The pressure is mounting on General Motors (NYSE:GM) and its still-new CEO, Mary Barra, to do something significant to compensate victims of the defective ignition switches that are implicated in 13 deaths.
The catch: There's a provision in GM's 2009 bankruptcy agreement that shields the current General Motors from liability for accidents that occurred before that date. In theory, GM could be shielded from most of the consequences of the defective switches -- but will GM dare play that card? The public-relations consequences could be severe.
In this video, Fool contributor John Rosevear takes a closer look at the immunity provision in GM's bankruptcy deal -- and at how Mary Barra is likely to try to navigate this increasingly messy situation.
A transcript of the video follows.
John Rosevear: Hey, Fools, it's John Rosevear, senior auto analyst for fool.com. I want to quickly explain something that has come up kind of as a backdrop in this whole GM recall mess. One of the issues is that GM theoretically has legal immunity from liability for any accidents that occurred before July 10, 2009. That was part of GM's bankruptcy agreement; it was written into the deal that released the new General Motors from bankruptcy protection, and clearly the thinking was to give this new company, this overhauled company, a fresh start.
But now that's becoming an issue. On the one hand, GM, the new GM, today's GM, is theoretically entitled to try to hide behind that provision when they get sued by people who had accidents in the cars with the defective ignition switches. All of the affected cars were made before then, and most of the accidents that are part of this discussion happened before then; there have been a few that happened later. But you can imagine how that's going to go over if GM tries to hide behind this thing.
Some of the lawyers looking to sue GM are talking about allegations of bankruptcy fraud, and this actually came up during the hearings this past week. GM CEO Mary Barra had some tough grilling before a U.S. House of Representatives panel on Tuesday, and an even tougher time before a Senate panel on Wednesday. Some of the senators were asking about this -- did GM conceal this potential liability at the time of the company's bankruptcy? And, of course, this has the potential to bring us right back to the dispute over GM's $49.5 billion bailout, and the high-speed bankruptcy proceeding that was arranged for GM by the Obama adminstration, and just as GM thought it had finally put that whole discussion behind them, the whole can of worms could pop right back open again.
So this is one of many places where Mary Barra has a hard choice. The company could waive that liability limit, which could expose them to billions of dollars in damage awards, or they could try to stick with it, which risks doing immense damage to GM in other ways. I suspect that what Barra is going to try to do is to put together a fund to compensate victims of accidents before the date of the liability limit -- in other words, to try to take care of those people in a way that doesn't leave GM with completely unlimited exposure.
A week ago I would have said that was a good idea, but I don't know if it's going to fly now. Barra took a real beating this week in front of the Senate. She didn't have the answers that the senators were looking for, and GM's position is that their investigation is still ongoing and so it's too early to give answers. But it gives people an opportunity to say that they're stonewalling, and that's just bad. Tough stuff, but this is a big issue, and it will be very interesting to see how Barra handles it. Thanks for watching.