US 4th Quarter GM Stock Sale: Luckiest Trade in History? Estimate of GM’s 1st Quarter Losses Doubles to $1.7 billion…Nearly 7 Million Cars Recalled Since Stock Sale.

Wow! That means more than twice as many GM cars were recalled in the 1st quarter of 2014 (following the government’s GM stock sale in the 4^th quarter of 2013) than were sold in the US during all of last year. In fact, 1^st quarter losses almost equal all of the company’s 2013 profit of $1.9 billion.

Now, we’re asked to believe that no one in senior management at GM (or the government representative(s) at GM) knew about the problems leading to the recall (the major source of its losses) until shortly after the government’s sale of the last of its GM stock on December 9th 2013.

Call us skeptical.

Supposedly, General Motors delegates to two small groups of non-executives the absolute authority and responsibility for initiating recalls without requiring boardroom or senior executive approval.  That would make sense. It would insulate the recall decision makers from the suits in the executive suite who might be overly focused on the bottom line. It makes no sense, however, to also keep the company executives uninformed and in the dark about a serious investigation into faulty parts that may be causing deaths to drivers of various GM models.  After all, uninformed executives could, at any time, choose to sell some of their GM stock at a very inopportune and inappropriate time.  Then again, a cynic might argue that that’s a rather nifty benefit of having such a see no evil, hear no evil, do no evil policy. Delegating recall authority is one thing.  Perpetuating executive suite ignorance, for years on end, about the potential of a disastrous recall is quite another.

Reviewing information that has now come to light, it seems incongruous that the issue never reached upper management. According to a timeline that GM filed with regulators the problem has been percolating since 2001.  GM first issued bulletins to dealers with suggested remedies for the faulty ignition switches in 2005. And, in fact, it seems that not all GM executives were kept in the dark about serious defects.  As we go to press, the House Energy and Commerce committee has released documents that make clear that executives were involved for years in discussions about faulty GM models.

In March 2007, officials of the National Highway Traffic Safety Administration met with GM employees to discuss a fatal Cobalt crash in July 2005. GM’s attorneys were, in fact, aware of the problem and had opened a file on the issue within two months of the crash.

By August 2011, a series of Cobalt and Pontiac crashes in which the airbags did not deploy, was brought to the attention of GM engineers, and the issue was, apparently, elevated to the two committees responsible for initiating recalls in 2013.

Here’s the way the recall system works. One small group is responsible for vetting incoming data and determining if a recall is warranted. It then makes a recommendation to an even smaller group in charge of approving the recall. If the second group approves a recall, the recommendation then goes to senior management.

Let’s face it, GM’s position that management just didn’t know that ignition switches could be inadvertently jostled out of position, causing power to cars to shut off and airbags to be disabled stretches credulity. People were, for over a decade, dying in crashes caused by these defects.  GM says it ordered a recall in February once it learned that the defective part had been linked to 31 crashes and 13 deaths over more than 10 years.

We now know from subpoenaed documents, including emails, that Mary Barra, when she was head of product development (she is now CEO), was aware back in October 2011 of power steering problems with the Saturn Ion that led to recalls nearly two years later.  While the power-steering issue is unrelated to the ignition switch defect, it certainly suggests that there is no Chinese wall keeping executives in the dark about major problems with the various models of GM cars. Barra, according to press reports, claims she didn’t know of the faulty ignition switch problem before last December (the month the government sold the last of its shares).

Our focus, at this time, is not about how GM handles it quality control problems, but rather about the plausibility of the government’s presumed ignorance of a huge problem that was about to erupt right after it sold the last of its stock in the company. Remember, The government’s relationship with GM was not exactly an arm’s length arrangement. Pursuant to the bailout, ten of GM’s 13 directors were placed there by the United States Treasury Department, while the Canadian government nominated one director.  Thus far, only two GM employees have been subject to any action by the company.  Both are engineers who were involved with the faulty ignition switch issue, and are now on paid leave.

This is not some academic point we’re discussing here.  Hundreds of millions of shares have traded in the sliding stock since the government’s sale (which was about at the stock’s high) and accumulated loses have been huge.

The government sold the last of its shares near the stock’s post-bankruptcy’s high of $41.85. The share-price decline began shortly thereafter, closing last Friday at 31.91, which is below its November 17, 2010 IPO price of $33.00 a share.

The timing of the December 9^th sale is, arguably, a bit curious. On Jan. 18 of last year, the U.S. Treasury released a formal trading plan announcing its intention to sell, on the open market, its remaining 300 million shares of GM stock by March 2014.  In January 2013 the government sold approximately 5.4 million shares of GM stock between $27.61 and $29.16 a share during an eight-day period, netting $156.4 million. As the year progressed GM shares steadily improved.  By the beginning of the third quarter of last year the stock had advanced to over $36.00 a share and by year end the stock was selling over $41.00 a share.  Curiously, in October 2013, and in the midst of a steady increase in the price of the stock, the government announces that it plans to sell all of its remaining shares by the end of the year, three months earlier than the original outside date in had announced at the beginning of the year.

According to the SEC, any large sale of stock preceding a previously undisclosed event that has a material negative impact on a company is typical of cases that result in investigations of insider trades.  We assume the only reason the SEC appears disinterested in the massive sale of GM stock just before the faulty ignition-switch fiasco became public is because the seller was the US government.

Meanwhile, much has been made during the past year of the so-called new GM.  Frankly, the new GM appears to us to look remarkably similar to the old GM.

Available at Amazon.com

And on Kindle, Barns and Noble’s Nook and Apple IBook