The Treasury Department failed to consider the economic fallout when it told General Motors and Chrysler to quickly shutter many dealerships as part of government-led bankruptcies, a federal watchdog found.
A report released Sunday by the special inspector general for the government's bailout program raised questions about whether the Obama administration's auto task force considered the job losses from the closings while pressuring the companies to reduce costs.
Treasury didn't show why the cuts were "either necessary for the sake of the companies' economic survival or prudent for the sake of the nation's economic recovery," said the audit by Neil Barofsky, the special inspector general for the Troubled Asset Relief Program, the $787 billion stimulus program known as TARP.
"Treasury made a series of decisions that may have substantially contributed to the accelerated shuttering of thousands of small businesses," investigators said.
Those decisions resulted in "potentially adding tens of thousands of workers to the already lengthy unemployment rolls — all based on a theory and without sufficient consideration of the decisions' broader economic impact," the report said.
Obama administration officials said they strongly disagreed with the findings and said the audit focused solely on one element of a painful restructuring. Without the shared sacrifices of workers, dealers, retirees, suppliers and creditors, they said, the companies may not have rebounded.
Herbert M. Allison Jr., Treasury's assistant secretary for financial stability, said the administration's actions "not only avoided a potentially catastrophic collapse and brought needed stability to the entire auto industry, but they also saved hundreds of thousands of American jobs and gave GM and Chrysler a chance to re-emerge as viable, competitive American businesses."
The audit also found that General Motors "did not consistently follow its stated criteria" for reducing its dealer network and noted that Chrysler failed to offer an appeals process.
The report, sought by lawmakers critical of the dealership closings, was seized upon by Republicans who have questioned the administration's dealings with private industry during the economic downturn.
Rep. Darrell Issa, R-Calif., said the audit "should serve as a wake-up call as to the implications of politically orchestrated bailouts and how putting decisions about private enterprise in the hands of political appointees and bureaucrats can lead to costly and unintended consequences."
GM's initial plan submitted to the government in February 2009 called for the gradual reduction of 1,650 of its 5,750 dealers by the end of 2014. Chrysler pointed to plans to trim its network from 3,181 dealers to about 2,000 dealers by 2014.
After Treasury rejected those earlier plans, the two companies released accelerated efforts to cut their dealership ranks. Chrysler said it would quickly close 789 dealers by June 2009 and GM said it would slash its dealer ranks by 1,454 by October 2010.
Following a fierce lobbying campaign by car dealers, Congress approved legislation last year requiring arbitration for closed dealers. GM said it would reinstate more than 660 dealers it had threatened with closure, reducing the number of dealers planning to appeal. Chrysler also agreed to restore about 80 franchises.
In a statement, GM said the events described by the report "have since been overtaken by a new GM and a stronger dealer network to match. More than a year since bankruptcy, GM is showing substantial progress."
Chrysler did not immediately comment on the report.