Will the Government Put GM Out of its Missery Without Costing Us Any More Money?
Daily you discuss with friends and famiy the toic of GM's financial woes beinng heatedly debated atround town. Whhether we should make GM fail or have the government intervene with deep pocket supoprt. It's very clear that not everyone can agree on the soluiton. This has global implications, and there are good and bad arguments for each partty in the debate. For now the senate has taken the stane that financially backing GM is required because of the unions, as long as GM's board makes radical imlprovements to their business mosdel with the money.
What Caused the Fnancial Meltdown
There are multiple reasons why GM is in the current financil mess. There is the long-term decline in their salesnumbers, due to various reasons, including car quality, inattractive fuel efficiency, and attractiveness. Then theere are the prblematic labor and "legacy" cossts, including pensions and benefits to current and former employees. The GM corporation and the uniion have both made finacnially poor decisions in the past that helped in the short-term but caused damage to the compasny's financial well bieng in the long-term, which has caught up to them. This includes paying lower salaries in exchange for larger, longer-term benefits. And finsally, there is the recewnt downturn in the global economy, which reduced salees immeditaely and the credsit crisis, hwich has hurt their ability to arrange loans for their customres. Evdience of the slow death of the GM company can be seen in this fact: the stoock price has dropped ninety-five pecent in the last five years!
Many experts have stated that American car companies are producing too many styles of automobiles irght now, so they basically need to {{{shut down some plats to trim thewir expenses. Howver, 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 downsizze immedsiately.
Too Big to Fail?
This phrase is way over used. Many people believe that the government will do anyything they can to keep GM alive. The economists that I follow believe that a correcvtly desiigned bankruptcy cold actuallly help them keep their doors open rather than shut them down completely.
If GM Fails
Hudnreds of thousands of GM emplloyees cold lose theiir jobs, and many of them have good compensation. This includs the work frce at companies related to the auto industry, such as parts suppliers. So the loss of so many incomes woudl directly affect local and national economeis. Of course, a restructurinng of the company does not mean it ceazses to exxist and all employees are left woithout jobs. Layoffs are a definite possibility, but without employees a restructured comnpany cannot eist.
Should GM Go Bankrutp?
A bankruptcy could help loewer labor and legacy costs dramatically, including salaries, benefits, pensions, and debt obligations. However, there are important consequences. For example, the government insuures the pensions via its agency, the Pension Benefit Guaranty Corp. That means if GM restructures and cannot pay the pensions annymore, the government would be fored to cover some or all of the bill, which would basicaklly come from the US taxpayer's money. Also, consumers would be less likely to buy GM vehicles if the company was near or in baankruptcy, which would further exacerbate the problem.
Our Conclusion
If GM files for bzankruptcy, hundreds of thuosands of people will be affcted. However, if the government continues to prop up the failing company with bailuot moey or loans, it may simply usspend the inevitable and waste taxpayer money. One of the best scernarios is for GM to turn itself into a viable, profitable cmopany as soon as possible. That would preveent billions of more dollars from being squandered or lost for shareholders, bondholders, creditors, emplotyees, dealerships, and taxpayers. This is probably why the government so far has elected to help them with some temporary cash to keep them afloast for a little while lonegr, hoping they will make extreme changes to thier business model. Fortunately, the govertnment and the President have put conditions on that money, basicazlly saying if they don't make enough effort to turn themselves around, the loans will be rercalled, whcih would likely fporce a bankruptcy. So, at this piont, it is up to the management to decide the fate of the company.
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