Will the Government Put GM Out of its Missery Sometime Soon?

Every day you get involved in the problem of GM's bankrupsy being passionately discussed around the country. Whether we should let 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 points for each side of the debate. For now the president has taken the stance that supporting GM is the best course of action, as long as GM's president makes strong improvements to their business model with the funding.

What Caused the Financial Meltdown
There are multiple causes for why the GM corporation is in the current financial mess. There is the long-term fall in their sales, due to many reasons, including car quality, poor gas efficiency, and attractiveness to customers. Then there are the chronic union labor and "legacy" costs, including pensions and benefits to current and former employees. This company and the union have both made financially disasterous decisions in the past that were short term self serving but hurt in the long-term, which has finally caught up to GM. This includes paying lower salaries in exchange for larger, longer-term benefits. And finally, there is the recent financial failure in the global economy, which reduced sales immediately and the credit crisis, which has reduced sales even further. Evidence of the certain death of this company can be seen by this once DOW 30 stock dropping to penny stock status.

Government officials have stated that American car companies are producing too many automobiles 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?
This phrase gets thrown around a lot too. Most people believe that the government will do everything they can to help GM keep their current level of union employement. The economists that I follow believe that a quickly executed bankruptcy could help them keep their doors open rather than putting GM out of business.

If GM Fails
Tens of thousands of employees could lose employment, 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 wages 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.

Bankruptcy for GM, Should it Happen?
A bankruptcy could help lower 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 you and me. 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 this company files for bankruptcy, it could affect hundreds of thousands of people, both inside of GM and employees of suppliers. However, if the government continues to prop up the ailing company with bailout money or loans, it may simply hinder 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 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 extreme changes to their business model. Fortunately, the government and the Obama 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 pull a rabbit out of its financial planning hat.

Nicholas Swezey is the creator of the day trading game at http://www.HowTheMarketWorks.com. Source: http://EzineArticles.com/?expert=Nicholas_Swezey.