GM Bankruptcy, Highly Probable?

March 23rd, 2009 by Reed Allmand

According to an article in the Star-Telegram, bondholders of General Motors Corp. sent a letter to the U.S. government warning that if the administration does not accept the company’s restructuring plan, GM will likely go bankrupt.

The article quoted a portion of the letter:

“The result of such a failed exchange would likely be a bankruptcy that would have dire consequences for the company, the tens of thousands of hard-working Americans that GM employs and the economy as a whole.”

GM is rapidly nearing the March 31st deadline for reaching an agreement with both unions and creditors. If the automaker hopes to meet the terms of the $13.4 billion bailout plan, the nearly bankrupt company must reduce its $28 billion unsecured debt by two-thirds. But under the current economic conditions, with so many creditors under stress, is that really possible? GM wants to offer bondholders equity in the company in exchange for reducing their debt but bondholders are hesitant about the deal because it would significantly reduce the value of their bonds. And most likely they are also concerned about the future of the company and expect that a GM bankruptcy is imminent–with or without a bailout.

Big corporations and banks have often threatened catastrophic effects on the economy if they’re allowed to fail; but GM is most likely not bluffing. GM is an old company which has thousands of American workers who depend on it for their income. But not just that, many businesses are tied to GM in critical ways and would be forced to shut their doors if GM went bankrupt. For those who are tied to GM, either through jobs or other businesses, it is probably wise to begin making alternate plans about how they are going to earn a living before it’s too late.