BP

Can GM afford compensating victims for its malfunctioning cars?

April 4, 2014: 7:49 AM ET

Now that GM has retained lawyer Kenneth Feinberg, observers are speculating that the car maker will create a fund to compensate victims.

General Motors FORTUNE -- General Motors CEO Mary Barra wants us to think she means business. In hearings before Congress this week, Barra has stressed that she's doing everything in her power to understand how the company could have built faulty ignition switches linked to 13 deaths and why it took the company nearly 10 years to reveal and rectify the company's mistakes.

The public will likely demand more than just discovering why these things happened -- it will also request restitution and amends. Which is likely why the company has retained Kenneth Feinberg, the lawyer responsible for administering the September 11th victims fund and the BP Gulf Oil spill compensation fund. According to GM (GM), Feinberg has been hired to, "explore and evaluate options in its response to families of accident victims whose vehicles are being recalled for possible ignition switch defects."

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Of course, what other response could GM possibly be exploring beyond monetary compensation?

The company isn't actually legally responsible to compensate victims because the accidents in question happened before GM's 2009 bankruptcy. The bankruptcy process alleviated GM of any liability for accidents that happened before 2009. Such defenses, of course, aren't going to fly in the court of public opinion. But how will GM decide how much to compensate victims, and can the company actually afford to be generous? GM has been a troubled company for decades -- its U.S. market share collapsed from 63% to 20% between 1980 and the time of its bankruptcy.

What's more, the automaker's main U.S. competitor Ford (F) has been thriving, gaining more market share in 2013 than any major automaker. So does GM have the wherewithal to spend big on its recall and a victims fund? According to Morningstar Analyst David Whitson, absolutely. He wrote in a note to clients this week that he would not change his estimate of GM's value, even in the face of a recall and regulatory settlements that could cost billions of dollars. Writes Whitson:

It is important to remember that even payouts by GM of several billion dollars would not drastically lower our fair value estimate. For example, a $5 billion settlement spread out across 1.85 billion diluted shares would only be a $3 reduction to our valuation. GM also has cash and availability on credit lines totaling $38.3 billion as of Dec. 31 and its 10-K states that 84% of this liquidity is in North America and at regional treasury centers.

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According to Whitson, GM is a company on the rise, and one that has finally shed the labor costs that bogged it down for years. Even a total cost of $5 billion would only reduce the company's stock price by a few dollars. And given the outrage that this incident has fomented amongst the public, GM would probably be wise not be cheap when it comes to dealing with the victims of its negligence. The automaker might not be legally liable for its actions before 2009, but the public expects justice. And justice doesn't just mean paying money to the family members of the dead, but GM itself facing some sort of consequence beyond its stock price falling a few points. Five billion dollars might sound like a lot of money, but it's likely that GM can afford it.

Correction: An earlier version misstated that of all the bailouts the U.S. government conducted during the 2008 financial crisis, GM is the only one in which it didn't recoup its principal investment. 

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