Should G.M. Be Allowed To Go Bankrupt.

There is a continuous debate as to whether General Motors should be allowed to go bankrupt or not.In fact the American public is being mentally prepared to accept the possibility of a 'structured bankruptcy' for G.M.,whatever that means.

Much has already been said about why G.M. finds itself in the present mess.So let us see what we stand to lose if G.M. is allowed to go bust.

Coming at a time when the entire economy is in a mess the impact of G.M. going bankrupt would be very large indeed.The immediate impact would be that sales would fall sharply as customers fret about everything from financing to warranties. Car rental companies who account for almost 15% of the vehicles sold by G.M. and have complex financing and buy back arrangements with it may be the first ones to rethink their relationship with it. As it is G.M. accounts for more than 1% of American G.D.P. Add to it the contribution of various industries dependent on the auto sector from glass and rubber to consumer electronics and the figure would be larger.Big auto parts makers rely on G.M. for a large chunk of their business. While some of the bigger ones would survive, the smaller ones may certainly follow G.M. into bankruptcy.Its pensioners and workers would be adversely impacted as would be its investors.Its stockholders would definitely see their investment getting wiped out, while its bondholders may have to accept reduced repayments over a longer period of time. Its dealers are also likely to lose money and create further unemployment.It also has to be kept in mind that the automotive sector is one of the biggest investors in R&D in America.G.M. set up the world's first automotive research center in Warren,Michigan and currently holds over 500 patents!It is the world leader in certain technologies,never mind that Toyota is able to earn more per car that it sells than G.M.Reduced spending in this area will have far reaching consequences.

The federal government's approach to bailouts has been uneven to say the least. On the one hand you have the example of Lehman Brothers who got nothing, while on the other you have AIG who got everythingIn comparison to AIG the auto companies want very little. Let's hope better sense prevails and all this talk of G.M.'s bankruptcy is nothing but pressure tactics to extract concessions from the UAW union and its creditors.Bankruptcy for G.M. would be a wrong decision at the wrong time.

Will Changes in M to M Accounting End the Financial Crisis.

The mark to market accounting system,as an accounting device became popular in the 1980's. The system was supposedly a foolproof method for valuing various financial instruments.Large corporations and banks adopted these rules as they felt that they provided a more transparent method of determining profits.
Now these very rules are being blamed for precipitating much of the subprime mortgage crisis.It is argued that they have compelled financial institutions and banks to exaggerate their losses on hundreds of billions dollars worth of assets.These massive write downs have been blamed for forcing several giant companies to seek federal aid in order to avoid bankruptcy.It is argued that this wholesale reduction of lending capacity is the primary reason behind the current economic slowdown.
It is tempting to accept the above argument. Unfortunately it does not give the true picture. M to M rules are perhaps the most accurate method of valuation if the assets are liquid and are traded regularly. However if the assets are not very liquid,as most of the mortgage backed securities are,then distress sales are likely to cause wild fluctuations in their prices. The present problem arose when companies needed to put up extra cash and had to liquidate such securities in a hurry.In a market where liquidity had suddenly dried up price fell very sharply.Compounding the problem was the fact that many of these securities were novel instruments which did not enjoy a ready market even in normal times.Many banks that held them perhaps had no intention of selling them.
The FASB has approved changes that will allow auditors to use 'significant professional judgment' to value such illiquid securities.Although the change may prevent further write downs it remains to be seen whether it will allow the reverse or 'write ups' to happen. Till houses and cars start selling again and the overall economic scenario takes a turn for the better, it is unlikely that any accounting jugglery is going to help matters.