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Law, Business and Society 11th Edition by Tony McAdams
Edition 11ISBN: 978-0078023866Law, Business and Society 11th Edition by Tony McAdams
Edition 11ISBN: 978-0078023866 Exercise 22
GM Bankruptcy/Bailout
General Motors, in 2009, was forced to enter Chapter 11 bankruptcy as part of a federal government-directed, prepackaged bailout of the failing firm. GM had gone from being one of the most prominent corporations in the world to a sprawling, dysfunctional failure. GM reported $82.29 billion in assets and $172.81 billion in debts. The federal government put $49.5 billion into the bailout and took a 60 percent equity stake in the new General Motors, although the company retained control of its day-to-day affairs. Achieving a remarkable comeback, General Motors is now consistently profitable, has been restored to the Standard Poor's 100 (after being kicked off), and is healthier than it has been in decades. In December 2013, the U.S. Treasury sold the government's remaining GM holdings. Taxpayer loss on the GM bailout totalled about $10 billion.
The rescue of GM, Chrysler, and their financing units saved an estimated 1 million jobs. According to a study by the Center for Automotive Research, had those jobs been lost, the cost to the government in reduced taxes and other negatives would have been nearly $29 billion. Thus, on balance, the Obama administration views the bailout as a significant financial and social welfare success. Critics argue, however, that the deal was a dangerous abandonment of market principles. Some of those arguments include:
• The bailout encouraged future risky behavior by conveying the message that the government will always be there as a backup.
• Private investors would have moved in to cut costs and restore a new, trimmer GM.
• The $50 billion of taxpayer money could have been better spent elsewhere or not spent at all.
Question
Was the federal government wise to bail out General Motors, or should GM have been left to face the force of the market and the decisions of the Chapter 11 bankruptcy judge
General Motors, in 2009, was forced to enter Chapter 11 bankruptcy as part of a federal government-directed, prepackaged bailout of the failing firm. GM had gone from being one of the most prominent corporations in the world to a sprawling, dysfunctional failure. GM reported $82.29 billion in assets and $172.81 billion in debts. The federal government put $49.5 billion into the bailout and took a 60 percent equity stake in the new General Motors, although the company retained control of its day-to-day affairs. Achieving a remarkable comeback, General Motors is now consistently profitable, has been restored to the Standard Poor's 100 (after being kicked off), and is healthier than it has been in decades. In December 2013, the U.S. Treasury sold the government's remaining GM holdings. Taxpayer loss on the GM bailout totalled about $10 billion.
The rescue of GM, Chrysler, and their financing units saved an estimated 1 million jobs. According to a study by the Center for Automotive Research, had those jobs been lost, the cost to the government in reduced taxes and other negatives would have been nearly $29 billion. Thus, on balance, the Obama administration views the bailout as a significant financial and social welfare success. Critics argue, however, that the deal was a dangerous abandonment of market principles. Some of those arguments include:
• The bailout encouraged future risky behavior by conveying the message that the government will always be there as a backup.
• Private investors would have moved in to cut costs and restore a new, trimmer GM.
• The $50 billion of taxpayer money could have been better spent elsewhere or not spent at all.
Question
Was the federal government wise to bail out General Motors, or should GM have been left to face the force of the market and the decisions of the Chapter 11 bankruptcy judge
Explanation
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Law, Business and Society 11th Edition by Tony McAdams
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