General Motors and Chrysler terminated the contracts of thousands of dealers while the automakers were in bankruptcy proceedings; a move that was required by the Obama Administration's auto task force as a condition of bankruptcy. The scheme was heralded as a way to save the struggling automakers millions or even billions of dollars, but special inspector general for the Troubled Asset Relief Program (TARP) Neil Barofsky claims in an audit that the dealer closings weren't "necessarily critical to the manufacturers' viability." Barofsky added in his TARP audit that the closing of dealerships would add thousands of workers to the unemployment lines "without sufficient consideration of the decisions' broader economic impact."

The U.S. Treasury, obviously, doesn't agree with Barofsky's assessment. The Detroit Free Press quotes an anonymous source who points out that it was well known in the auto industry that Detroit automakers have too many dealers. Toyota, for instance, has a much smaller dealer body than GM. And the dealers Toyota does have average much higher sales volumes than dealers of domestic products. That theoretically leads to dealers with more marketing muscle in their perspective markets. Not all automaker executives wanted to shrink their dealer networks, either. Some feared the loss of sales that would follow shutting down retail outlets, but the task force reportedly felt those lost sales would be recouped within a few years

But while arguments can be made for or against shrinking the pool of retail outlets around the country, one fact is hard to ignore. A reported 35,000 dealer employees lost their jobs in 2009 and 2010, or over three percent of all dealership employees around the country – roughly equal to the 32,000 jobs lost within the industry.

Barofsky also touched on the process which both Chrysler and GM used to determine which dealers should stay and which should go. The auditor claimed that Chrysler stuck to its plan throughout, which is evidenced by the fact that only 28 dealers won their arbitration cases out of 789 stores that were closed last year. Barofsky claims that GM wasn't so strict in determining which dealers to cut, and there wasn't much documentation to show how and why the General cut its dealers. GM has since restated 666 of the 1,454 dealers it cut, though the company gave dealers more than a year to wind down operations, while Team Pentastar cut off its under-performing dealerships almost immediately.

[Source: Detroit Free Press | Image: AP/Jeff Roberson]