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Will Volkswagen Settle With the Feds This Week?

By John Rosevear – Mar 22, 2016 at 1:30PM

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Reports suggest that the U.S. government is taking a very tough line with VW. Will the company settle before a critical court date later this week?

Image source: Volkswagen

Embattled German auto giant Volkswagen (VWAGY -1.69%) may establish funds to promote clean transportation throughout the United States as part of a settlement with the federal government over its diesel emissions scandal, according to a a report from Bloomberg.

Separately, Reuters reported that the company is pushing for a "comprehensive" deal with U.S. authorities that would resolve most or all of the government's outstanding issues against the company.

It has been six months since U.S. government officials first announced charges against VW for programming its diesel-powered vehicles to cheat on emissions tests. Are VW and the Feds finally getting close to a deal that will help owners of the 600,000 affected cars in the U.S. -- and VW's struggling dealers -- get past this mess?

VW is pushing for a "comprehensive solution"
"It must be our goal to negotiate a comprehensive solution, which could also include the lion's share of expected penalties," said an unnamed "senior manager" at VW who was quoted in the Reuters report.

According to this source, the negotiations between VW executives and U.S. regulators are focused on fixing the affected cars and on some kind of compensation for several years' worth of illegally high nitrogen oxide emissions from the affected diesel engines. Nitrogen oxides cause smog, and emissions are sharply limited in the U.S. under the Clean Air Act.

What kind of compensation might the Feds have in mind? According to the Bloomberg report, attributed to "people familiar with the matter," VW and U.S. authorities are discussing the possible creations of two funds. One, administered by the U.S. Environmental Protection Agency (EPA), would promote clean transportation throughout the country. The other, to be administered by California regulators, would be devoted to promoting zero-emission vehicles in that state. 

The pressure on Volkswagen is immense -- and still growing
VW is under tremendous pressure to agree to something soon: A Federal judge has ordered the company to present a plan to fix (or buy back) the affected vehicles by this coming Thursday, March 24.

Volkswagen is facing a series of civil charges filed by the EPA and California regulators after it admitted to cheating on certain emissions tests for years. VW has admitted that it sold about 11 million diesel-powered vehicles that had been programmed to cheat on government emissions tests -- about 600,000 of those are in the United States. The cars' exhaust appears to comply with regulations when tested, but it's much dirtier than allowed in real-world driving.

Volkswagen has been ordered to come up with a solution that will bring those 600,000 vehicles in the U.S. into compliance with the law -- or, alternatively, to buy them back from their owners at a fair price. The company submitted a plan to repair the vehicles late last year, but it's believed that regulators are demanding that the company provide an offer to buy back some or all of the cars -- and it's believed that VW has balked at that demand.

In addition to the civil charges, VW is facing a suit filed by the Justice Department in January over the company's violations of the Clean Air Act. The penalties for the violations could theoretically total as much as $46 billion -- a staggering sum that has apparently provided VW's senior leadership with some motivation to settle the charges.

It's the judge in that case that has ordered VW to have its plan ready on Thursday.

What's likely to happen this week
From what we've heard, it sounds like VW's plan will involve a combination of recalls and buybacks.

Earlier this year, VW CEO Matthias Mueller said that he believed that most of the affected vehicles in the U.S. could be retrofitted with additional exhaust-cleaning systems that would bring them into compliance.

That's "most," not all. It's thought that VW will need to buy back some of the older models that can't be cost-effectively brought into compliance with the Clean Air Act. It's also thought that the regulators are pushing VW to offer the option of a buyback to most or all of the affected owners. That could end up costing VW several billion dollars, and it's likely a key sticking point in the negotiations.

But as the quote from the unnamed VW manager suggests, it's very much in VW's interest to settle as much of this as possible so that it can begin to move past the scandal. But to do that, Mueller and his team may have to accept a very expensive settlement -- or take its chances in court with an angry U.S. government.

John Rosevear has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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