Will GM Accept Bankruptsy As the Final Solution?

By: dgcarticle


Every day you discuss with friends and family the problem of GM's bankrupsy being loudly discussed around town. Whether we should make GM fail or have the government intervene with deep pocket support. It's quite clear that not everyone can agree on the solution. This is a complex situation, and there are many good points for each side of the debate. Based on the latest information the senate has taken the position that supporting GM is politically expedient, as long as GM's president makes financially sound improvements to their business model with the money.

What Caused GMs Downfall
There are multiple issues behind why this company is in the current situation. There is the chronic fall in their sales volume, due to many reasons, including product quality, inattractive gas efficiency, and attractiveness to customers. Then there are the huge union labor and "legacy" costs, including pensions and benefits to current and former employees. The company and the union have both made debilitating decisions that helped in the short-term but is hurting in the long-term, which has finally caught up to them. This includes paying lower salaries in exchange for larger, longer-term benefits. And finally, there is the recent downturn in the global economy, which crippled sales immediately and the credit crisis, which has hurt their ability to extend credit. Evidence of the slow death of this company can be seen by the stock price dropping ninety-five percent in the last five years.

Many experts have stated that American car industry are producing too many cars today, so they basically need to {{{shut down some plants to trim their expenses. However, the companies have proven to be slow to make big changes like that. With a huge drop in sales and cash this year, it is more important than ever that the automakers downsize immediately.

Too Big to Fail?
Does this overused phrase really have significants? Most Americans believe that the senate will do everything they can to help GM keep their current level of union employement. The new government feeling is that a well designed bankruptcy could actually help them stay alive rather than having to close their business.

If the Government lets GM Fail
Hundreds of thousands of GM employees could might need to look for new jobs, and many of them make a good salary. This includes union employees at companies related to the auto industry, such as parts suppliers. So the loss of so many incomes would directly affect local and national economies. Of course, a restructuring of the company does not mean it ceases to exist and all employees are left without jobs. Layoffs are a definite possibility, but without employees a restructured company cannot exist.

Should GM Go Bankrupt?
A bankruptcy could help reduce labor and legacy costs dramatically, including salaries, benefits, pensions, and debt obligations. However, there are important distinctions. For example, the government insures the pensions via its agency, the Pension Benefit Guaranty Corp. That means if GM restructures and cannot pay the pensions anymore, the government would be forced to cover some or all of the bill, which would basically come from the US taxpayer's money. Also, consumers would be less likely to buy GM vehicles if the company was near or in bankruptcy, which would further exacerbate the problem.

Summary
If this company files for bankruptcy, it could affect hundreds of thousands of people, both directly and indirectly. However, if the government continues to prop up the ailing company with government money or loans, it may simply postpone the inevitable and waste taxpayer money. One of the best scenarios is for GM to turn itself into a viable, profitable company as soon as possible. That would prevent billions of more dollars from being squandered or lost for shareholders, bondholders, creditors, employees, dealerships, and taxpayers. This is probably why the government so far has elected to help them with some temporary cash to keep them afloat for a little while longer, hoping they will make drastic changes to their business model. Fortunately, the government and the President have put conditions on that money, basically saying if they don't make enough effort to turn themselves around, the loans will be recalled, which would likely force a bankruptcy. So, at this point, it is up to the management of GM to decide the fate of the company.

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Nicholas Swezey is the owner of the stock market simulation at www.HowTheMarketWorks.com. The Article Source: EzineArticles.com/?expert=Nicholas_Swezey.

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