by Lucas Marques Lusvarghi

Created on: July 18, 2009   Last Updated: July 23, 2009

After 84 years that joined the Dow Jones Industrial Average, General Motors (GM) went to bankruptcy. A brief analysis of its history could show both why it happened and the market trends opened with these new precedents.

It's believable that GM's culture became conservative and used to change only in times of crisis. In the 1970s, GM tried to change its production process when Japanese cars, smaller, but more efficient, got the cars market during the oil crisis. This attempt surely was made with little planning and high costs as a reaction to the crisis.

It may explain why the company's health care and pension costs bubble had grown up that much. In 1962, for each 100 people who worked at GM, the company supported 9 pension plans and 320 health care plans. In 2005, these numbers reached the mark of 290 pension plans and 760 health care plans for each group of 100 workers. Now, in a time of crisis, GM is just firing about 20.000 employees.

In 2004, the last GM's profitable year, the efforts to maintain the American customers not only caused profits reduction, but also many losses. Now, the survival of the company depended on US government's bail-out plan.

On 1 June, GM entered in bankruptcy proceedings arguing that otherwise it would have to liquidate. This month, the Judge Robert Gerbert, even with the opposition of some groups, approved a bankruptcy plan for GM. Just briefing the plan, the company would be shared in the following way: 60% for the US government, 12% for the Canada's government, 17,5% for the United Auto Workers union, and bondholders would own 10%.

Despite the law, the decision was based on what was economically better for all the groups involved, considering that If GM liquidates it wouldn't leave anything for anyone. In that way, by almost buying the company, the US government takes to lower rates the bad consequences of shows to bondholders that, in despite of the risk, they may keep trust in productive market.

Nevertheless, the facts shows the trend is that bondholders act in order to decrease the risk of losses by making harder to loan money or increasing the interest rates. It can be done by analyzing the company's history, financial health and other warranties.

Otherwise, respectable business credit enterprises already make these analyses and use to input the possible losses in their interest rates for all debtors. This way, even if some of their debtors don't pay, the other will grant that the creditor won't lose money at all.

At least, the GM's stockholders are the ones who lost more. Of these ones, it is expected that they assume a position more conservative than they nowadays used in the matter of investments, making it more difficult for unionized companions, like GM, to get investments, and, because of that, more difficult to get credit, since the amount of credit which an enterprise may get is based on its capacity of giving warranties of payment.

This way it's possible to predict a low rate growth, especially for the unionized companies, which depends on these investments and credits, caused by a careful , but more healthy, market.

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