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General Motors Bankruptcy

Review the General Motors bankruptcy that occurred during 2009. What type of bankruptcy was it (what Chapter) and what kinds of decisions went into the bankruptcy declaration? How did the creditors of GM and workers and related businesses at GM fare in the bankruptcy process? What do you think were the positives and negatives of this bankruptcy? Use examples of other business bankruptcies for comparison. Additionally, discuss whether you believe that there is a "moral hazard" in allowing companies that make bad business decisions to survive through a bankruptcy?

Solution Preview

According to Business Week in 2005, the Chief Executive of GM G. Richard Wagoner Jr. decided to publish an internal memo to all employees seeking quash rumours and put the minds of employees at ease by indicated that bankruptcy was not a viable option because it was not in the interest of customers, employees, investors, and by large stakeholders. Wagoner Jr. further stated that GM had enough cash and assets which could be readily liquidated to keep the company afloat.

Type of Bankruptcy Filed and Declaration Decision for Bankruptcy

Four years later according to Court documents filed by GM on June 1, 2009 a voluntary petition for relief under Chapter 11 of the Bankruptcy Code was proposed pursuant to section 1121(a) of title 11 of the United States Code (http://www.motorsliquidationdocket.com/pdflib/MLC_Amended_Chapter_11_Plan.pdf).
On July 5, 2009, an order was entered approving the sale of all of the Initial Debtors' assets to General Motors Company, a new and independent company under section 363 of the Bankruptcy Code (http://www.motorsliquidationdocket.com/index.php3). According to a report by MSNBC news GM had $172.81 billion in debt and $82.29 billion in assets, as a result, Sanger, Seleny and Vlasic, (2009) posited that as one of the biggest automotive companies in America, GM was hard pressed into bankruptcy protection with the belief that GM could be saved. This bankruptcy was seen as a historic moment in to automotive industry which was once the nerve centre of the American financial system. As with all cases of bankruptcy GM's future was filled with downsizing and great financial loss for stakeholders.

Effects of GM's Bankruptcy on Stakeholders

Customers

The greatest issues faced by GM was that sales and the cost of stock would ...

Solution Summary

"After years of losses, the troubled automaker is forced into bankruptcy. GM is set to close a dozen facilities and cut more than 20,000 jobs" (Isidore, 2009, para. 1). After the Second World War, General Motors (GM) conquered the American automotive market capturing 50.7% of its market niche in 1962 (Holstein, 2009). Whether GM was late introducing a new feature or design was irrelevant, Bob Lutz (cited in Holstein, 2009) was quoted as saying "we had such enormous power that we could always steamroller everybody else." In 2009 GM's stock dropped below that of the minimum price required to trade in the New York stock market and closed at its lowest in 76 years at 37 cents (Sandler, Green & Ramsey, 2009). GM therefore was obligated to file for bankruptcy protection.

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