Analyst: GM may offer $2B-plus to settle recall claims

A major automotive analyst today predicted that General Motors will establish a settlement fund of $1 billion to $1.5 billion for customers affected by the ignition switch recall worldwide of 1.62 million small cars from GM's pre-bankruptcy era.

Barclays analyst Brian Johnson said in a research note that GM could funnel the cash through its bankruptcy estate, an entity called Motors Liquidation Co. and informally dubbed "old GM." That legal maneuver could help reorganized "new GM" maintain its protection against pre-bankruptcy liabilities.

The company may also need about $1 billion to pay a federal fine, similar to the fine Toyota recently agreed to pay to settle its criminal investigation.

"Notwithstanding the lack of legal liability, we believe GM will craft a settlement to put the issue behind it," Johnson said.

Based on his settlement estimates of $2 billion to $3 billion," Johnson sees GM's share price drop as excessive. "Since the market took greater notice of the ignition switch recall on March 10, GM's market cap has fallen by $5.4 billion (shares down 8.4% vs. S&P -0.7%)."

The analyst predicted GM could announce a "settlement mechanism" before CEO Mary Barra's testimony before Congress on Tuesday and Wednesday next week. If it does, he wrote, "shares could see a rebound."

A GM spokesman declined to comment on the report specifically.

"I'd simply say that GM's first focus is on ensuring the safety and peace of mind of our customers involved in the recall and fixing their vehicles," GM spokesman Greg Martin said in an e-mail.

It's unclear whether any future settlement, or what has been dubbed a "victim's fund," would cover only customers involved in accidents or whether it would cover all owners of the vehicles, which span 2003 to 2007 models years for vehicles including the Chevrolet Cobalt and Saturn Ion. Suits have been filed seeking compensation for all owners for a loss of value of their cars due to the recall.

Johnson also said there's "little chance" that lawyers could successfully challenge GM's protection against pre-bankruptcy liabilities.

Plaintiff lawyers have search for "novel theories to make new GM foot the bills for older accidents – and have invoked the notion of 'bankruptcy fraud.' But Johnson notes the bankruptcy fraud "generally involves concealing assets, not liabilities."

The automaker has been flooded with lawsuits and investigations in recent weeks after it was revealed that the automaker knew about the ignition switch problem for years. The issue has been tied to 31 accidents and 12 deaths.