The Plot Thickens at GM With SEC Subpoenas

Updated from 11:24 a.m. EDT

The Securities and Exchange Commission is investigating General Motors'(GM) handling of retirement benefits and its relationship with bankrupt parts supplier Delphi(DPHIQ), the automaker said in a government filing.

GM, which posted a $1.3 billion third-quarter loss last week because of spiraling labor costs, confirmed it has received a subpoena from the agency and is cooperating with the probe.

"These matters include GM's financial reporting concerning pension and other post-employment benefits, certain transactions between General Motors and Delphi, GM's recovery of recall costs from suppliers and supplier price reductions or credits, and any obligation GM may have to fund pension and OPEB costs in connection with Delphi's proceedings under Chapter 11," the company in an SEC filing.

The company didn't elaborate on the probe.

Given its recent performance and debt downgrades, legal scrutiny is the last thing GM needs right now. The company is sensitive to perceptions its solvency is at risk, with a spokesman reiterating to Reuters overnight a statement by CEO Rick Wagoner that Chapter 11 "is not an option."

Still, concerns about the risk sent the stock down $1.98, or 6.8%, to $27.19 Thursday and led to a flight-to-quality rally in the Treasury bond market.

Argus Research analyst Kevin Tynan said the subject of pension accounting is broad enough that it's possible the SEC's probe will not be a huge issue for GM.

"The way the pension accounting code is written is the problem," Tynan said. "You can do a lot of creative stuff and still be within the rule there, so I don't think anybody will be led off in handcuffs on this one. It may mean they overstated some income or under-stated some debt, and the resulting restatements will certainly hit the stock, but I don't think this is anything criminal."

Accounting for pension liabilities involves some fairly complex modeling that includes assumptions about future returns on investment, interest costs, healthcare costs, mortality rates and other factors. In 2003, GM was facing payments totaling $15 billion over four years to shore up its under-funded pension liabilities. To avoid paying increased pension insurance premiums, it sold a $13.1 billion issue, using most of the money raised to make the payments.

Wednesday's Wall Street Journal reported the SEC issued a subpoena to GM's competitor, Daimler Chrysler (DCX), last month seeking information from the company on accounting methods it has used for pensions in North America. The newspaper reported the subpoena appears to be part of a wider probe into pension accounting that has led regulators to request information from Ford (F), Boeing (BA) and a number of other large U.S. companies on the same topic.

That hardly means GM is in the clear, however. Last week, the company announced that it reached a deal with the United Auto Workers that would allow it to slash its multibillion-dollar health-care costs by cutting benefits for UAW-protected blue-collar workers and retirees. Reaching such a deal was held up by GM as the cornerstone of its plan to stem its collapsing sales and earnings. Still, Tynan said the deal was not substantial enough.

"What happened at Delphi showed that the UAW is unwilling to make the kind of deep concessions that are really needed for GM to avoid Chapter 11 somewhere down the line," Tynan said. "It was a moral victory for Rick Wagoner in the short-term, but it's only $3 billion before taxes, and they've already lost more than that so far this year."

Whatever optimism the agreement may have provided shareholders probably disappeared with the latest news of stepped up scrutiny from regulators.

"This is one more distraction and another black mark on GM after all the problems they're already dealing with. But I don't think it's a nail in their coffin," Tynan said.

In a separate matter, GM said the SEC and a federal grand jury have subpoenaed its finance subsidiary, GMAC, in connection with the ongoing investigation of insurance industry practices. The requests pertain to "loss-mitigation insurance products such as finite risk insurance."

Such policies have been the subject of an extensive state and federal probe that has touched companies including American International Group(AIG) and Berkshire Hathaway(BRKA). In general, regulators have sought information on the economic rationale for corporate coverage that has occasionally been used to burnish financial statements.

GM's stock closed down $1.87, or 6.4%, to $27.30.

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