GM Recall: General Motors Stock Still at Risk

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Strong fundamentals have helped General Motors (GM) stock hold steady in recent weeks amid the GM recall crisis involving faulty ignition switches tied to at least 13 deaths and more than 30 crashes over the past decade. But as Congress demands answers and accountability from GM over why it took so long to issue a recall, a darker question is emerging:

gm-stock-gm-recallDid a cash-strapped General Motors deliberately cover up the defect — and could GM’s inaction rise to the level of criminal behavior?

That’s why both Congressional subcommittees that grilled GM CEO Mary Barra this week want to know what top GM executives knew about the ignition switch defect — and the decision to assign the same number to a redesigned part — and when they knew it.

General Motors Pounded in Hearings Over GM Recall

In Wednesday’s Senate subcommittee hearing over the GM recall, Sen. Claire McCaskill, D-Mo., fired a shot across General Motors’ bow, alleging the company’s “culture of cover-up” led a GM engineer to lie in a deposition for a lawsuit against the company last year.

That engineer, Ray DiGorgio, said in the deposition he never approved changes to the ignition switch; in fact, GM documents prove DiGorgio personally signed off on the changes in 2006. GM did not make DiGorgio, who still works for the company, available for comment.

On Tuesday, House Subcommittee Chair Tim Murphy, R-Pa., asked Barra an even more pointed question:

“Did GM purposely, willfully negotiate during the bankruptcy issues, or in the process of obtaining the loans did they purposely withhold any information, that they may have known about pending lawsuits or things that would emerge in the future about the Cobalt or other cars?”

Barra’s stunning answer: “I personally did not withhold any information … I am not aware of [that], but I can’t speak to every single person.”

Congress and federal regulators almost certainly will reach out to more GM executives, and this line of questioning should chill the blood of GM stock holders. Should any proof emerge that General Motors deliberately failed to disclose such a serious defect, that would pose a huge problem for the automaker.

Where Things Went Awry

Faulty parts and vehicle recalls are fairly common, but what sets this case apart is the highly unusual way GM chose to deal with the problem.

As early as 2001, GM was aware of a defect in an ignition switch produced by parts manufacturer Delphi (DLPH) for the Saturn Ion that could suddenly cause the small car to stall, which also disabled airbags; the new Chevy Cobalt experienced the same problem in 2004.

In 2005, GM rejected a 57-cent-per-car plan to fix the problem, citing cost issues and the lack of an acceptable business case. (Reuters obtained a separate document that indicated the cost would be “an extra 90 cents per unit and additional tooling costs of $400,000.”) At the time, GM was losing billions of dollars on labor costs and the impact of high gas prices on SUV sales.

But that’s where it gets interesting: GM did redesign the faulty ignition switch in 2006 — but kept the same part number for both the original and the redesigned part. According to a senior engineering expert I spoke with, if there is any change to a part’s “form, fit and function” — a manufacturing term that encompasses the physical, functional and performance characteristics — that part must be assigned a different number that identifies it as a revision. GM clearly did not follow that standard engineering practice with the redesigned part.

Barra admitted to the Senate panel on Wednesday that failing to assign a new serial number to the part — an action that would have made it very difficult to track failures — was “completely unacceptable.”

“I think it goes beyond unacceptable,” Sen. Kelly Ayotte, R-N.H., responded, “I believe this is criminal.”

That’s why timing and politics ultimately may prove most troubling for GM.

The decision not to issue a recall — and to give the redesigned switch the same part number — came in mid-2007, while GM was fighting for survival and federal regulators were eying at least two high-profile crash fatalities linked to the faulty switch. Little more than a year later, the federal government bailed out GM, and six months after that, the automaker filed for bankruptcy protection.

In Tuesday’s House subcommittee hearing, Rep. Morgan Griffith, R-Va., pointed out to Barra that it might have been easier for GM to list any additional liabilities from the faulty ignition switch during the company’ 2009 bankruptcy. He then added: “Would those liability issues have negatively impacted the prospects of either a bailout by the federal government or prior to the bailout, the people who were lending you money to keep GM afloat with its heavy liabilities already existing?”

Since disclosure of those additional liabilities could have dissuaded private investors and the federal government giving cash to GM at that time, General Motors arguably had a strong motive to delay the recall and keep the defect under wraps.

And while there is no hard data as of yet to support that argument, any such link would be catastrophic for GM.

Bottom Line

“It’s almost always the cover-up rather than the event that causes trouble,” Howard Baker, the Republican vice chairman of the Senate Watergate Committee once said.

And while it’s too early to determine whether the GM recall fiasco is a series of poor (and inexplicably stupid) management decisions or something more sinister, Barra and GM are walking through a minefield right now.

Apologies will not be enough dig GM out of this ditch – at a minimum, compensation and hefty fines are in the cards. The GM recall debacle also will damage the company’s brand at least in the near term.

At best, GM’s roadmap through the mire will look like Toyota (TM), which in 2010 recalled 7.1 million vehicles in 19 separate campaigns. Problems with unintended acceleration — and a recall delay — resulted in lawsuits, and hefty government fines.

When it comes to the impact of the GM recalls on investors, fasten your seatbelts: There’s a rough road ahead.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/04/gm-recall-stock/.

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