How Much More Will GM's Recall Crisis Cost Shareholders? Only Ken Feinberg Knows

Jun 5 2014, 1:48pm CDT | by

General Motors told investors today it is still tallying recall-related costs for the second quarter, but said its overall business plan is on track and the company will post modestly higher profits for 2014.

The business update came the same day GM CEO Mary Barra disclosed the “deeply troubling” findings of an internal investigation into GM’s botched handling of a faulty ignition switch blamed for the deaths of at least 13 people. In a town hall meeting beamed to all 220,000 employees worldwide, Barra said the report found a “pattern of incompetence and neglect” inside GM and said the company had failed its customers.

The full financial impact of the safety crisis, which has already cost GM $1.7 billion, is not yet known. GM said it will establish a compensation fund for those whose loved ones were killed or who suffered serious injuries as a result of crashes tied to the bad switch. But the size of that fund will depend on an independent analysis by compensation expert Kenneth Feinberg, who is vetting all claims and will decide who is eligible for compensation and how much they should be paid.

It’s not clear, though, whether GM gave Feinberg any parameters or limits on the size of the fund. “We want to capture every case where someone has lost their life or been seriously injured due to the switch failure,”  said Barra. The fund will not extend to claims from GM owners who claim their car’s resale value was hurt because of the crisis.

Feinberg, who oversaw claims for victims of 9/11, Hurricane Katrina and the BP oil disaster, is defining the criteria for eligibility and expects to be ready to start accepting claims on August 1.

GM Chief Financial Officer Chuck Stevens told analysts he hoped to have an estimate of GM’s financial exposure by the end of the second quarter, which ends July 31. “Over time, as the claims play out, we’ll have to make adjustments as appropriate,” he said.

GM already took a recall-related charge of $1.3 billion in the first quarter, and said it plans a $400 million charge in the second quarter. Barra said there could also be additional charges resulting from the company’s decision to redouble its safety reviews in the wake of the crisis, but that those costs, too, should be known by the end of the quarter.

There is still an ongoing investigation by the U.S. Department of Justice, which could level a hefty fine on the company. Earlier this year, the Justice Department reached a $1.2 billion settlement with Toyota Motor over its history of tardy recalls. Also unknown is the extent of GM’s potential liability in cases where plaintiffs choose not to accept Feinberg’s compensation offer.

Much to the relief of GM officials, perhaps, the crisis appears to have had “no meaningful impact” on GM sales in North America, where average transaction prices are up an average of $2,700 so far this year on the strength of its new pickup trucks and passenger cars like the Cadillac CTS.

GM said its South American profit will be weaker than expected in the second quarter, largely due to challenges in Venezuela, but its core overall business is improving there. Its European operations continue to improve thanks to a stronger economy and the success of new models so GM believes it is in on track to restore profits there by mid-decade. GM is targeting a European market share of 8 percent, and adjusted earnings before interest and taxes (EBIT-adjusted) of 5 percent by 2022.

 
 

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