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Comments on: Obama supports bankruptcy of GM http://www.tvhe.co.nz/2009/04/02/obama-supports-bankruptcy-of-gm/ The Visible Hand in Economics Wed, 01 Apr 2009 20:55:21 +0000 hourly 1 https://wordpress.org/?v=6.9.4 By: Matt Nolan http://www.tvhe.co.nz/2009/04/02/obama-supports-bankruptcy-of-gm/#comment-18650 Wed, 01 Apr 2009 20:55:21 +0000 http://www.tvhe.co.nz/?p=3482#comment-18650 @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 😉

]]> By: Nigel Kearney http://www.tvhe.co.nz/2009/04/02/obama-supports-bankruptcy-of-gm/#comment-18649 Wed, 01 Apr 2009 20:51:43 +0000 http://www.tvhe.co.nz/?p=3482#comment-18649 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.

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