Bankrupcy ok gm
JoShua Rauh and LuiGi ZinGaLES
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ot long ago, Alitalia was one of the largest airline companies in the world. Today it is a shadow of its former self, having burned massive amounts of taxpayer money before finally entering bankruptcy with few assets remaining. The principal culprit of this debacle was the Italian government. Trying to avoid the political pain a bankruptcy would have caused, the government continued providing subsidized financing to the money-losing airline, delaying the necessary restructuring. Not only was it a gigantic waste of taxpayers’ money, but it was a death sentence for the very company it wanted to save. Postponing the day of reckoning weakened Alitalia’s competitive
Joshua Rauh and Luigi Zingales are professors at the University of Chicago Booth School of Business.
© The Berkeley Electronic Press
position, making it lose market share it will never regain as a reorganized company. General Motors is quickly going down the same path. It desperately needs a restructuring. According to its latest earnings report, GM’s operations burned $19.2 billion of cash during 2008. The company still has a total labor cost that is substantially higher than U.S.-based Toyota and Honda plants, and it produces cars nobody wants even at prices that generate large economic losses. It is saddled with massive pension and healthcare obligations and is essentially insolvent: GM’s total liabilities are more than 50% greater than the book value of its assets, according to GM’s latest filing with the SEC. At the rate GM is losing money, the $17 billion in short-term loans from the U.S. government received in December, which were shared between GM and Chrysler, has not gotten GM --
much further. GM is now back at the trough, telling the federal government that it needs to increase its loan request to $30 billion. Little of this distress results from the current financial and economic crisis. The current crisis is simply