Buying In to Bankruptcy

Written by Audrie Zettick on November 20, 2008

Heritage Foundation’s Morning Bell today shone a light on the need for GM to be financially responsible to stakeholders by making plans for bankruptcy (even if only included in a back-up plan).  Drawing on a WSJ article, they noted that Americans are accustomed to buying from bankrupt organizations. 


Some in the mainstream media (MSM) as well a few (conservative?) pundits have tried to make the point that the bailout is preferable to bankruptcy.  Primarily, their argument is twofold: 1) consumers would cease to buy vehicles from the Big 3 and 2) GM would find it difficult to get funding after bankruptcy. 


I don’t buy these arguments.   On the first point, why would consumers stop buying from GM?  We fly airlines which are in bankruptcy proceedings and don’t seem to be concerned that the jets will fall from the sky.  I take my car to the local garage (not always the dealership) and, if Ford disappeared, I have confidence I could continue to get it repaired (it’s run great so far, in spite of 126,000 miles of wear).  With so many vehicles already on the road, demand for parts would continue, although admittedly there would be some shake up in the supply chain with the Big 3 cutting back on production (but isn’t overproduction one of the issues anyway–see my post on this).


Rick Newman at US News and World Report observes the many ways that GM could benefit from bankruptcy, not the least of which is the opportunity for real reform.  Reform would include the need to condense their divisions, which contain a great deal of overlap between the models in the various lines (but union contract renegotiation comes to mind too).  I’ve frankly never quite understood (aside from some production savings) why the Big 3 historically had cars that were virtual images of each other in different lines (look, there’s Ford Taurus, no, wait, it’s a Mercury Sable).  


Not everyone is concerned with GM’s ability to get financing post-bankruptcy.  Newman, among others, notes that

A bankruptcy filing doesn’t mean GM would go out of business. Some bankrupt companies do, but many write off debt, shed costs, dissolve unprofitable divisions, and emerge as healthier companies.


You can’t tell me that there isn’t value in their brand, the number of past customers and the future plans for new vehicles (see Newman’s Ten Cars That Could Salvage Detroit ).  Yes, GM would take a hit, but some saavy investors would step in with funds.  Let the free market reign. 

Posted in: Auto bailout, economy, GM

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