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Daily you discuss with friends and family the topic of GM's financial woes being heatedly debated around town. Whether we should make GM fail or have the government intervene with deep pocket support. It's very clear that not everyone can agree on the solution. This has global implications, and there are good and bad arguments for each party in the debate. For now the senate has taken the stance that financially backing GM is required because of the unions, as long as GM's board makes radical improvements to their business model with the money. What Caused the Financial Meltdown There are multiple reasons why GM is in the current financial mess. There is the long-term decline in their salesnumbers, due to various reasons, including car quality, inattractive fuel efficiency, and attractiveness. Then there are the problematic labor and "legacy" costs, including pensions and benefits to current and former employees. The GM corporation and the union have both made financially poor decisions in the past that helped in the short-term but caused damage to the company's financial well being in the long-term, which has 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 hurt their ability to arrange loans for their customers. Evidence of the slow death of the GM company 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 too many styles of automobiles 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 is way over used. Many people believe that the government will do anything they can to keep GM alive. The economists that I follow believe that a correctly designed bankruptcy could actually help them keep their doors open rather than shut them down completely. If GM Fails Hundreds of thousands of GM employees could lose their jobs, and many of them have good compensation. This includes the work force 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 lower labor and legacy costs dramatically, including salaries, benefits, pensions, and debt obligations. However, there are important consequences. 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. Our Conclusion If GM files for bankruptcy, hundreds of thousands of people will be affected. However, if the government continues to prop up the failing company with bailout money or loans, it may simply suspend 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 extreme 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.
Article Source: http://profitnb.com
Nicholas Swezey is the owner of the stock market simulation game at www.HowTheMarketWorks.com. He is an active author and investment advisor. Read more on Will the Government Put GM Out of its Missery Without Costing Us Any More Money?
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