US Supplier bailout carries fraud risk, watchdog says

ERJ staff report (AN)

Neil Roland, Automotive News

Washington, DC-- The US Treasury Department's $5 billion fund for auto suppliers may be susceptible to fraud, a watchdog for the federal bailout said.

The fund, which provides government-backed protection to suppliers against automakers' failure to pay for goods received, may be exposed to "phantom receivables," said a report by the special inspector general for the Troubled Asset Relief Program.

These receivables are auto parts that qualify for federal funding but are never delivered to the manufacturers.

The fund also may be susceptible to commercial bribery because of the unchecked power given to automakers to pick the suppliers that can participate in the program, according to the 248-page report to Congress.

Automakers have the power of "effectively picking winners and losers with no clear restrictions," the report said.

The Treasury replied that certain financial aspects of the program would act as a disincentive to fraud.

The report by special inspector general Neil Barofsky also said:

• The Treasury Department is considering funding its automobile warranty program for General Motors and Chrysler LLC at up to $1.25 billion.

• Chrysler Financial sought additional funding beyond the $1.5 billion it got in January but dropped the matter when senior executives refused to comply with a Treasury request to accept certain executive compensation limits.

• GM is to get up to $5 billion and Chrysler up to $500 million in federal aid to provide working capital for the period through May 31 and April 30 respectively while they are trying to develop new business plans to avoid bankruptcy.

Supplier program liabilities

The report addressed the entire $700 billion bailout begun last fall by the Bush administration and continued under President Barack Obama. While federal aid to financial institutions is the focus of much of the report, it also includes provisions on the auto industry rescue.

The Auto Supplier Support Program, announced in March, is a renewable one-year program to provide up to $5 billion in financing intended to benefit both suppliers and manufacturers.

It is designed to ensure payments to suppliers even if GM or Chrysler files for bankruptcy.

The inspector general, after receiving Treasury assurances about disincentives to fraud, wrote that he "awaits further briefing on the program."

Warranty coverage financed

The Auto Warranty Commitment Program was devised by the Obama administration to reassure consumers that their auto warranties would be honored while GM and Chrysler are being restructured.

It provides government-backed financing on domestically produced vehicles.

GM doesn't have figures on the amount it spends on warranties for domestic vehicles. Worldwide, its costs were $3.85 billion in 2008, though that figure also includes the cost of recalls and vehicle buybacks, a GM spokeswoman said.

Chrysler spokespersons did not respond to requests for figures.

Chrysler Financial executive waivers

In response to the request for additional aid by Chrysler Financial, the automaker's financing arm, Treasury asked it earlier this month to obtain waivers from its top 25 executives on potential legal claims they might file related to executive compensation changes, the report said.

Chrysler Financial told Treasury it could not obtain waivers from all 25 executives, and the company's request for additional funding was denied, it said.

A Chrysler Financial spokeswoman said its executives "have not been presented with any new demands with regard to executive compensation."

In addition, the company "has determined that it has adequate private capital funding to cover the short-term needs of our dealers and customers and as such, no additional TARP funding is necessary at this time," said spokeswoman Amber Gowen.

From Automotive News (A Crain publication)