A Drive-By Murderer?

Photographer: Andrey Rudakov/Bloomberg

Volkswagen's Scandal is Libor on Wheels

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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There's never just one cockroach. That's what we learned from the market-rigging scandals in recent years. Be it the London Interbank Offered Rates, currencies, metals, oil or… (you get the picture), it turned out that every bank and broker that touched every market benchmark left grubby fingerprints of fraud, collusion and deceit. So the revelation that Volkswagen cheated for years on tests measuring how much damage its diesel engines do to the environment raises a mammoth question: Who else did the same?

The parallels between the shameful behavior in finance and the backdrop to executives at Volkswagen deciding it was OK to program 11 million cars with deceitful software are compelling. In both industries, the regulatory structure left large areas of territory open to manipulation. In finance, self-regulation produced flagrant and widespread abuse; in cars, enforcement of diesel emissions rules was lax and testing was easily gamed. And in both industries, that's created an attitude of "What can we get away with?" rather than "What's the right way to behave?"

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While the market was shocked at VW's flagrant deception, just as it was the Libor scandal, in both cases manipulation was an open secret for industry cognoscenti. There is an echo here of the "broken windows" thesis that argues buildings where a single pane is left broken are more vulnerable to further vandalism than those were the breakage is repaired. If the overseers of an industry turn a blind eye to some kinds of misbehavior, they're opening the door to a culture that regards rules and regulations as obstacles to be dodged rather than standards to be observed.

So while the U.S. Environmental Protection Agency and its peers around the world can probably be excused for not spotting the VW dodge -- the idea of software that can switch engine emissions behavior when it detects that there's a test underway is the stuff of an Austin Powers movie, if not a Bond flick -- the entire regime of testing seems riddled with the kinds of flaws that should have been fixed years ago.

Korea's Hyundai paid $100 million last year, as well as forgoing $200 million in emissions credits and spending $50 million on preventive measures, to settle charges it exaggerated both fuel efficiency and carbon emissions to the EPA. A June 2013 article by Steve Abrams for the website Road and Track explained how electronic management systems can be tailored to game the EPA's tests:

Engineers know exactly how their vehicles will be evaluated. They know exactly how fast the car will go, and how long and how quickly it will accelerate or decelerate. When engineers program the control logic, they can monitor parameters that correspond to the test cycles, such as speed, acceleration and pedal position, and select the gear ratios, throttle positions and air-fuel ratios that will deliver the minimum possible fuel consumption.

Even before the Volkswagen bombshell, there was plenty of evidence that automakers aren't exactly adherents to Google's "Do No Evil" corporate pledge. While logic suggests that reputational concerns, if not outright litigation risks, dictates high standards of probity, it took General Motors more than a decade to recall cars that had a faulty ignition switch that's been blamed for at least 124 deaths, costing the company more than $1.5 billion in this month's settlement. It took a four-year criminal investigation before Toyota conceded last year that its accelerator pedals were jamming, leading to 10 million vehicles being recalled and a settlement worth $1.2 billion.

Arguably, what's being uncovered in the auto industry is even worse than the wrongdoing in finance. In the bank scandals, it's only money. But, as U.S. District Judge William Pauley said in March when Toyota reached its deal with the authorities, "corporate fraud can kill" when safety is involved. As Wired magazine points out, the reason for having auto emissions regulations in the first place is because nitrogen oxides hurt health:

Exposure to nitrogen oxide and ozone is linked to increased asthma attacks, respiratory illnesses and in some cases premature death. Ozone also worsens existing cardiovascular and lung disease.

Volkswagen shares were already in a funk; Friday's revelations have wiped a third off the value of its shares, leaving the company's value at less than half of where it was in mid-March:

Source: Bloomberg

That drop of 23 billion euros ($25.5 billion) between Friday and Tuesday reflects expectations for how much the company might pay in fines. But given that the banking industry has paid $10 billion just for rigging currency rates -- deplorable and dishonest, but not actually a health hazard -- maybe investors in car company shares should brace themselves not only for more bad news, but for fines that might make the banking scandals look like small beer.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net