GM Bailout
General Motors was the biggest company in the auto industry for most part of the twentieth century. The company was not only a leader in innovations, but it also helped in defining the new breed of bureaucratic, massive multinational corporations that shaped the post-war economy. GM was the largest car maker from 1931 to 2008 before Toyota surpassed it. But things are different now, in the fall of 2008, despite its efforts to cutback of operation cost; GM succumbed to bankruptcy forcing it to turn to federal government for financial assistance in order to stay afloat (Woodhill, 2012). The company received $9 billion in federal aid under the administration of George W. Bush. In March 2009, President Obama removed GM’s chief executive, Rick Wagon from office, rejected a reconstruction plan proposed by the company and coerced it into bankruptcy court following massive write-downs by its creditors. The bankruptcy process came to an end on July 2009 after GM sold its assets to a new company owned by government.
The stakeholders in the decision to bailout GM include the tax payers, the government, GM, shareholders, employees, customers, suppliers, and competitors. In the bailout process, the government settled on using tax payer’s money to salvage the company that was in the verge of collapsing. The motive behind the bailout dates back to 1953 when Charles E. Wilson, president of GM informed the Senate Committee, “What is good for the country is good for General Motors, and what’s good for General Motors is good for the country.” During that time, GM’s US market share stood at 51%, meaning that GM’s interest were unavoidably aligned with those of the nation as a whole (Barone, 2012). This is what influenced Obama’s decision to bailout the company from bankruptcy in order to protect national interest. Presently, the federal government owns 500,000 shares of GM which constitute about 26% of the firm. But auto industry analysts think that the company is on the brink of another bailout owing its dwindling financial health. The federal government requires about $53.00 per share for the total shares held to break even on the bailout, but the stock closed at only 20.13% on August 7 (Isidore, 2012). In addition to this, the government has realized a loss of $16.4 billion.
The decision to bailout GM has consequences and implications on each of the stakeholders. On the negative side, bailout can result into moral hazard as large private companies may take uncalculated risks hoping that the government will support them when they fail. On the other hand, saving private companies reduces unemployment thereby allowing the government to save on unemployment benefits. For the taxpayers, bailout results into probable cut on government spending on other projects such as welfare or infrastructure. On the other hand, a stable company provides a stable growing employment opportunities and a stronger economic community. For the company, a bailout enables it to strengthen its operations and avoid bankruptcy. Even though bailout on its own damages a company’s reputation, bankruptcy could severely damage the reputation of the company among consumers. Bail out process has a positive impact on employees since only a few lose their jobs. Continued business operations will also ensure that suppliers get constant business (Muller, 2012). However, competitors would not be happy with bailout of another company since it may gain market share.
References:
Barone, M. (2012, August 8). From Bad to Worse: Obama’s GM Bailout. National Review Online. Retrieved from http://www.nationalreview.com/articles/314694/bad-worse-obama-s-gm-bailout-michael-barone.
Isidore, C. (2012, September 6). 3 Answers to the auto bailout debate. CNN Money. Retrieved from http://money.cnn.com/2012/09/06/autos/auto-bailout/?source=cnn_bin
Muller, J. (2012). Leadership, Not Another Bailout, Will Fix GM (And No, It Is Not Going Bankrupt). Forbes.Com, 22.
Woodhill, L. (2012, August 8).General Motors Is Headed For Bankruptcy – Again. Forbes. Retrieved from http://www.forbes.com/sites/louiswoodhill/2012/08/15/general-motors-is-headed-for-bankruptcy-again/
