Two GM engineers placed on paid leave in ignition safety recall

April 10, 2014: 11:24 AM ET

Wall Street analysts also scale back automaker's financial forecasts in wake of investigation.

By Doron Levin

GM headquarters in Detroit

GM headquarters in Detroit

FORTUNE -- The investigation into defective General Motors Co. ignition switches and their link to traffic fatalities gained intensity as two GM engineers were placed on paid leave and Wall Street equity analysts scaled back financial forecasts.

GM (GM) didn't identify the engineers. The automaker said in a statement on Thursday that it took the action after a briefing from Anton Valukas, the former federal prosecutor GM hired to lead an internal probe into why a recall of 2.6 million cars with possibly defective ignitions took a decade.

On Wednesday, Morgan Stanley equity analyst Adam Jonas downgraded GM shares to "underweight" -- the firm's equivalent of "sell" -- based on the cost of the safety furor, as well as what it signified about GM's short-term prospects. Longer-term, Jonas said GM "still has the time and resources to remain a relevant force in global autos."

MORE: New GM: Same as it ever was?

Earlier in the week, RBC Capital Markets equity analyst Joseph Spak lowered his price target on GM shares slightly, noting that investors may have trouble differentiating the "old GM" from the "new GM" that emerged after the automaker's bankruptcy in 2009. The stock is down 17% this year.

Analysts have estimated that GM will spend several billion dollars on the recall, damages to accident victims, and penalties. The hit to the company's reputation is harder to quantify but undoubtedly will be substantial.

In February, GM recalled 2.6 million Chevrolet Cobalts, Saturn Ions, and other small cars that were equipped with the ignitions. The automaker has acknowledged that it knew, as early as 2001, that the component might be defective. GM said least 31 accidents and 13 fatalities may be linked to the ignition, which can slip from "run" to "accessories" when jarred or when a heavy keychain is in use.

MORE: Federal regulators fine GM $7,000 a day

Last week, GM chief executive officer Mary Barra faced grilling in Washington by House and Senate panels over the delayed recall. She also apologized to the families of accident victims that traveled to the Capitol.

GM this week acknowledged that a criminal probe of the automaker has begun by the U.S. attorney's office for the Southern District of New York. The New York office is the same that prosecuted Toyota Motor Corp. (TM) on wire fraud charges based on a slow recall of Toyota models that were alleged to contain defects leading to unintended acceleration. In a settlement two weeks ago, Toyota agreed to pay a $1.2 billion fine and accept a three-year federal monitor for its recall procedures.

Capitol Hill legislators have been harshly critical of Barra and GM, which may serve to accelerate a criminal probe that could reach into the automaker's managerial and executive ranks. So far she has earned high marks for poise. Enduring the complicated, unpredictable and fierce onslaught from so many directions will be a substantial test of her mettle as chief executive.

Join the Conversation
Search This Column
View all entries from this: Week, Month
Current Issue
  • Give the gift of Fortune
  • Get the Fortune app
  • Subscribe
Powered by WordPress.com VIP.