GM CEO Mary Barra spoke at a conference for GM investors last fall. Barra and her team are facing an effort by activist investors to force an $8 billion share buyback. Source: General Motors Co.

Will a quick-profit scheme by a group of hedge funds end up costing General Motors (NYSE:GM) $8 billion? It could end up costing more than that. The hedge funds' effort to force GM to spend $8 billion of its $25.2 billion cash reserve on a share buyback could hurt GM's hard-won investment-grade credit rating, according to a Wall Street Journal report. That could drive GM's financing costs up by hundreds of millions of dollars a year, making this an even more expensive boondoggle than it appears. 

Will CEO Mary Barra and GM's board of directors let this happen?

Behind this cash grab, an architect of GM's bailout
More details have begun to emerge since Tuesday's surprise announcement that Harry J. Wilson, representing four hedge funds which together own 2.1% of GM, would try to get himself elected to GM's board with the aim of forcing an $8 billion share buyback within a year. 

(Interesting side note: As a former U.S. government official, Wilson was an architect of GM's $49.5 billion government bailout in 2009. That's where much of GM's current cash hoard came from. Now he's trying to get GM to spend it on a windfall for some hedge funds, which have promised him a cut of the profits. Nice business if you can get it, I guess.)

Wilson's backers are trying to win the support of other GM shareholders. One of those backers, Appaloosa Management, released a statement summing up its complaints with GM's management team: 

"We have in the recent past discussed a number of critical issues with GM's management team, including the need for greater discipline and efficiency in allocating the shareholders' capital. In addition, we highlighted the lack of transparency in GM's executive compensation program and questioned whether it properly incents effective capital deployment. Finally, we pointed out the need for greater shareholder-oriented representation on its board of directors."

But Appaloosa's statement makes clear that its real complaint is what it calls "an excess accumulation of unproductive cash."

Or as observers sensitive to GM's recent history might call it, a must-have rainy-day fund.

GM has good reasons to hold a lot of cash
That's the real issue. GM has a huge cash hoard because CEO Mary Barra and her team want to make sure that the company can continue its aggressive (and necessary) investments in future products even if the economy heads south.

But some impatient tough-guy fund managers think that GM should blow a chunk of that cash hoard on a huge stock buyback, which would presumably create a big (and maybe temporary) rally in GM's share price into which they could dump their holdings.

GM has signaled that they're wiling to meet these guys partway. Barra and CFO Chuck Stevens said last week that they would ask GM's board to approve a dividend boost in the second quarter, and Stevens said he was open to other efforts to return cash to shareholders down the road.

But -- critically -- Stevens wants to wait on those until he has a better idea of what last year's recall disaster is going to end up costing the company. GM has already allocated funds to pay for the recalls, but there's litigation ongoing, and the possibility of criminal charges. GM could end up paying a billion dollars (or, potentially, several billion) to settle these messes.

That's way more important than a share buyback, and Stevens is absolutely right to be cautious.

So how is GM going to respond to Wilson and this hedge-fund gang?

Is Mary Barra gearing up to fight this effort?
It isn't clear yet. But it sounds like GM is starting to circle its wagons. Reuters' Ben Klayman and Soyoung Kim reported on Thursday that GM had turned to Wall Street for advice -- specifically, to two big investment banks, Goldman Sachs and Morgan Stanley. Both banks have long had close ties to GM; GM President Dan Ammann, a key architect of GM's conservative cash strategy, is a former Morgan Stanley analyst.

I'm a GM shareholder, and while I like the idea of a fat share buyback in the abstract, I think it's way premature to talk about it while GM's massive global restructuring is still unfolding. 

Right now, I think it's much more important for GM to hang onto its cash reserves and continue to spend on the things that will enhance the real value of the company: New products, restructuring and expansion overseas, the buildout of GM Financial, and so forth.

GM has a history of wishy-washy responses to activist shareholder efforts. A lot has changed about GM in the last few years, nearly all of it for good; I hope to see a vigorous response here.