Should New GM Be Liable for The Misdeeds of Old GM?

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The unfolding fiasco over GM’s apparent shoving-under-the-rug of a potentially life-ending defect with the ignition switches in millions of its vehicles brings up the interesting issue of moral hazard and how it applies to corporations.

Or, doesn’t.

The defect – which has resulted in a tsunami recall of 1.6 million GM vehicles – could (and did) result in total shutdown of the engine (and with it, all power accessories, such as power steering and brakes) while the car was moving – with the added benefit of disabling the air bags at the same time, so that if the driver lost control as a result of a dead-stick engine and hit something, the air bags would notdeploy. Which is just what happened in at least a dozen cases that have come to light… so far.

Affected models include the Chevy HHR, Cobalt and certain Pontiac and Saturn vehicles made from roughly the late ’90s through the 2007 model year.

12 deaths have been linked to the defect.

The actionable kicker is that GM knew. Foryears. As long ago as 2001. But did nothing – for years – to correct it and even continued to sell vehicles with these same defective ignition switches all the way through the ’07 model year.

People who bought these cars – especially the post ’01 models, which GM was aware were potentially lethal lemons – are gathering up their pitchforks. You can hear the lawyers rubbing their hands together. There will be congressional hearings in April, with sweaty execs under the klieg lights and two-legged great whites with attache cases and perfectly capped teeth champing at their flesh.

There are potentially billions on the line – not just fines, but losses to GM as people shy away from the products of a company they no longer trust.

Fool me once. . .  .

Minimally, the value of the affected GM vehicles will plunge faster than the Titanic after compartment six flooded – even if the cars are fixed. Their unfortunate owners – as a class – will be wanting a check. What is 1.6 billion times say a couple grand per owner? The answer: A lot of money – even for GM. Then there is the serious coin. The value to be placed upon the 12 lives lost thus far.

It’s epic – but who’s responsible?

The legal question debates whether it is the old, pre-bankruptcy GM – or the shiny New GM, jump-started by the government-mandated, taxpayer-finaced bailout back in ’09.

But neither the old nor the new GM is an actual person. A corporate person, yes. And there’s the problem, as it relates to moral hazard.

No specific person is responsible – or can be held personally accountable. The corporation exists for precisely this reason.

To quash moral hazard.

It’s like giving a teenager a new Corvette, a credit card and a bottle of whiskey – and letting him know you’ll buy him another one (and hire the very best lawyers) in the event he wraps it around a tree. Only it’s worse than that, because when it’s a corporation like GM behind the wheel – so to speak – there isn’t even the possibility of the “driver” being killed – thus ending his streak –  although he may certainly kill others along the way.

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