Treasury’s Estimate for Cost of Government Guaranteeing GM, Chrysler Warranties Well Below Past Years’ Warranty Costs

April 28, 2009 - 7:28 PM
The cost of customer warranties for GM and Chrysler vehicles during the restructuring of the two automakers is estimated to be $1.1 billion, although warranty payments in previous years far exceeded that number.

Chrysler headquarters are shown in Auburn Hills, Mich., Monday, April 27, 2009. Chrysler LLC cleared another major obstacle to its survival Sunday when it reached a tentative deal for concessions with the United Auto Workers union. The troubled automaker is just days from a June 1, U.S. government deadline to gain concessions from its unions and debtholders and form an alliance with Italy's Fiat Group SpA or face almost certain liquidation. (AP Photo/Paul Sancya)

White House (CNSNews.com) - The cost to the taxpayers of President Obama's promise to guarantee the warranties for General Motors and Chrysler vehicles during the restructuring of the two automakers is estimated by the Treasury Department to be $1.1 billion, a number far below the historical annual warranty costs for those two automakers.

Last year, U.S. car companies (GM, Chrysler and Ford) paid $13.1 billion in auto warranties worldwide, according to Warranty Week. In 2007, GM alone paid $4.46 billion in warranties, while in 2006 DaimlerChrysler paid $6.1 billion in warranty claims worldwide, according to Financial Week.  (Data for DaimlerChrysler includes warranty claims on Mercedes-Benz, Smart, and the truck unit of DaimlerChrysler, as well as Chrysler vehicles.)

Under the arrangement with the Treasury Department, warranties for GM and Chrysler vehicles sold during the restructuring – which began on Mar. 30 – are covered. And, “should a participating automaker go out of business, a program administrator will be appointed to identify a qualified service provider to supply warranty services for vehicles sold during the restructuring period in exchange for the assets of the special purpose company,” reported the Government Accountability Office (GAO), a watchdog agency that recently published a report on the auto bailout. 

The Treasury Department also has the flexibility to extend the length of the program, said Kate Siggerud, managing director of physical infrastructure issues at the GAO.
 
“We did not assess the estimated cost of the Warranty Commitment Program,” Siggerud told CNSNews.com. “Treasury officials told us that the cost of the program was estimated using 125 percent of the average historical cost for each company of providing warranty services on a per vehicle basis.”

The Bush administration authorized a $13.4 billion loan to GM and a $4 billion loan to Chrysler late last year, using money from the $700-billion Troubled Assets Relief Program (TARP). The Bush administration turned to TARP funds after failing to get an auto bailout bill through Congress that tapped money from a Department of Energy fund.
 
President Obama expanded the auto bailout. As GM chief Rick Wagoner was pushed out, the administration required restructuring from both companies before getting additional federal dollars and Obama guaranteed car warranties to take away the reluctance consumers might have to buy a GM or Chrysler while both companies are trying to stay afloat. 
 
However, several members of Congress, including committee chairmen overseeing TARP and House leaders have said they do not know where Obama gets the legal or constitutional authority to expand the program without congressional approval.

Under the Bush administration, the conservative Heritage Foundation said using the TARP funds to bail out the automakers was not legal because the language approved by Congress in the TARP set aside money for financial institutions. 
 
Under the warranty program, the government guaranteed the equivalent of 125 percent of the expected cost for a warranty service on each covered vehicle. The automakers are required to contribute 15 percent of the projected costs, while the Treasury Department provides a loan to contribute 110 percent of the projected cost of warranties.
 
“Addressing consumers’ concerns about warranties is important because, unlike buying a plane ticket from a bankrupt airline, purchasing a vehicle is a significant and long-term investment,” the GAO report said. “Thus, consumers may avoid purchasing vehicles from an automaker facing the possibility of bankruptcy because they are concerned their warranties may not be honored, further depressing vehicle sales.”

Presumably, the auto warranty guarantee will last more than a year, said former Oklahoma Congressman Ernest Istook, a senior fellow with the Heritage Foundation who recently wrote report on auto warranties. So, he wonders why Treasury’s projected costs are so much less than what warranty payments were in previous years.

“The lesser figures could mean only two things: That they plan for this to be short term, which they have not said, or they deliberately low-balled the estimate,” Istook told CNSNews.com. “This is a president’s creation. It was not approved by Congress. It was created by the White House and is putting taxpayers on the hook.”
 
With regard to the authority on specifically the warranty program, Siggerud of the GAO said, “Funding to Chrysler and GM for this program will be provided through amendments to the original loan agreements signed with Treasury in December 2008.  Under these loan agreements, Treasury purchased debt obligations of GM and of Chrysler LLC's parent company, Chrysler Holding LLC.  Debt obligations constitute TARP ‘troubled assets’ under section 3(9) of the Emergency Economic Stabilization Act of 2008, 12 U.S.C. §5202(9).”
 
White House Press Secretary Robert Gibbs told CNSNews.com last month that the president had the authority under the TARP law to expand the auto bailout.
 
Gibbs stressed on Tuesday that the Obama administration does not want to own the auto companies.
 
“This administration does not desire to or plan to run GM or any auto company on a day-to-day basis,” Gibb said. “In the longer view this, these two companies asked the government for additional assistance to continue to function. The president’s auto task force determined that the viability plans did not satisfy an auto company that could sustain itself without continued and repeated government assistance. The president decided that viability meant being able to operate without that assistance. Management changes were asked for as part of moving forward.”

A Treasury Department spokesperson could not be reached for comment Monday or Tuesday.
 
Last week, House GOP Conference Chairman Mike Pence (R-Ind.) gave a clearer statement affirming Obama’s authority to expand the auto bailout. 
 
“I think the initial TARP legislation was so poorly written and so vaguely drawn that both the prior administration and this administration have authority far beyond what most Americans and, frankly, most members of Congress thought they had,” Pence told CNSNews.com. “They’ve already used TARP money to finance part of the auto bailout. I would expect they would be able to do that again if the resources were there. I wouldn’t want to draw that conclusion. I wouldn’t want to confirm previous decisions. I would accept the last administration used TARP funding to finance the auto bailout and  I would  regretfully assume the current administration would feel the latitude to do likewise.”
 
Still, many members of Congress are perplexed about what authority Obama expanded, with none of the members who were asked certain that he had the authority without congressional approval.
 
House Majority Leader Steny Hoyer (D-Md.) told CNSNews.com earlier this month, “The administration clearly believes it does have the authority to use some of the remaining TARP funds for the automobile industry …  I don't know, technically. I would be kidding you to mouth some words on that, because I don't know technically where that authority would be.”
 
House Minority Leader John Boehner (R-Ohio) told CNSNews.com, “I have no idea” where the authority is derived and added, “They just shouldn’t do it at all.”

House Financial Service Committee Chairman Barney Frank (D-Mass.) said Congress would not get involved. “It’s an administration situation so I’m not very well informed on it,” Frank told CNSNews.com. But House Budget Committee Chairman John Spratt (D-N.C.) said Congress should be involved.