Friday, April 24, 2009

Chrysler, GM- Will they go bankrupt?

These are some factors that strongly favor a bankruptcy outcome-
* Some bond holders/lenders may have bought CDS(Credit Default Swap) or bond insurance from some companies like AIG, etc. These lenders are totally protected even if these companies go bankrupt so they are less likely to get involved in pre-bankruptcy restructuring negotiations, making it a difficult job for US Government and company management. (Weird, right? US Government bailed-out AIG and others, so their CDS are still active for lenders and this can be an obstacle in negotiating with lenders of GM, Chrysler.)
*Sorry but other big problem for GM may be the unions and high labor costs (including retires' pensions and healthcare). I have no details to provide but this is the impression I have. Unless they are brought down, there are little chances for GM to emerge again as a competitive company. High labor cost is a drag on GM IMO.
* The bankruptcy court proceedings could also help the company cut the costs of closing some of its 3,200 Chrysler, Jeep and Dodge dealerships. Because some state franchise laws prevent automakers from forcing dealers to close, it can be expensive to buy them out. In bankruptcy, however, a judge could eliminate dealerships.

On a sidetrack, this recession may seem to be ending soon just because of the enormous fiscal and monetary stimulus by government. However every recession is supposed to make industries, economy stronger by curing some of its weaknesses.
Sorry got to go..

If you are interested, take a look at my another blog: Best Market Articles blog

1 comment:

Jayesh Patel said...

* GM debt holders could make billions off credit default swaps: The large number of credit default swaps written on General Motors debt is making it increasingly unlikely that GM's debt holders will support a restructuring for the troubled automaker. Owners of the debt stand to make billions of dollars on the swaps in the event of a default but would put those proceeds at risk by trading their debt for an equity stake in a restructured GM.
Financial Times (11 May.)