This topic is being passionately debated around the country every day. It’s obvious that not everyone can agree on the same solution. This is a very complicated situation, and there are pros and cons to each side of the debate, for letting GM fail or for government intervention with financial support. It seems that, for now, the government has taken the stance that supporting GM is the best course of action, as long as they make strong improvements to their business model with the money.

What Caused This Mess There are multiple reasons why the company is in the current situation. There is the long-term decline in their sales, due to various reasons, including vehicle quality, fuel efficiency, and attractiveness to customers. Then there are the huge labor and “legacy” costs, including pensions and benefits to current and former employees. The company and the union have both made poor decisions in the past 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 reduced sales immediately and the credit crisis, which has reduced sales even further. Evidence of the slow death of GM can be seen in this fact: the stock price has dropped ninety-five percent in the last five years!

Many experts have stated that American car companies are producing way too many cars right now, 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? This phrase gets thrown around a lot too. Many people believe this is true and that the government will do everything they can to keep GM in business. Believe it or not, a well-executed bankruptcy could actually help them stay alive rather than shut them down completely.

If GM Fails Hundreds of thousands of workers could lose their jobs, and many of them are paid very well. This includes workers 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 consequences. For example, the government guarantees 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 taxpayer 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.

Conclusion If GM 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 bailout money or loans, it may simply delay the inevitable and waste taxpayer money in the process. 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 wasted or lost for shareholders, bondholders, creditors, employees, dealerships, and taxpayers. This is probably why the government so far has chosen 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 to decide the fate of the company.

Tags: mortgage, loans