Throw The Book At Volkswagen

I often find myself speaking in defense of large companies when regulators overreach in pursuit of scapegoats and punitive fines. But Volkswagen, the latest target, deserves all the punishment U.S. authorities care to dish out.

Washington may have been ham-handed in its treatment of foreign companies like BP and Toyota, whose transgressions were the result of chains of inadvertent mistakes that led to serious accidents. But there is every reason to throw the book at Volkswagen, and there will be no sympathy in this column for the German automaker if that happens.

Standing on its own, Volkswagen deserves the maximum penalty, even at an exposure of $18 billion, as reported in some accounts of its behavior. Volkswagen’s “clean diesel” cars did not violate U.S. emission standards because of some miscalculation or manufacturing defect. In fact, some of those cars may not violate emissions standards at all, at least in most places. A software patch could likely fix the problem – or at least, that problem.

But VW’s misstep was not to build faulty cars, or even dirty cars. It was that the company cheated. And from all appearances, the cheating was substantial, systematic, intentional and done for purely commercial advantage – and because VW thought it would get away with it.

Kevin Tynan, Bloomberg Intelligence’s auto-industry analyst, said, “What is so damning is that this was something actively pursued. This isn’t an oversight.” He went on to add that one or more people at VW decided that gaming the system was a better use of time and resources than developing cars that met regulatory emissions requirements.

The scheme has now blown up, spectacularly. Volkswagen announced yesterday that as many as 11 million cars worldwide may employ the subterfuge that was initially reported just to affect a half-million here in the United States. The company also said it is setting aside 6.5 billion euros (about $7.3 billion) to cover costs associated with repairs. I doubt that sum will come anywhere close, when all is said and done.

That VW executives thought they could get away with such cheating makes some sense when you consider it was uncovered mainly by accident. Discrepancies on European tests of the diesel models of VW’s Passat and Jetta, as well as the diesel version of BMW’s X5, led a small clean-air group to run tests in the United States. As John German, the U.S. co-lead of the International Council on Clean Transportation, told Bloomberg, the group had expected the vehicles to pass; they simply wanted to show European regulators that clean diesel was possible.

Volkswagen’s “clean diesel” cars may not be as clean as advertised, but they are smart. The cars were reportedly designed with sensors and software that could detect when they were hooked up to an emissions testing device. When such a device was detected, the pollution-control systems were switched on at their maximum settings, and the cars ran clean. But when the testers disconnected their hardware, the cars turned off or turned down those pollution control systems. The result was better performance for drivers, but dirtier air for everyone – and an improvement in VW’s fleet-average pollution and fuel economy statistics.

So who did VW hurt? Literally everyone, via the dirty air. But also specifically drivers who thought they were buying cutting edge “clean diesel” technology that delivered high performance, when they were actually getting lower-performance clean technology on the testing rack and old-fashioned dirty diesel otherwise.

VW also hurt its competitors, who are investing billions in other clean-transport technology, such as hybrids and electric vehicles. VW lags in those areas, choosing instead to focus on diesel, where it is a leader in sales, performance and, as it turns out, deception.

These are reasons enough to come down hard on Volkswagen, but there is a compelling political dynamic as well. VW is one of the European Union’s premier industrial enterprises. EU regulators have made a habit in recent years of going after large American companies from Silicon Valley that have a competitive advantage based on our technological leadership.

For example, Apple just underwent an antitrust review of its expansion in the highly competitive music streaming business. In August, the investigation apparently ended without any adverse findings, though reportedly the EU will continue to monitor the market for music streaming services.

Google was not so lucky. The search giant is under regulatory assault across the continent for its advertising sales practices, as well as its search rankings that allegedly favor its own products. Imagine – a company promoting the stuff it makes and sells over its competitors’ offerings! For such temerity, Google may face fines up to 10 percent of its most recent annual revenue. Google continues to deny the antitrust charges. This case is in addition to a French court’s declaration that a European citizen’s “right to be forgotten” must be honored by companies like Google and enforced on their servers, even those servers far from European shores.

Facebook, too, has run into trouble with European regulators. The Hamburg Data Protection Authority recently took issue with Facebook’s real name policy, which requires users to go by their real, legal names on the website or risk unilaterally having their account name changed by the company. German regulators claim that this policy violates German privacy law, and demanded that Facebook stop enforcing the rule within the country. Belgium’s Privacy Protection Commission has also taken on the social media giant, encouraging Belgian Internet users to install privacy software and publishing a report critical of changes to the company’s privacy policy that took effect in January.

Meanwhile, a French court is hearing charges that could put at least two Uber executives in jail, for the crime of bringing unauthorized car services to French people who want them.

All of this alleged American corporate misconduct pales in comparison to what VW has already acknowledged that it did. Europe could use a stern reminder that enforcing good business conduct is a two-way street. There is not the slightest reason for American regulators to cut VW a break, and all sorts of reasons to do otherwise.

Maybe when all is said and done, Europeans will pay a little more attention to what their own companies are doing to the physical and financial health of their citizenry, and a little less to trying to hamstring American firms whose major fault is success.

About Larry M. Elkin 553 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

Visit: Palisades Hudson

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