Start the conversation
Thursday's General Motors Company (NYSE: GM) recall of nearly 800,000 compact cars in North America is markedly different from the slough of other 2014 recalls from the likes of Toyota Motor Corp. (NYSE: TM), Ford Motor Corp. (NYSE: F), and Tesla Motors Inc. (Nasdaq: TSLA).
That's because, according to depositions in a civil lawsuit against GM, the carmaker knew about the defect that's caused fatal and nonfatal crashes since at least 2004.
For its inaction, brand faith – and GM stock – will suffer.
"This is going to be a legacy issue for years to come," Money Morning Capital Wave Strategist Shah Gilani said to Neil Cavuto on FOX Business after the news came out on Thursday.
Here is a summary of the GM recall details:
- In addition to the North American recall, which affects the 2007 Pontiac G5 and the 2005-2007 Chevrolet Cobalt, GM also pulled around 155,000 cars in Canada and 6,000 in Mexico.
- An ignition issue, caused by either a heavy key ring or a "jarring event," can shut off the ignition and prevent air bags from properly deploying.
- In a news release last week, GM said it knew of six deaths in five crashes in which the front air bags did not deploy, as well as 17 other crashes "involving some type of frontal impact and nonfatal injuries where the air bags did not deploy."
Rarely are flaws that cause a recall deadly; typically, a recall occurs simply because of monitoring reports from dealers and consumer complaints.
"This latest GM recall involves 22 crashes and six fatalities tied directly to a design issue," Kelley Blue Book senior analyst Karl Brauer said to USA Today.
Gilani pointed out that several more may surface.
But what really sets this recall apart is the news of how long GM knew about the defect without acting.
Note: This incredible trading tool helps investors to grab profits and hedge their portfolios. You can turn volatility in your favor by understanding the market's most powerful index…
Back in 2005, GM sent a technical service bulletin warning to dealers about a stalling problem related to heavy key rings in the 2005-2006 Cobalt.
And a deposition from a 2010 civil lawsuit shows that in 2004, GM knew the Cobalt had an ignition switch that could involuntarily shut off the engine while driving. GM settled that case for an undisclosed amount with the plaintiff – the estate of the 29-year-old pediatric nurse who died in a fatal crash the day after picking up her 2005 Cobalt from the dealer, where she'd taken it for ignition switch problems, according to documents obtained by USA Today.
It goes back even further.
"GM has known about an ignition problem since the 1960s," Gilani said.
He's referring to a fix-it column called "Gus Wilson's 'The Model Garage,'" run from 1920 through the 1960s in Popular Science magazine. In one issue, a customer's stalling engine was resolved by removing several keys from her key ring.
"[This recall] is certainly a reason for investors to hold back," Gilani said. "If I own GM stock, I'd want to look at some floor to get out if it continues to drop – it's going to get hit on this. I wouldn't touch the stock and it's going to be a legacy issue for years to come."
Watch the following video for Gilani's full breakdown of the GM recall, plus two automakers he recommends for investors – and the two he would avoid:
Volatility has certainly defined the markets in the early weeks of 2014. But rather than locking in losses on the sidelines, here's how to take advantage of the profits that the boom/bust crowd is leaving behind...
- National Highway Traffic Safety Administration:
General Motors Recall Report
- USA Today:
Lawsuit: GM Knew of Cobalt Ignition Problem