard for the job losses that would result, according to a government watchdog report out Sunday.

Treasury was charged with helping the car companies out of bankruptcy through the Troubled Asset Relief Program. Together they've received over $80 billion in government funding.

"Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses ... potentially adding tens of thousands of workers to the already lengthy unemployment rolls," said the report, released by the Special Inspector General for the Troubled Asset Relief Program (SIGTARP), Neil Barofsky.

GM and Chrysler were both required to submit restructuring plans to the Treasury's Auto Team in February of 2009, but the plans were rejected because Treasury deemed that the car makers weren't moving to close dealerships at a rate fast enough to keep their businesses viable.

So the auto manufacturers accelerated the process, with the help of bankruptcy laws that let them cancel dealer contracts. Chrysler terminated 789 dealerships last summer and General Motors announced plans to wind down 1,454 dealerships by October of 2010.

According to the SIGTARP report, Treasury's Auto Team believed that with fewer dealerships, the remaining dealerships would be more profitable. But the report takes issue with this "not-universally-accepted theory," and questioned the cost in job losses for an already fragile economy.

The National Auto Dealers Association (NADA) has maintained all along that any incremental beneift for the manufacturers was not worth the economic blow to local communities from shuttered dealerships. "The SIGTARP report confirms what was said in NADA's testimony presented to Congress in several hearings and to the Auto Task Force in multiple meetings: 'We do not see how these cuts make economic sense -- not for the companies, not for the dealers, not for local communities and certainly not for the struggling U.S. economy,'" said Ed Tonkin, chairman of NADA in a statement issued Monday.

Treasury fires back: In a letter Treasury said it "strongly" disagrees with the reports findings.

A letter from Herbert Allison, the assistant secretary for financial stability at the Treasury, to Neil Barofsky, said that without the administration's help, GM and Chrysler "faced almost certain failure and liquidation, which would have resulted in the loss of hundreds of thousands of American jobs across multiple industries." The Treasury said it would follow up with a more detailed response later.

The audit report from SIGTARP agreed with Treasury that the administration's response was critical. The oversight report from SIGTARP, however, argues that dealerships did not have to be closed in such numbers and with such speed.

"No one from Treasury, the manufacturers or from anywhere else indicated that implementing a smaller or more gradual dealership termination plan would have resulted in the cataclysmic scenario spelled out in Treasury's response."

The report points to the fact that hundreds of dealerships were later reinstated as evidence that the initial whack at the dealer count was too severe. In response to dealer outrage and political pressure, GM and Chrysler launched an arbitration process to hear the cases of dealers who felt they were unfairly closed.

Dealerships weren't axed to save money: The audit also found that dealerships weren't axed as money-saving ventures for the manufacturers but for "far more amorphous reasons." The auto team "did not consider cost savings to be a factor in determining the need for dealership closures," the report said.

Only after the closure notices were issued did GM and Chrysler issue any savings estimates, in response to a request from Congress.

The two companies had radically different cost estimates. GM said that the dealership terminations would save as much as $2.6 billion, or $1.1 million per dealership. Chrysler estimated that the closures would save $35.8 million, or $45,501 per dealership.

Dealers were outraged by the terminations and many shuttered auto dealers felt they were closed without legitimate cause. The audit by Barofsky's office found that GM was not consistent in applying criteria for closing dealerships, and it didn't document the process properly.

GM responded that it was operating under extreme circumstances. "The GM which existed at that time did its best to develop and implement an objective dealer consolidation process under extraordinary circumstances," the company said in a statement released Sunday. "Business conditions required GM to undertake difficult and urgent actions that would require sacrifice among all stakeholders."

Chrysler said it wasn't ready to comment on the report, but defended its shrunken dealer count. "The rightsizing of Chrysler's dealer network contributes to more profitable, better performing dealers and better customer service."