WHEN RISKS GET PRICED IN..

AROUND EURO 13 BILLION MAY HAVE BEEN wiped off Volkswagen’s (VW) market capitalisation last week and at least more than half a million cars will soon be recalled by this auto major in the wake of emission tests cheating caused by software algorithms in “defeat devices” installed in its cars.   But is Volkswagen really worried ?  According to Financial Times (FT), VW’s cash pile at the end of the year is expected to reach Euro 30 Billion and the company has already set aside Euro 6.5 Billion to cover fines and penalties.  And #Martin Winterkorn, its CEO who resigned has walked home with pension benefits amounting to USD 32.5 million.  (Until his resignation, he was the highest paid CEO of a listed German company). In India, VW exports 60% of its annual production and about 50,000 cars are shipped every year to Mexico.  At the end of it all, VW would perhaps only be facing a manageable liquidity crunch and the company appears capable of tiding over the crisis.

WRITING ABOUT THE SCANDAL, #John Gapper, the business columnist of FT wrote nonchalantly : “The key to getting away with bending rules is that it needs to be done subtly and discreetly. Abuse may be common but it cannot become too blatant, or it will alert regulators that tolerate some grey areas.”  However he also found it appropriate  to quote a Wall Street banker :“Ethics  are absolute, not comparative.”  The paper’s Lex column concluded rather clinically: “Fines will make the headlines now, but the future is still a matter of making the right car.” The interesting thing to note is that the scandal was uncovered as early as 2013 by an engineer named #Daniel Carden and his research team at West Virginia University in a USD 50,000 study that was sponsored by the International Council on Clean Transportation.  It is still unclear why it took so long for the scandal to surface in the public domain.

IN THE ABOVE CONTEXT, #STUART PEARSON, an analyst at Exane BNP Paribas said : “The artificial gaming of emission tests threatens to become the car industry’s Libor moment.”  He was alluding to the trillions of  dollars plus scandal in LIBOR (London Interbank Offer Rate) fixing (read rate rigging) that involved some of the world’s top most banks who are still anticipating further penalties.  Of late, scandals have engulfed banking, pharma and the auto industry.  Irregularities in several other sectors will soon be discovered perhaps for their  individual “Libor Moments”!  But if the cost of doing something patently wrong is already priced in the operational budgets of the scandal-ridden companies, the credo seems to be : Laugh your way to the bank, until your get caught. If something implodes, it has been priced anyway!!

CURIOUSLY ENOUGH, THINGS TAKE A DIFFERENT TURN IN INDIA. For instance, of the thousands of companies making food products,  only Nestle gets singled out and the officer in charge of food safety standards who spearheaded the investigation gets shunted to an inconsequential desk job in the newly constituted Niti Aayog (the new avatar of the erstwhile Planning Commission under the Modi Government)!

WE HAVE TWO WORLDS HERE : ONE, WHERE you do what you want and pay the fine when you get caught; the other where anything goes! The fundamental question we should ask ourselves is whether markets alone should determine our ethical standards.   #Michael Sandel dwelt at length on the subject in his book that cries to be read aloud : What Money Can’t Buy: The Moral Limits of Markets.  

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

w

Connecting to %s