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Opinion

Whatever Happened at VW?

By Ingo Walter

ingo walter article

Examples from the banking industry suggest that "rogue" behavior in one firm often turns out to be "industry practice."

With the resignation of Volkswagen CEO Martin Winterkorn, the scandal facing the world’s largest car manufacturer raises lots of questions that go way beyond VW to encompass corporate governance, regulation, competitive structure and performance and individual accountability. A true learning moment.

As the proud owner of an outstanding VW Toureg turbodiesel, it also hits close to home. Happily for now, VW V6 diesels like mine were not named in the fraud allegations. But that may just be because they were not tested in the US for the offending “defeat” software – they don't sell very many of them (except for delighted customers like me).

What next? Examples from the banking industry suggest that "rogue" behavior in one firm often turns out to be "industry practice." Examples include FX, LIBOR, hedge fund late trading in mutual fund shares, mis-selling of “payment protection insurance,” insurance broker kickbacks, falsification of international payment transactions, aiding and abetting tax evasion and the list goes on.

One firm gets tagged and the others run for the hills and take a super-low profile until the posse rounds them up. That could be the case here also, with MB, BMW, Renault, Peugeot, etc. If so they will step up very soon. Last guy in is a reputationally rotten egg. So we’ll soon see whether the VW problem is firm-specific or industry-wide.

Certainly nitrogen oxide (NOX) emissions remain an issue. Travelers can tell you that the problem is pretty bad in parts of Europe. On a dozen or so days a year, the speed limit in the Paris region is cut to 90 kmh because of the health effects – an air-shed where well over half the cars and almost all trucks are diesels. This is not, however, a case of engineering fraud but rather more lax NOX standards than the California or US 50-state rules, which are presumably much easier to meet.

I think what happened here is that the VW engineers got squeezed between the marketing pitch for modern European common-rail diesels (fuel economy, durability, torque and environmental friendliness) and the tightening noose of CA environmental standards, which eventually made the two simply incompatible.

The engineers no doubt signaled the problem internally (how high up we don't know), and senior management told them to fix it or else. So they were trapped. Pressed to the wall, the engineers came up with a workaround. Whether in the whole process anyone raised the full range of potential consequences including the possibility of individual criminal charges and extradition requests we also don't know. Anyway, decisions got made somewhere.

So the otherwise walk-on-water CEO has walked the plank instead. Famously, this has rarely happened in banking. And there is the usual hurricane of investigations and lawsuits, costs already partially provisioned in VW’s books. The shareholders have already taken a huge hit.

European friends have blamed the US regulatory approach and litigiousness for the brouhaha. In Europe, it would have been taken care of in a sensible way by specialists talking to specialists. Maybe so. But the same thing was said of the FIFA mess.

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Ingo Walter is Professor Emeritus of Finance.