Home > Blogroll > When Doing Bad is Good for Business.

When Doing Bad is Good for Business.


I’m reminded of the scene in the movie “Fight Club,” when Edward Norton is speaking to a woman on a plane and tells her about the formula his automotive company uses to figure out if they should recall a product.
“A new car built by my company leaves somewhere travelling at 60 mph. The rear differential locks up….The car crashes and burns with everyone trapped inside. Now, should we initiate a recall?”

“Take the number of vehicles in the field (A), multiply it by the probable rate of failure (b), multiply the result by the average out of court settlement (C.) A x B x C=XX.  If XX is less then the cost of a recall, then we don’t do one.”
“Are there a lot of these kind of accidents,” The passenger sitting next to him asks. He replies “You wouldn’t believe.”


The recent fine of $16.4 million levied against Toyota brings to mind this formula. The largest in US history, but nowhere near the cost of a recall.
In an earnings call on Feb. 4, Toyota estimated it had paid $1.12 billion on warranty expenses and $812 million on lost sales for a total of $2 billion. A heavy price to pay and quite an incentive to keep things quiet.
Now presently they have 41 class action suits against them and 13 individual lawsuits. Without the Governments recall, would the class action suits against them even have been brought? Then you are left with just individual suits claiming deaths or injuries caused by unwanted acceleration.
So as Toyota tried to slide under the radar, so as not to do the recall, their only punishment is a fine that is less then 1% of what would happen if they came right and out and told people.


Now getting to the SEC allegations of Goldman Sachs. The SEC alleges they knowingly put together these $42billion CDO’s and sold them, knowing they were going to fail.
Now if the SEC wins the case against the best lawyers money can buy, the resulting fine is going to be what $10million? Maybe the $15 million they made in fee’s off the deal. Compare that to the revenue of $51 billion from last year. Or even to the $16.2 billion in bonuses given out this year, not to mention the extra $5 billion they are planning on doling out for three months work.
The US public and agencies assigned to protect the little guy carry far too small a stick to handle the greed of big business. I mean we can’t even get finance reform bill off the ground to at least prevent the last economic collapse from happening again!

I think  we need to have penalties that will give companies enough of an incentive to re-think their dubious deeds.  Whether that is larger fines or imprisonment.

I mean if Goldman was fined $16.2 billion, the payout of this years bonuses,  they may actually care.

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