Why the VW mess is worse than other recalls

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Volkswagen Beetles are offered for sale at a dealership on Sept. 18, 2015, in Chicago.

Volkswagen shares slid more than 34 percent this week following news that the German automaker would stop selling its "clean diesel" cars in the U.S. Last week, environmental regulators accused the company of installing software to evade emissions standards.

Monday was the biggest one-day drop for VW since February 2009, and losses amounted to about $15 billion in market value. That's some amazing movement, especially considering that it's about 482,000 cars in the U.S. that are involved in the alleged misdeeds.

Data show that VW's drop is unusual for automakers involved in big recalls. A Big Crunch analysis suggests that investors in the past decades have not been significantly bothered by market fears associated with auto recalls.

Overall, there isn't a pattern of losses or gains in the first 30 days after a recall report is filed in the National Highway Traffic Safety Administration database. Automakers tended to be down a year afterward.

Of course, the market often moves independently of major recalls. If we adjust for the movement of the indexed S&P 500, the average change after a recall is close to nothing—and there is little evidence of investors' dumping their stocks immediate before or after a recall campaign is made public.

The biggest recall in U.S. history was of 21 million Ford and Mercury vehicles in 1981. The cars and light trucks had faulty parking brakes that would indicate that they were engaged but would not actually work. The share price fell just 7 percent in the month following the recall's announcement and 15 percent over the year.

To repeat, that's 21 million vehicles recalled and a 15 percent drop over 12 months. Nothing like a 34 percent drop in two days over less than half a million potentially recalled cars.

Ford's share price rebounded and more than tripled over the five years after the massive recall.

Ford also saw the opposite—their share price leap after a large recall. In 2009, the company recalled 4.5 million vehicles of Ford and Mercury models with faulty wiring. A Texas Instruments-made speed control deactivation switch could overheat and catch fire, something that could happen whether or not the car was actually running at the time.

Ford's share price leapt 17.6 percent in a month of trading following the recall announcement. A year later, the stock had increased 91 percent in value.

Cheating diesel

While the approximately 482,000 VW and Audi cars in the U.S. affected by the EPA's allegations are far fewer than the millions recalled in the largest campaigns, the costs could be far greater.

In the quest to create "clean diesel" cars with both high fuel efficiency and low emissions, VW seems to have found a short-cut: cheating. According to EPA documents, the company admitted to using software to game emissions tests, keeping emissions within legal limits during laboratory conditions but exceeding them by as much as 35 times out on the road.

The understandably irate EPA has the power to fine the company as much as $18 billion—more than six times the company's net profit in 2014. Citing anonymous sources, Bloomberg reported Monday that VW was under a criminal investigation by the Justice Department in association with skirting the emissions testing. On Tuesday, VW acknowledged another 11 million diesel cars worldwide were installed with the same software. Some 6.5 billion euros ($7.3 billion) have been set aside to deal with the cleanup, VW said in a statement.

And the damage isn't a one-time problem. Not only could the company's reputation be seriously harmed, but the company has thousands of TDI clean diesel cars that can't be sold. Those models accounted for 22 percent of Volkswagen of America sales last year.

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