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The costs of financial distress

The car crisis has been confusing to me for a few reasons, but one of the main ones is the central justification for the bailout: to avoid bankruptcy. The argument has been that bankruptcy leads to no one buying cars (not they are anyway) because no one will buy from a bankrupt company which will lead to a complete collapse of the auto industry ecosystem (as if it hasn’t already collapsed).

Technically, the cost of financial distress is the cost to the big three of lost sales, lost credit, supplier difficulty, etc. that comes as a result of bankruptcy. The problem I see is that the costs of financial distress are here. What consumer is going to buy a Chevy from a nearly bankrupt GM but not the technically bankrupt GM? What supplier hasn’t already begun to insulate itself from the Big 3, cut off credit, imposed strict payment terms, etc? The costs of financial distress are here, and in fact the structured bankruptcy might be a great way to provide some reassurance to customers and suppliers that the companies will survive in some form or another to continue working a year from now. Without bankruptcy it’s hard to see that guarantee when the government debates bailing out the companies for a month or two at a time using the same exact failed model of operations.

I hope someone will call out business leaders and politicians on this one. It’s not like the financial problems of the auto companies are a big secret to consumers and suppliers. Why wouldn’t bankruptcy provide some element of certainty and in fact lower the cost of non-technical financial distress currently being experienced in the sector?

{ 1 } Comments

  1. Muhammad | December 20, 2015 at 3:12 pm | Permalink

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