Volkswagen Scandal an "Extinction-Level Event" for VLKAY Stock

A Volkswagen scandal is playing out on the world's stage this week – one that could be "an extinction-level event for VW as we know it today," according to Money Morning Chief Investment Strategist Keith Fitz-Gerald.

Volkswagen AG (OTCMKTS ADR: VLKAY) stock plunged 17.1% Monday after the 78-year-old company confessed it deliberately programmed more than 500,000 vehicles to emit lower levels of emissions during official testing than when they're on the road.

Then on Tuesday, another hammer dropped – to the tune of an additional 15.48% loss for Volkswagen stock. This time, the auto giant admitted internal investigations found another 11 million VW vehicles with emissions-cheating software installed. CEO Martin Winterkorn announced his resignation at 11 a.m. ET Wednesday.

"It's a betrayal of customers everywhere who thought they were buying greener, energy-efficient vehicles – including yours truly," Fitz-Gerald said.

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Volkswagen is the biggest German car maker and one of the country's largest employers, with more than 270,000 jobs in its home country and even more working for suppliers.

"VW represents about one in 10 vehicles sold worldwide, so this is a huge problem," Fitz-Gerald said. "All by itself, the company employs about one-third of all German auto industry workers. Roughly 20% of German exports are vehicle-related. That's going to pinch everybody from steel makers to tires. Anybody in that industry is guilty by association, unfortunately."

"I cannot recall something so serious in modern times."

Millions of investors, large and small alike, are reeling. Shares of Bayerische Motoren Werke AG (ETR: BMW) and Daimler AG (OTCMKTS: DDAIF) have taken corresponding hits of 6% and 7%, respectively, simply because they're German-based, even though the issue does not affect their cars.

The scandal threatens to crush VLKAY stock – forever. Over the last five sessions, shares are down 29.4% in heavy trading.

Is this only the beginning of the reputational fallout for VW, or has the worst passed?

Let's take a look…

Volkswagen Scandal an Abrupt End to 78-Year-Old Auto Giant?

If you like Volkswagen, this will come as bad news….

"At best, the Volkswagen scandal will drag earnings into the toilet for years to come if the liabilities are as bad as everybody thinks," Fitz-Gerald said. "At worst, the company fails, leaving vultures to pick it over."

"Perhaps it sells Audi, Lamborghini, and Porsche as a part of that, or simply implodes. It's too early to tell. I think it's potentially an extinction-level event for VW as we know it today."

Fitz-Gerald pointed to a 2010 joint study by Lin Bai of the University of Cincinnati College of Law, James Cox of the Duke University School of Law, and Randall Thomas of the Vanderbilt University Law School. The authors found that companies engaged in fraudulent behavior can suffer financial punishment at the hands of the financial markets averaging 7.5 times that of any legal penalties.

Volkswagen has already set aside $7.3 billion in an effort to cover recalls. That's equivalent to about a half-year of profits.

But the penalties could top $18 billion in the United States alone. Worldwide, the number could be double or even triple that amount, if investigations in South Korea, Britain, France, Italy, and other countries find similar problems.

"For most investors, this is the end of the road – pun absolutely intended," Fitz-Gerald said. "They can't imagine a way out, let alone how to profit from the situation." [Editor's Note: Fitz-Gerald does see a way to profit – by using a "pairs trade." He explained the method – and how to use it when it comes to VW – here…]

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