One of the arguments in favor of spending $50 billion bailing out GM is that if the company reorganizes under Chapter 11 of the U.S. bankruptcy code (as suggested by this earlier posting), consumers won’t want to buy their cars due to uncertainty about the value of the warranty. Instead of throwing cash at the company, why not offer to back up the warranty with a federal guarantee for every car sold during GM’s Chapter 11 reorganization? New cars are extremely reliable and the true cost of the warranty is probably close to $500 (source). GM is currently delivering 170,000 cars per month. If GM imploded and nobody purchased any of its brands or the purchasers would not honor the old warranties, the Feds would be on the hook for something like $85 million for every month that GM was being reorganized. If the Chapter 11 reorganization lasted for 9 months, we’re talking about less than $1 billion of exposure or 1/50th of the cost of what Congress is currently contemplating.
3 thoughts on “Should the Federal Government guarantee GM car warranties?”
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You may be correct in assessing the potential risk over a period of nine months, however beyond that, I can imagine a room full of GM execs asking the question “Where can we cut costs in quality assurance and vendor/part selection now that the government is picking up the warranty expense?”
Chad: The government doesn’t pay the warranty expenses unless GM is liquidated. Until then GM accrues warranty obligations on its balance sheet and pays warranty claims from dealers on a current basis. If the company were to continue operating or any of its divisions were to continue operating under new ownership, the government would not incur any costs.
Thanks for the additional information. While I am squarely in the “GM belongs in bankruptcy camp”, I do appreciate all efforts to protect the tax payer and future generations from the current fiscal insanity.