General Motors

The Justice Department's $1 Billion GM Shakedown for the Cobalt Debacle

Victims will see very little of the criminal penalties that GM will pay

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The Justice Department announced that it is slapping General Motors with a $900 million fine for the 125 deaths and 250 injuries caused by its faulty 2005 Cobalt ignition switch and non-deploying airbags. No one will face any criminal

Deployed airbag
BreakfastPirate / Foter / CC BY-NC

prosecution or jail time. And the fine is about $300 million less than what Toyota was forced to pay for its accelerating vehicles whose cause was never fully established.

Nevertheless, GM got a reprieve, Justice says, for cooperating with its investigation. That sounds hooey given that Toyota is far more culturally conditioned to grovel before government. (In fact, sources have previously told me that automakers were furious at Toyota for turning the other cheek to Justice rather than fighting it out.) Be that as it may, there are three things that are troubling about this settlement:

One: The GM settlement has cemented an insidious custom that Justice inaugurated with Toyota, namely, imposing criminal penalties on automakers without actually going to court and engaging in niceties such as presenting evidence and attempting to obtain a conviction. The actual charge against GM is "wire fraud" – a broad, vague category inherited from RICO that government prosecutors use to go after anyone for anything. U.S. Attorney Preet Bharara, who pursued both probes, had dubbed the Toyota probe a "watershed moment" – and GM now proves that he was not kidding.

Two: If past is prelude, the actual victims of the crashes will not see a dime of the penalty money. General Motors obtained a liability shield during its bankruptcy restructuring that technically protects it from any liability for crashes prior to the restructuring. The court of public opinion has made it impossible for GM to completely diss victims and it is pledging to pay them $625 million in compensation. (It is impossible to say how this compares with the Toyota settlement because that settlement amount wasn't disclosed.) But the $900 million dollars in Justice penalties will go to – you guessed it – Justice itself! As I have previously written:

In Toyota's case, the Justice Department put the entire $1.2 billion it collected from the carmaker in criminal fines—along with the$1.7 billion it received in the Bernie Madoff case—into its notorious civil asset forfeiture fund, an all-purpose slush fund where the department also parks assets seized during illicit drug raids from people never accused of a crime.

Although Toyota's victims had the option of filing copious amounts of paperwork to collect additional damages for economic losses relating to accelerating vehicles, it is unclear how many of them actually did so. (My queries to DoJ went unanswered.) What is clear is that the forfeiture program's operating expenses not related to any kind of victim payoff experienced a $1.3 billion boost in 2014—as per page 8 of this report.

Three: There is little doubt that GM fell on the job in failing to make a connection between its crashing Cobalts and the faulty ignition switch. Despite many red flags, it took GM nine years to figure this out and finally issue a recall of some two million vehicles.

But NHTSA (National Highway Traffic and Safety Administration), the agency that regulates automakers and is supposed to be command central for monitoring vehicle safety, also fell asleep at the wheel. NHTSA conducted three separate investigations into several different accidents involving the Cobalt and its sister vehicles and dismissed the connection between the crashes and the ignition switch, even though a state-trooper had flagged it.

But what will NHTSA's penalty be for its lapses? Likely, more funds for more investigations in the future. The NHTSA chief started lobbying for this almost as soon as the GM scandal broke. ("NHTSA is not a large agency," he insisted. There are 280 million registered vehicles in the country. But it has a staff of only 591 employees, many of whom end up "often working nights and weekends" to "protect consumers.")

So the final score of the GM saga is that victims will get screwed, GM will be a few billion dollars poorer and the guvmint will make out like a bandit!

The good news in all of this is that despite such joint public-private malfeasance, cars are getting safer with fewer fatalities in crashes because of superior safety technology. Features such as air bags and seat belts have contributed to cutting driving fatalities from 26 per 100,000 people in 1965 to 10 now, which is really very remarkable.