GM

GM ignition recall earnings hit: $1.3 billion in first quarter

April 11, 2014: 12:03 PM ET

Questions also emerge about a redesigned ignition switch's part number.

By Doron Levin

General Motors CEO Mary Barra

General Motors CEO Mary Barra

FORTUNE -- General Motors Co. warned investors and Wall Street that the financial cost of its mushrooming investigation into defective ignition switches all but assures a first-quarter deficit for this year.

GM (GM) on Thursday said it raised its charge against earnings for the quarter, primarily in connection with the ignition defect, to $1.3 billion from $750 million previously. Additionally, GM announced it intends as part of its recall to replace a locking cylinder on 2.2 million cars that will prevent the key from slipping out of its slot.

The No. 1 U.S. automaker has been tangled for more than two months in a legal and financial quagmire, as it probes the reasons for a decade-long delay in recalling 2.6 million Chevrolet Cobalts and other small cars whose ignition switches could slip from "run" to "accessories," cutting power to steering, airbags, and other apparatuses. GM said 13 deaths and 31 accidents could be linked to the defect

MORE: Two GM engineers placed on leave in ignition safety recall

Through Friday morning, GM shares have lost 6% of their value in the past five days as analysts have lowered earnings estimates and pulled recommendations.

The automaker's legal troubles worsened as GM placed two low-level engineers on paid leave, pending resolution of investigations by the U.S. Justice Department and by outside lawyers hired by GM. Committees of the U.S. House of Representatives and the Senate both want to know why it took more than a decade for GM to recall cars with the defective ignitions.

The investigation so far has yielded at least one intriguing fact: that the defective ignition switch was redesigned in April 2006, though without a corresponding change in the number used to designate the part. Changing the number of a redesigned part is a standard industry and GM practice that enables service mechanics, recall supervisors, and accident investigators to keep track of whether a part must be replaced.

In 2013, Ray DiGiorgio, a GM engineer, testified under oath in a personal injury lawsuit that he hadn't signed off on an ignition redesign. Documents produced by the House committee suggested that DiGiorgio indeed had signed off in 2006, leading Sen. Claire McCaskill of Missouri to accuse the engineer of perjury and to demand that GM fire him.

MORE: New GM: Same as it ever was?

Mary Barra, GM chief executive officer, acknowledged before McCaskill that she knew of the inconsistent testimony. "The data that's been put in front of me indicates that, but I'm waiting for the full investigation. I want to be fair," Barra said.

DiGiorgio, one of the two GM engineers placed on leave, undoubtedly will face questioning -- if he hasn't already -- by GM lawyers, as well as prosecutors. Is it possible he acted alone? His testimony likely will lead to questions about the roles of GM peers, managers, and executives.

Barra and GM directors must be considering strategies to conclude and resolve the scandal expeditiously. But similar difficulties that Toyota (TM) and Ford (F) faced during broad, tumultuous safety investigations during the past decade suggest that the end won't be quick in coming, nor without deep financial, emotional, and reputational damage.

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