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Recall wars: Toyota versus General Motors

Recall wars: Toyota versus General Motors

This week brought news of a gigantic $1.2 billion settlement between Toyota and the U.S. Justice Department, with the company admitting it “misled U.S. consumers by concealing and making deceptive statements about two safety issues involving its vehicles.”  This isn’t one of those complicated multi-year settlement deals, either – they have to wire-transfer 1.2 billion clams to the U.S. Marshals Service by Tuesday, according to Forbes.  If Boyd Crowder could somehow get his fingers into that wire transfer, putting Deputy U.S. Marshal Raylan Givens on the case to solve a billion-dollar heist, I think we’d have a fine plot for “Justified: The Movie.”

The Toyota case is long and complicated, including a large number of individual lawsuits for physical injuries and economic damages.  Expensive product recalls have already been made.  It has been theorized that some of the unintended vehicle accelerations might have been due to driver error; Fox News notes that Toyota won almost all of the cases against it, until finally losing a big one in Oklahoma last fall.  Furthermore, “the National Highway Traffic Safety Administration never found defects in electronics or software in Toyota cars, which had been targeted as a possible cause.”

Nevertheless, the company paid dearly for being too slow to report these potential safety issues to the government, and too reluctant to disclose them to its customers.  Attorney General Eric Holder was eager to wave the bloody scalp collected in the immense settlement:

Holder called Toyota’s conduct in the matter “shameful,” and said that the automaker showed “a blatant disregard for systems and laws designed to look after the safety of consumers. By the company’s own admission, it protected its brand ahead of its own customers. This constitutes a clear and reprehensible abuse of the public trust.”

The settlement represents the largest penalty of its kind imposed on an automotive company by the U.S.

Holder added that “other car makers should not make Toyota’s mistake,” while U.S. Attorney for the Southern District of New York Preet Bharara underlined this point, saying that Toyota’s public admissions should be a warning to other automakers.

In a statement early Wednesday, Toyota said it has “cooperated with the U.S. Attorney’s office in this matter for more than four years” and had “made fundamental changes to become a more responsive and customer-focused organization, and we are committed to continued improvements.”

Some observers find the settlement and its attendant rhetoric excessive, including former General Motors vice chairman Robert Lutz, who said, “Even though it’s happening to a major Japanese competitor, I take no joy in it whatsoever.”  After relating his comments, Forbes gives consumers a few reasons to be less than completely thrilled about the siphoning of $1.2 billion away from a successful company that might have used the money to open new factories and launch new product lines.

Speaking of General Motors, they just happen to be going through a bit of a product-safety controversy as well, but their treatment has been considerably different.  They’ve had to recall 1.6 million vehicles with ignition problems… a problem that causes the engine to shut down, and disables the air bags, while the car is in motion.

USA Today reports this issue has been “linked to at least 31 crashes and a dozen deaths,” and there is documentation proving that GM personnel knew about it.  “Perverse incentives” in the relevant legislation kept the knowledge bottled up at the lower levels of chaotic bailout-era General Motors: once top executives become aware of such a problem, they are legally obligated to inform the National Highway Transportation Safety Administration, so there are good reasons to keep reports from quickly reaching the desks of high-level managers.

There aren’t going to be any billion-dollar settlements for GM, because unlike Toyota, they have legal immunity thanks to their government bailout:

Owners of the recalled cars, along with the families of two teenagers killed in a 2006 Cobalt crash in Wisconsin, filed a class-action lawsuit last week seeking $6 billion to $10 billion in damages for GM’s alleged negligence. But GM enjoys legal immunity from all incidents before its 2009 restructuring.

A liability shield isn’t unusual in bankruptcy cases, but what is unusual is that GM and Chrysler, which also filed for bankruptcy protection, weren’t required to put money in special trust funds for prospective victims. Instead, the corporate giants can treat injured customers as shabbily as unsecured creditors. What little compensation that is available will come from the sale of closed GM plants being held in a shell corporation.

The NHTSA did eventually learn of the problem with GM cars… and that’s where the story heats up, drawing attention from congressional investigators:

The only way victims can get adequate compensation is by suing the restructured GM, but that would require proving that the company knowingly withheld information to obtain its shield. What is now mostly a legal and regulatory story could explode into politics if it turns out during congressional investigations that GM disclosed the liability issues with the Cobalt and related vehicles to Treasury Department officials negotiating the bailout before they offered to protect the company from liability.

If NHTSA knew about the problems, why didn’t Treasury?  Car owners aren’t the only ones hurt by the bailout deal. GM’s competitors are being harmed, too.

For example, notes Center for Automotive Research’s Sean McAlinden, the shield gives GM an unfair competitive advantage. The company has avoided millions in annual payments on product-liability claims on top of the lower debt-service costs and special post-bankruptcy tax write-offs that GM received through the bailout.

The House Energy and Commerce Committee has announced it will hear testimony from current General Motors CEO Mary Barra on April 1.  NHTSA Acting Administrator David Friedman has also been invited to testify, but his participation has not yet been confirmed.  Both Republican and Democrat members of the Committee welcomed the testimony:

“We look forward to hearing from both Mary Barra and Administrator Friedman. Their testimony is critical to understanding what the company and NHTSA knew about the safety problems, when they knew it, and what was done about it,” said full committee Chairman Fred Upton (R-MI) and Oversight and Investigations Subcommittee Chairman Tim Murphy (R-PA). “The problems originated long before Barra and Friedman took the helms of their respective organizations, but their actions and input now, as our investigation proceeds, will be essential to getting answers about what went wrong. We want to know if this tragedy could have been prevented and what can be done to ensure the loss of life due to safety failures like this don’t happen again.”

“I look forward to this hearing so we can find out from GM and NHTSA how this happened and why these dangerous vehicles were not fixed in a timely fashion,” said full committee Ranking Member Henry A. Waxman (D-CA) and Oversight and Investigations Subcommittee Ranking Member Diana DeGette (D-CO).

Both the Toyota and GM cases are extremely complex, stretching over several years, with conflicting analysis from a variety of experts and investigators.  In both cases, drivers and passengers have been injured and killed.  In both cases, consumers have a clear interest in ensuring automakers are forthcoming about potential safety risks.  The difference in consequences for the two corporations is so many orders of magnitude apart that further investigation is clearly in order.

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