A tale of two scams...

Sep 24, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

We opened the paper this morning and discovered that VW's CEO "falls on his sword," as the Financial Times put it.

The FT was speaking metaphorically.  Martin Winterkorn is German, after all, not Japanese.  A Japanese businessman in a similar circumstance would have his intestines on the floor by now.

Yesterday, US stocks took another loss, but not enough to write home about.  So, we turn our attention to the business world...and note, right off the bat, that it is a disturbing place.

Mr. Winterkorn's company, Volkswagen, supplies motor vehicles to the world, millions of machines that work at least as well as any other.  We have one of their small, diesel pickups at the ranch.  It serves us well.

The company employs 600,000 engineers, machinists, accountants, metallurgists, and hundreds of other metiers, all gainfully working in the modern economy.  And judging from its revenues, VW is doing as much to make the world a better place as practically any other enterprise in the world.

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But yesterday, not only did Mr. Winterkorn resign, investors sold VW stock, punishing the firm's owners with a loss of nearly $20 billion.   And estimates of the fines, civil settlements and other penalties the company will eventually pay are running into the hundreds of billions of dollars.

What do you have to do to earn this kind of a flogging? How many customers were killed by VW's reckless engineering?  How much money was stolen from buyers by its underhanded marketing techniques?  How many women were raped in its showrooms and how many pets drowned in its dark pools?

What's this?  None of the above?  Apparently, not a single person suffered injury and not a single pfennig was lost or stolen.  The total measure of harm suffered by the public?  We don't know.  It depends on how harmful "harmful" emissions really are.

VW's clever engineers found a way to pass US emissions tests, apparently disguising unwanted vapors during testing.   Was this illegal?  Was it immoral?  Did it harm any living thing?  We don't know.

But it was definitely a bad idea.  At the very least, VW has had to recall half a million cars, at enormous expense.

VW is paying the price for its mistake.

Yesterday also brought news of another corporate faux pas.  This one was made by America's mortgage finance giant, Fannie Mae.  The case also involved hiding something.

Fortune reports:

    On Monday afternoon, Thomas Lund settled charges brought by the Securities and Exchange Commission back in 2011 that he helped deceive shareholders of Fannie Mae in the run-up to the financial crisis. Fannie had to be rescued by the government in early September 2008, and many see the giant mortgage insurer's misconduct as one of the main contributors to the meltdown. The suit claimed that Lund, who was the head of Fannie's single-family division, helped hide more than $100 billion of subprime exposure from Fannie's shareholders, allowing it to continue to back more and more risky loans.
Now, here we have a clearer case.  Thanks in part to Mr. Lund's chicanery the bubble in mortgage finance caught investors unaware, resulting in losses of at least $8 trillion in the US stock market alone.  Mortgage finance had become a key component of Wall Street collateral.  When housing prices fell, many of the big banks were faced with insolvency.  Arguably, in September 2008, the entire financial industry - and the world economy -- was on the edge of collapse.

Losses in the housing market were colossal and came with great personal suffering.  We don't remember the number, but something like 10 million households found themselves "under water," with mortgage debt in excess of the value of their houses.  Millions of them lost their homes, when they were repossessed by lenders.  Remember 'jingle mail?'  People had no choice; they just mailed their house keys back to the mortgage companies.  Whole families were living in cheap motels and improvised lodgings. 
You'd think Mr. Lund would want to duck.  Surely, the SEC - when it ruled this week - would throw the book at him.  But wait.  Mr. Lund was in finance, not manufacturing.  He was not making cars.  He was not making anything.  He was taking cheap money that didn't belong to him (thanks to the Fed's EZ money policies) and lending it to people who couldn't pay it back.  He was not a German businessman.  He was an American crony.

So, when Mr. Lund looked up at the judge on Monday ...and said "Judge, what will be my fine?"  The judge didn't look at Mr. Lund and say "Boy, you got 99."

Instead, Fortune continues:

    Lund's penalty for his role: a mere $10,000. What's more, the penalty won't even be considered a fine. The SEC agreed to classify the payment officially as a "gift to the U.S. government," not an actual punishment. But the worst part is this: Lund won't even pay the penalty. The agreement allows Fannie to make the payment for him, which it has agreed to do. And don't forget: The government had to bail out Fannie and still controls it.

    So in other words, the non-fine "gift to the U.S. government" that has been levied on the former head of Fannie's single family division, which was the biggest source of the company's problems, will actually be essentially paid by the government. How's that for justice?

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Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "A tale of two scams..."

Jay.

Sep 24, 2015

Amazing to see that such things happen in America also. I thought that such ingenuity in creating financial scams and subsequent harsh punishment was patented by the Indian political establishment! Your post left me feeling guilty of being judgmental and biased towards Germans, a feeling I developed after going through reports on the scandal on Bloomberg and Economist. That's the power of media and newsmakers ( you included Mr Bonner).... Bending of minds and turning of thoughts. But I do believe that mistakes/ wrong deeds are what they are. How the society deals with these misdeeds varies immensely from country to country, as you mentioned by citing the Japanese example.

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