Obama supports bankruptcy of GM

To a degree I support this.

Then again – there is an argument to keep them afloat.

If they are subject to a binding credit constraint, and they would be profitable in the medium term, a loan to GM (at market interest rates) could be good for everyone – especially if they are unable to efficiently sell parts of their captial (eg the learning by doing associated with their workers).

Then again what am I saying – GM won’t be profitable in the medium term. Let them eat cake!

Update:  Then again it depends how they do it – this doesn’t sound very good.

  • Bankruptcy doesn’t mean they cease trading. The legal company can be wound up while the business continues. The principal benefit of bankruptcy is that a viable business is not destroyed or tied up in lawsuits when it cannot honour its obligations.

    I would suggest a solution where creditors accept a write-down of a proportion of the amount they are owed, and get a proportional number of shares in a new company. The write-down would be sufficient to return the business to viability. Existing GM shareholders get nothing so would never agree to this voluntarily.

  • @Nigel Kearney

    Indeed. However, if a business isn’t viable over the next 1-2 years, but would be in 5 years there is still the potential for specific capital investment to be wasted – hence why the idea of a strong credit constraint is so important for this.

    If there is specific capital, that can’t be brought by anyone not suffering from a credit constraint then letting GM fail might be a mistake – however, I don’t think that these extremely strict conditions really hold in this case 😉