TARP audit on dealer shutdowns: Ethnic, gender issues trumped economics

The difference between private-sector decisions on business consolidation and those under government supervision gets exposed in a portion of Neil Barofsky’s audit of the government-driven closures of GM auto dealerships during the $62 billion bailout.  There may be a question of whether the automakers needed to consolidate in order to shed poorly performing dealerships at all, but we’ll get back to that.  The plan to consolidate dealerships that resulted from the push by the car czar and TARP used rational, objective measures to select the target outlets. In practice, those often got ignored in favor of politics, according to the audit:

GM determined that dealerships with a DPS Score of 100 were average performers; those below 70 were considered poor performers and would not be retained. SIGTARP noted, however, that GM did not uniformly apply the phase one criteria to the entire network. For example, our analysis found that two of the wind-down dealers did not meet either criterion. Furthermore, we found that, of the dealerships that met only one of the two criteria:

GM retained 355 (or approximately 41 percent) of the 858 dealerships that had a DPS score below 70.16

GM retained 9 of the 394 dealerships that sold fewer than 50 new vehicles in 2008.17

An additional 10 dealerships with a DPS score below 70 were in phase two wind-downs.

GM officials attributed these inconsistencies primarily to a desire to maintain coverage in certain rural areas where they have a competitive advantage over import auto companies that are not typically located in rural areas, although ultimately close to half of all of the GM dealerships identified for termination were in rural areas. Other dealerships were retained because they were recently appointed, were key wholesale parts dealers, or were minority- or woman-owned dealerships (emphasis mine).

On June 1, 2009, GM filed for bankruptcy. As indicated earlier in this report, bankruptcy would permit GM to accelerate the process without the restriction of state franchise laws. Bankruptcy laws supersede various state franchise laws, which could have required litigation or arbitration. GM management had also determined that the company would need to wind down more dealerships than those designated in phase one to get close enough to the “ideal network size” of 3,380 dealerships.

A couple of points should be made clear on this.  Nothing in the report says that the Obama administration forced GM into these specific decisions, and apparently this didn’t happen with Chrysler’s closures.  Nevertheless, it seems certain that GM would have been particularly sensitive to political considerations after begging for an receiving tens of billions of dollars to unwind its collapsing finances.  If the point was saving money through the closures, GM didn’t act as if they had so much need for that to trump political considerations.

There’s a reason for that, too.  The American Thinker points out that Barofsky actually found that closing dealerships wouldn’t save the automakers all that much money, anyway.  A Chrysler exec told the Special Inspector General for TARP that at best it each closure would save less than $46,000, although GM put the savings at $1.1 million.  But the issue was scalable, as lower performing dealerships ate up less resources anyway.  One GM exec said closures weren’t going to make much difference at all:

GM would usually save ‘not one damn cent’ by closing any particular dealership. … Furthermore, a GM official stated that removing a dealership from the network does not save money for GM — it might even cost GM money — and that savings cannot be attributed or assigned to any one dealership.

So why close them if doing so would not save any real money?  After all, both automakers need a substantial retail network to maintain their sales output.  The Boss Emeritus explains why politics trumped business concerns:

In search of the rationale for Team Obama’s bizarre, job-killing exercise of power over thousands of small car dealerships, the TARP inspector general may have stumbled onto the truth from Bloom. On page 33 of its report, Barofsky writes that “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; indeed, when asked explicitly whether the Auto Team could have left the dealerships out of the restructurings, Mr. Bloom, the current head of the Auto Team, confirmed that the Auto Team ‘could have left any one component (of the restructuring plan) alone,’ but that doing so would have been inconsistent with the President’s mandate for ‘shared sacrifice.’”

In other words,we destroyed tens of thousands of jobs in the private sector for a soundbite about sacrifice.  In doing so, we weakened the economy and handicapped the automakers’ ability to push sales through their network of dealerships.  A board that made those kinds of decisions in the private sector would get sacked by its shareholders — which is why those decisions should have stayed in the private sector in the first place, and taxpayers shouldn’t have had to shoulder the risk.

Update: WTPOTUS notes that the government didn’t force Chrysler to close dealerships, according to counsel for some of the dealers:

Nowhere in the SIGTARP Report does it say that the Government “forced” (as Malkin put it) Chrysler to reduce its dealership network. As to GM, yes the Government did specifically urge dealership reductions, but as to Chrysler the Government did not.  The SIGTARP Report is very clear on this point.

I’ve amended the first paragraph to remove Chrysler.  The rest of the post dealt mainly with GM anyway.