Unintended Consequences

Thu, 2017/01/12 - 1:18pm | Your editor
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Legendary investor John Templeton stated in 1994 that bull markets are "born on pessimism, grow on scepticism, mature on optimism, and die on euphoria." While Sir John was the original global investor, his comments are likelier to apply to Wall Street than to global markets in 2017. They also die from unintended consequences when the powerful speak off the cuff as Donald Trump did yesterday.

What's sauce for the goose is not sauce for the gander.

It is much harder to manage the corporate ethics of an Amercian Depositary Shares from a financially serious country, like Germany, than from a country considered to be a global lightweight, like Portugal. To say noting about holding companies from a tolerated haven like Luxembourg. This is the lesson from the imposition on Volkswagen of securities fraud fines over its diesel emissions “defeat mechanism” last week.

Meanwhile outright fraudulent acts by the board at Portugal Telecom were not prosecuted under US securities laws and the perps went scott free. Yet Volkswagen shares traded only thinly on the over-the-counter pink sheets. Meanwhile PT stock was an NYSE-listed and regulated ADR easily purchasable by any US investor and many pension and investment funds.

Moreover the board of the German automaker which included representatives from German auto-maker trade unions and the local state government was not directly involved in fiddling its US share price, from all the evidence adduced to date, and barely aware about how it misled diesel car-buyers. Meanwhile members of the PT board representing its 15% shareholder, the Banco Espirito Santo, were directly implicated in its misrepresented acccounts, deliberately bled of cash for its publicly announced Brazilian purchase plans, absconded through a series of obscure Luxembourg family holding companies.

Under normal securities law standards, the PT “scandal” should have had greater American stock market repercussions in Lisbon than VLKAY faced in Wolfsburg. But in fact the reverse occurred. The American watchdogs let Portugal off the hook while Berlin was forced to pay up, even on behalf of the unions and local state government which had Volkswagen board seats but were probably totally unaware of the diesel emissions testing fraud. One reason the German firm was targetted for more severe penalties is that nobody could expect to raise $4.3 bn+ from Portugal.

The ball is now in the US court as Fiat Chrysler faces its own diesel emissions scandal with the US Environment Protection Agency accusing it of falsifying diesel emissions on 100,000 vehicles. FCAU, Dutch-incorporated with operations in Italy and North America, is the latest environmental sinner. It has less cash than VLKAY but is hardly Portuguese poor. We owned it until about a year ago, much more recently than any involvement in Volkwagen, sold in the 1990s.

More for paid subscribers follows from around the world today on regulatory matters and more news about the auto industry, aviation, real estate, heavy industry, and, alas drug-makers, the sector most badly hit yesterday by the rambling Trump so-called press conferences.

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