VW car crash damages still piling up

Winterkorn of market discontent

As details about VW’s sneaky pollution transgressions continued to emerge late on Tuesday, one of the most crucial questions for investors was how long its increasingly isolated CEO could last.

A near-40% loss by VW shares in two days was the most eloquent view shareholders could give about the future of Martin Winterkorn, who’s been at the wheel since 2007.

And a partial answer to their question emerged on earlier in the day.

It was via an uncorroborated report from the generally reputable Der Tagesspiegel German daily newspaper.

Unidentified sources, supposedly on Volkswagen’s supervisory board, said Winterkorn would be replaced by Matthias Mueller, the head of the carmaker’s Porsche division.

A Volkswagen spokesman subsequently said the report was “ridiculous.”

Still if VW unofficially wanted to get a ‘holding’ message through to investors, it succeeded.

VW shares pared back losses that earlier threatened to match their 20% slide a day before.

Also, the carmaker’s denial enabled it to maintain the impression of ‘due process’ ahead of what will probably turn out to be its most closely observed Supervisory Board meeting ever, scheduled for Friday.

(In fact as this article was going online, further German press reports suggested VW’s board could meet as early as Tuesday night.)

Criminal damages

Still, hopes that Winterkorn’s likely ejection may draw a line under the affair seem forlorn.

Further unconfirmed–but almost certainly accurate—reports have alerted markets that the US Justice Department launched a criminal investigation after VW’s unequivocal admission of guilt about “defeat device” software.

Alleged misdemeanours could now include offences against the Clean Air Act and perhaps fraud.

The situation continued to metastasize late on Tuesday evening.

And whilst Volkswagen earlier announced it would set aside €6.5bn ($7.27bn) in its current quarter for potential damages, this by no means closed the door on further multibillion euro provisions.

In short, what is turning into one of Germany’s biggest ever corporate scandals continues to evolve—leaving investors with a long and growing list of important issues to gauge.

We still think the two biggest concerns at the top of investors’ #VWGate worry list right now are the length of the CEO’s remaining tenure, and VW’s likely damages.

10 Reasons why Winterkorn’s days are numbered and VW’s maximum damages will keep rising

• Winterkorn will almost certainly stand down, probably before Friday, but possibly a few weeks after. The scale of the alleged deception, touching 11 million VW cars by VW’s own admission, happened under his watch. It would be in keeping with norms of direct (if harsh) corporate responsibility-taking in Germany for the Wolfsburg, Lower Saxony group to dismiss its CEO as soon as possible.
• Backing that up, VW almost certainly wants to participate in the DoJ’s recently established conditions for taking into account corporate co-operation. These include that companies must name culpable individuals. (For VW, this might include more than just its current CEO).
• Winterkorn himself has stated that he is “deeply sorry” and “would do everything…necessary in order to reverse the damage”.
• Winterkorn’s position was previously under serious pressure during a leadership battle with long-time chairman Ferdinand Piech, who subsequently resigned.
• Winterkorn was responsible for the VW brand between 2007 and 2015, a period which spans the time of the alleged transgressions.
• Even after Winterkorn’s likely imminent departure, a damaging period of months and more probably years will pass before concrete charges are posted.
• Speculation about the outcome of these charges has focused on the now infamous $37,500-per-car maximum redress sought by the Environmental Protection Agency for each one of the 482,000 alleged polluting vehicles. This would total $18bn.
• Whilst the total possible figure would probably be negotiated downward, it of course does not include penalties for charges on non-environmental grounds—e.g. fraud.
• The possibility of other countries levelling their own charges against Volkswagen is a material one.
• Several ‘private’ fraud lawsuits have already been filed. Many of these will evolve into ‘class actions’ that could eventually result in multibillion-dollar damages.