An Innocent Crime?

PARIS – Volkswagen CEO “falls on his sword,” reports the Financial Times. The FT was speaking metaphorically, of course. Martin Winterkorn is German, after all, not Japanese.

A Japanese businessman in a similar circumstance would have his intestines on the floor by now.


seppuku 2The silhouette of Martin Winterkorn as seen a few days ago

(Seppuku graffiti, anonymous)


Volkswagen supplies motor vehicles to the world – millions of machines that work at least as well as any other. We have one of its small diesel pickup trucks at the ranch in Argentina. It serves us well.

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

Or perhaps not… Yesterday, Mr. Winterkorn resigned, after the company was caught rigging emissions tests. And VW stock plunged. Estimates of the fines, civil settlements, and other penalties the company will have to pay ran into the hundreds of billions of dollars.


VWVolkswagen AG, daily (Frankfurt Stock Exchange) – click to enlarge.


What do you have to do to earn this kind of a flogging? How many customers did Volkswagen’s reckless engineering kill? 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” carbon emissions really are for the environment. So, Volkswagen’s clever engineers found a way to pass U.S. emissions tests – apparently by disguising unwanted vapors during testing.

Was this illegal? Probably. Was it immoral? Did it harm any living thing? We don’t know. But it was definitely a bad idea. At the very least, Volkswagen has had to recall half a million cars, at enormous expense. The company is paying the price for its mistake.


PassatVW Passat 1300, a 1980s model. Yours truly (PT) used such a car to drive through the largely unpaved mountains of Eastern Anatolia in the early 1980s (a place full of grim-looking Kurds, strange nomadic mountain people and lots of Turkish military at the time. Probably not much has changed). A highly reliable car, that can be easily fixed if anything goes wrong.

Photo via


A $100-Billion Fraud

Yesterday also brought news of another corporate faux pas. This time, by one of America’s government-sponsored mortgage giants, Fannie Mae. The case also involved hiding something. But this time, the result was genuine suffering on behalf of millions of U.S. Homeowners.

Fortune magazine reports:


“On Monday afternoon, Thomas Lund [one of the highest ranking former officials of Fannie Mae] 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.

The suit claimed that Lund, who was the head of Fannie’s single-family division, helped hide more than $100 billion of sub-prime 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. This resulted in losses of at least $8 trillion in the U.S. stock market alone.


LundThomas Lund, at an MBA conference in 2007

Photo credit: Lucas Jackson / Reuters


Mortgage debt 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, this brought the entire financial industry – and the world economy – to 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 “underwater,” with mortgage debt in excess of the value of their houses.


FNMAThe stock of Mr. Lund’s former employer – a company that is truly a monument to the term “government boondoggle” – click to enlarge.


Millions of people lost their homes when lenders repossessed them. Remember “jingle mail”? Underwater homeowners 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.


Thomas Lund’s Parting Gift …

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.


Of course, Lund was not a German industrialist. He was a true American crony.


wh-tour-cronyCronies get special dispensation. Falling on swords is not part of the crony program.


Image captions by PT


Charts by bigcharts


The above article originally appeared at the Diary of a Rogue Economist, written for Bonner & Partners. Bill Bonner founded Agora, Inc in 1978. It has since grown into one of the largest independent newsletter publishing companies in the world. He has also written three New York Times bestselling books, Financial Reckoning Day, Empire of Debt and Mobs, Messiahs and Markets.




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3 Responses to “A True American Crony …”

  • Awakening:

    I recently read an article (perhaps on ZeroHedge) discussing some sort of meeting/arrangement/agreement between Merkel and Putin. This Merkel/Putin meeting then lead to Putin increasing Russian forces in Syria, which of course infuriates the US. Unfortunately, I don’t remember any of the specifics of the article, and I cannot find it. Has anyone seen something discussing this Merkel/Putin agreement? I want to re-read it, and I’d love to know if the recent Volkswagen scandal is actually retaliation from Obama to Merkel for her cooperation with Putin that lead to Putin’s buildup in Syria (if my memory of the ‘article’ is correct). The $9billion fine of BNP Paribas comes to mind as a similar sort of US retaliation for when the Europeans don’t fall in line with their US overlords.

  • SavvyGuy:

    Agreed. Ideal combustion would produce only water vapor and CO2; everything else is pollution.

  • Belmont Boy:

    Bill: You commit the same sin as the climate nuts. When you presume that testing car exhausts for pollutants means just testing for “carbon emissions,” you conflate. Pollution, i.e. the introduction of substances that don’t belong, is real and and undesirable. Emissions testing targets oxides of nitrogen, carbon MONoxide, and hydrocarbons, not (or at least not strictly) carbon dioxide. As we both understand, adding a bit of the latter to the atmosphere does not pollute any more than would emptying salt shakers into the ocean. But it’s hard to argue that the introduction of particulates and specific noxious chemicals into the air is harmless. It would, methinks, be best to rein such activity in. The government’s role in the necessary reining in might be the subject for another discussion.

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