An $18 billion liability figure attached itself on Friday to Volkswagen's diesel disaster. Tuesday morning brought news that the German carmaker has set aside $7.3 billion (€6.5 billion) to cover a scandal spreading worldwide. How to make sense of these impressive-sounding numbers? 

As we all know, Volkswagen has apologized for selling hundreds of thousands of diesel cars in the U.S. with software specifically designed to evade government pollution tests. That's bad, but it gets worse. As regulators in multiple countries have weighed in to say they would also investigate VW imports, the company disclosed that the irregularities on diesel-emission readings extend to some 11 million vehicles globally.

At this early stage, putting a precise price tag on the ultimate cost of pollution penalties, criminal fines, private settlements, and the like is virtually impossible. But we can begin to break down some likely elements of the pecuniary damage VW faces.

David Fuller's view

What a distressing and humiliating problem for Germany.  The country’s automobile industries have long been the pride of modern Germany.  Volkswagen is practically wrapped in the national flag. 

The Audio portion of this Bloomberg report mentions that Lower Saxony has a 20 percent stake in Volkswagen.  The Federal Government also owns a stake in VW, as do Germany’s Automobile Unions. 

The only winners in this saga will be the lawyers.  Meanwhile, the markets are now engaged in their exercise of asking: who else might be involved in this problem?  Hopefully, no other companies but given Volkswagen’s influence, the question is not unreasonable. 

Why would a powerful prestigious company take this risk?  Surely a number of people at Volkswagen, from management to software engineers, would have known of the deception to ensure that it could not remain a secret indefinitely.  I can only assume that Volkswagen found that it could not comply with the EU’s tough emission standards, without a loss of performance which would have weakened its international competitive position. 

What about the share performances of Germany’s three automobile giants?  My guess is that Volkswagen could lose a year or two’s earnings in dealing with the fines, lawsuits and recalls.  If so, that would certainly weaken the company, including potentially forcing some downsizing in both manpower and divisions.  If BMW (est p/e 8.57, yield 3.66% and Daimler (est p/e 8.22, yield 3.70%) are cleared of any similar emission fraud, they are very competitively priced today.