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Senators Demand Late Recall Penalty from GM

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General Motors Co. (GM - Free Report) has been facing tough times lately due to a series of vehicle recalls. Recently, a House subcommittee released documents showed that the automaker is reluctant to address the safety problems.

In Feb 2014, General Motors announced the recall of 2.6 million older-model small cars associated with 31 crashes and 13 front-seat fatalities due to faulty ignition switches. The recalled vehicles mainly include Chevrolet Cobalts and Saturn Ions. Considerable costs associated with the repair are a potential reason behind the delayed recall. If replaced in 2007, the switches would have cost the automaker $100 million. However, the expenses will be much higher now with higher prices of parts.

General Motors identified the switch problem in 2001. The engineers provided different options to rectify the defect but none of them were accepted due to cost concerns. Delphi Automotive plc (DLPH - Free Report) , the parts supplier of General Motors, also said that the ignition switches did not match the GM specifications.

According to General Motors, a heavy key ring or uneven roads can cause the ignition switch to shift away from the run position, thus turning off the engine and electrical power. In such a situation, the front air bags will not inflate in case of a crash.

The documents also confirm that the present CEO of General Motors, Mary Barra, has been aware of the faults in the Saturn Ion power steering since Oct 2011. However, the company recalled the vehicles more than two years later.

The U.S. senators requested the Department of Justice to take steps which will hinder the efforts taken by General Motors to avoid financial responsibility related to the late recall of vehicles with faulty ignition switch.

The senators want General Motors to create a victims compensation fund which will ensure that consumers are warned about cars with potential ignition switch problems. General Motors will record a $750 million charge in the first quarter of 2014 due to the increased number of recalls. The expenses include a $300 million charge incurred on three recalls in March and the ignition switch recall.

Recently, Mary Barra had to face a congressional committee hearing due to the delayed recall of vehicles with faulty ignition switches. Barra revealed that the company is determined to resolve the issue without further delay.

Barra also announced that it has hired Kenneth Feinberg, known for handling the compensation funds for the victims of 9/11, the Boston Marathon bombing and the BP oil spill, to find out ways to compensate the victims of the accidents. Allocation of separate funds for victims is not yet confirmed.

General Motors currently holds a Zacks Rank #5 (Strong Sell).

Better-ranked automobile stocks worth considering are Tesla Motors, Inc. (TSLA - Free Report) and PACCAR Inc. (PCAR - Free Report) . Both carry a Zacks Rank #2 (Buy).

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