Analysts Sees GM Creating $3B Fund for Ignition-Switch Claims

March 30, 2014 by Jeff Green

General Motors Co. will probably create a fund of as much as $3 billion to pay claims associated with an ignition-switch flaw the automaker said is linked to the deaths of 12 people, a Barclays analyst wrote last week.

GM shares may see a rebound if the largest U.S. automaker announces such a plan before Chief Executive Officer Mary Barra testifies at U.S. House and Senate hearings April 1 and April 2, Barclays’s analyst Brian Johnson said. GM will probably create the fund even though the automaker is shielded, under its July 2009 U.S.-backed bankruptcy reorganization, from liabilities of the old GM, which sold the cars.

“I don’t think they have a choice in terms of creating a fund,” said Davia Temin, head of the Temin & Co. crisis- management firm in New York. “I think Mary Barra has been doing everything right up until now, and the next right thing is to create this fund before someone orders it. You have to put your money where your mouth is.”

GM last month recalled 1.6 million Chevrolet Cobalts, Saturn Ions and other models for a defect the company now says it was aware of as early as 2001 and thought it had fixed. The National Highway Traffic Safety Administration is investigating. The U.S. Department of Justice also has launched a probe, people familiar with that action said earlier.

Barra has apologized for the slow response that resulted in deaths. GM has also hired an outside investigator to probe the delay and has created a position of vice president in charge of global vehicle safety, as Barra has sought to shore up GM’s image and reinforce the automaker’s message that it is recreating itself after its $50 billion taxpayer-funded bailout.

Falling Shares

GM shares have fallen 8.4 percent through last Thursday since March 7, the last trading date before March 10, when Johnson said investors started to get more concerned about the recall costs. GM has already said it will have expenses of $300 million related to recalls in the first quarter.

GM’s statement on the crashes suggests the automaker may eventually help more drivers than required under its bankruptcy reorganization.

“GM is focused on ensuring the safety and peace of mind of our customers involved in the recall,” GM has said. “It is true that new GM did not assume liability for claims arising from incidents or accidents occurring prior to July 2009. Our principle throughout this process has been to put the customer first, and that will continue to guide us.”

Asked if that could include compensating victims of pre- bankruptcy incidents, Greg Martin, a GM spokesman, declined to elaborate.

Compensation Urged

In a March 27 letter to Barra, U.S. Senator Richard Blumenthal, a Democrat from Connecticut, urged GM to establish a fund to compensate victims. Blumenthal is a member of the Senate Commerce Subcommittee on Consumer Protection, Product Safety and Insurance, which will hold a hearing April 2 on the GM recalls.

Clarence Ditlow, executive director of the Washington-based Center for Auto Safety, a consumer-advocacy group, and Joan Claybrook, a former NHTSA administrator, sent a letter to Barra earlier this month asking her to establish a $1 billion fund to cover losses for victims and their families for any claims that have been extinguished by the bankruptcy, even beyond the ignition complaints.

Toyota’s Road

Typically, automakers’ safety-recall announcements are followed swiftly by lawsuits, years of litigation and probes, and eventually settlements. Toyota Motor Corp., which recalled more than 10 million models globally in connection with unintended acceleration, settled lawsuits brought by car owners who claimed economic losses for about $1.6 billion. The Japanese automaker agreed this month to pay a $1.2 billion penalty to end a U.S. criminal probe.

GM presents a different case. By court order in GM’s 2009 bankruptcy deal, the new GM can’t be held responsible for any product-related liabilities, such as wrongful death, personal injury or property damage, except those arising on or after July 10 of that year, when the new entity was born.

Some plaintiffs’ lawyers have argued that post-bankruptcy GM would continue to bear responsibility if it wasn’t clear about the liabilities it could face on models that were later recalled. Challenging GM’s immunity, however, would require asking the judge who oversaw the historic bankruptcy to reconsider his ban on claims. Setting aside money to satisfy any pre-2009 claims, meanwhile, could risk angering current shareholders.

BP Fund

“Notwithstanding the lack of legal liability, we believe GM will craft a settlement to put the issue behind it,” Johnson, the Barclays’s analyst, wrote in his March 26 report.

BP Plc created a $20 billion fund to compensate victims of the 2010 oil-rig explosion and spill in the Gulf of Mexico.

Barra previewed her Congressional testimony in a March 18 interview with reporters at the automaker’s Detroit headquarters. When asked that day whether GM might set up a fund for victims, she declined to comment.

“My message will be that we are focused on the customer,” she said at the time. “We’re doing everything we can to support the customer to get their vehicles fixed.”

She added that the company will fix its habits.

“I’m very sorry for the loss of life that has occurred and we will take every step we can to assure this will never happen again,” she said.