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 verify the processes and procedures Treasury has established to monitor and enforce the reporting requirements. 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. 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 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. 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. 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 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. 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 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. 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. 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 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. 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 year- end 2008.