Feds Probe GM Bankruptcy - Analyst Blog

General Motors Company GM received another blow with the federal authorities now investigating whether the pre-bankruptcy General Motors committed bankruptcy fraud by not revealing the ignition switch defect that recently led to the recall of 1.6 million vehicles, according to The New York Times. They are investigating whether the company was aware of the problem during the bankruptcy filing in 2009 but failed to notify the authorities to prevent liability claims.

Although the new General Motors, formed after bankruptcy, is not responsible for the liabilities of the old General Motors, pressure is mounting on the company to compensate the victims. The company is also facing a lawsuit claiming that the new GM should be held liable for the old GM's actions as it was also responsible for hiding the ignition switch flaw. The National Highway Traffic Safety Administration (NHTSA) is also facing an internal audit by the U.S. Transportation Department for not investigating the matter earlier despite being aware of so many incidents of failure in airbag deployment.

The chronology of events filed by General Motors with the NHTSA indicates that the faulty ignition switches were identified way back in 2001 during the pre-production test of the Saturn Ion vehicles. However, the company assumed that a change in design had resolved the problem.

Saturn Ions, along with many other GM vehicles, were found to have faulty ignition switches which may lead to abrupt engine shutdown, leading to near-fatal crashes. It was found that a heavy key ring or uneven roads could cause the ignition switch to shift from the run position, thereby turning off the engine and preventing deployment of front air bags in the event of a crash.

On Feb 13, the automaker announced the recall of 778,562 Chevrolet Cobalt and Pontiac G5 compact cars of model years 2005–2007 in North America to fix faulty ignition switches. Later, on Feb 25, General Motors announced a recall of 2003–2007 Saturn Ions, 2006–2007 Chevrolet HHRs and 2006–2007 Pontiac Solstice and Saturn Sky models adding up to 842,000, for the same problem.

General Motors is facing multiple investigations for the delay. Two congressional committees and the Justice Department will examine the reason behind the delayed recall. Additionally, the NHTSA has started an investigation into the matter. Moreover, General Motors has hired a team to probe into the ignition switch recall.

General Motors currently holds a Zacks Rank #5 (Strong Sell). Some better-ranked automobile stocks worth considering are Tata Motors Limited TTM, Daimler AG (DDAIF) and Tesla Motors, Inc. TSLA. TTM and DDAIF sport a Zacks Rank #1 (Strong Buy) while TSLA carries a Zacks Rank #2 (Buy).