British Petroleum, Volkswagen, Wells Fargo

 

Where do you think the story goes from here?

Here we have one of the world’s largest oil companies, a leading auto manufacturer, and the second largest bank in the U.S.  What do they all have in common?   I’ll give you a hint. The word starts with an “S,” and, ends with a drop of nearly 40% in shareholder value.

On April 20th 2010, British Petroleum’s (NYSE: BP) Deepwater Horizon oil rig exploded and eleven BP employees were killed. For the following two months, BP proceeded to create the third largest oil spill in history and one of the most severe ecological damages to the Gulf of all time.

Within the first 37 days of the spill, 120 lawsuits were filed against BP.

Last year, five states along with the U.S government settled for a record $20.8 billion with BP.  BP was ordered to pay $4 billion in criminal fines and $2.4 billion in penalties. The additional damage includes $4.9 billion to Gulf States, $1 billion to local governments, $600 million for reimbursement claims to the federal government, $8.1 billion for restoration projects, and $700 million for any future damages.

In New Orleans, BP relinquished $5.5 billion in Clean Water Act penalties.  The total bill to BP was an estimated $62 billion. Yes, you read that right. $62 billion was just to BP.

On September 18, 2015, Volkswagen (OTC:  VLKAY) became the next subject of harsh environmental scrutiny.  It came to light that VW had cheated emissions standards in over 11 million diesel vehicles since 2008, allowing these cars to dump 40 times the legal levels of pollution into the air.

In terms of lawsuits, VW was ordered in October to pay the final settlement amount totaling $14.7 billion in the USA. In Germany, the company was sued for $3.6 billion, and Norway’s State Pension Fund is suing for an undisclosed amount.

As far as financial reparations, VW has instituted a buyback program that is projected to cost $10 billion, plus $10,000 cash to every owner of a Volkswagen TDI (Turbocharged Direct Injection).

The surface of the emissions cheating became the worst PR nightmare that any company could ever want. Former CEO Martin Winterkorn was forced to step down, Volkswagen has recently cut 30,000 jobs and according to the company it is a direct result of the false admissions standards testing.  The company also started a restructuring process and the new CEO Matthias Mueller is making changes to the production process to cut costs, improve efficiency, and make sure a situation like this does not happen again.

News broke on September 8th 2016, that Wells Fargo has been opening accounts in clients’ names without their knowledge.  It came to light that employees all over the country had opened approximately 2 million fake savings and credit card accounts from 2011-2015, on the basis of allowing bankers to meet unrealistic sales quotas. These customers were also being charged management and activation fees over this period.

In addition, Wells Fargo fired 5,300 employees and are now paying heavily for their actions.

They have been hit with $185 million dollars in fines, refunded over $5 million to customers, are facing a flurry of expensive class action lawsuits. Some of the larger ones come with price tags of $7.2 billion and 2.6 billion respectively.

Ok, the word I was looking for is “Scandal.”

The three scandals were different in many ways. With Wells Fargo, the collateral damage was to customer’s credit scores and bank accounts. With Volkswagen, while pollution was a serious problem, it was one that did not directly affect the well-being of human and marine life, and did not affect the natural landscape of the earth.

However, the outstanding example here is BP. Due to the explosion of the oil rig, human and marine life was lost, businesses were directly hurt, entire industries were negatively affected, and significant damage was incurred by the beaches and natural landscape around the gulf.  The effects of BP’s catastrophe stretch much wider and farther than those of the two other scandals.  This is best demonstrated in what has happened to the shareholders.  The BP scandal has cost more and their shareholders have lost more than in any other corporate scandal in history.

Now, let’s crunch some numbers.

Since the wake of the Deepwater Horizon, BP has lost a whopping 86 billion in stock values, compared to Exxon’s gain of $54 billion over the same time period.  So relatively, BP shareholders have paid over $140 billion for with $62 billion settled liabilities.  As BP’s legal troubles are pretty much done, we think that the market has over punished their shareholders.

Volkswagen investors haven’t fared much better.  From the day of the announcement, the stock has lost a total $13 billion in market cap.  Over the same time period, General Motors’ shareholders have gained around $6 Billion.  So, compared with the projected liabilities already on the table of $18.3 billion, VW’s stockholders are not out of the woods yet.

Similarly, since the scandal broke, Wells Fargo investors have lost $27 billion in stock values, compared with JP Morgan which has little retailer clients’ exposure.   Based on what we have already known now, the Wells Fargo scandal will cost upwards of $10 billion.  So similar to BP, Wells Fargo’s shareholders have paid more than their share.

Though the causes of these three scandals are distinctly separate from one another, each company lost massive fortunes due to common negligence.

 

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