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July 8th, 2009

U.S.’s Control Complicates Automaker’s Finances

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If the plan passed last evening by a House panel requiring GM and Chrysler to restore their franchise agreements with their closed dealerships makes it into law, it would spell the first serious decision made by the bankrupt automakers that was directly influenced by the White House’s ownership stake (emphasis added):

The Appropriations Committee approved by voice vote a plan by Rep. Steve LaTourette, R-Ohio, to effectively force the two automakers to restore their prior franchise agreements with dealers as a condition of being partially owned by the U.S. government as they work their way through bankruptcy proceedings. The move came as the panel approved a spending bill to fund the Treasury Department and White House operations, among other programs.

Is requiring the automakers to uphold the franchise laws counter-productive for them?

GM and Chrysler decided to close a portion of their dealerships as a cost-cutting maneuver. Executives from the automakers testified in front of Congress to defend their decision to shut down thousands of dealerships, claiming that there wasn’t enough business to go around. However, dealership owners and Congressmen fired back, accusing the automakers of violating state franchise laws which require dealers to be compensated when their businesses are shut down. Yet those cries dies down as GM and Chrysler began their bankruptcy proceedings.

The White House was seemingly silent over the claims that the automakers violated franchise laws — our interpretation was that they deemed it financially necessary. One could argue that restoring the franchise laws will be counter-productive given GM and Chrysler’s financial constraints. On the other hand, there are thousands of dealers who feel they have been wronged by the automakers and the government, and deserve to get paid.

Within months we have witnessed Washington send seriously conflicting messages to the automakers. In return for receiving billions in Federal dollars the automakers were required to cut costs. GM and Chrysler did so by trimming, what they called, under-performing dealerships. Now lawmakers could be significantly adding to the automakers’ financial stress by requiring them patch things up with their closed dealerships.

Ever since the first bailout money was doled out, we have always said that government involvement complicates things. There will be many votes and much discussion before this plan has a chance to become law, not to mention several opportunities for it to be thrown out entirely, says HSH VP Paul Havemann. If it does get passed, it will signal the first directly-influenced action the automakers will have to make because their new partner says so.

Related posts:
How Involved Will Washington Be With GM?
Axed GM/Chrysler Dealership Owner Blogs About Experience

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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