Volkswagen Shorts Get Run Over

October 28, 2008

The financial turbulence brings up all kind of strange stories like Citibank’s crazy business model. Here is another one.

As the recession settled in, car sales have tanked and car makers are in trouble. But this week Volkswagen shares exploded and for a few minutes Volkswagen was, on paper, the world’s most expensive company. This is the mother of all short squeezes.

What happened:

20% of Volkswagen shares are owned by the state of Lower Saxony.
Porsche, having made loads of money in previous years, is for some
time know to own 35% of Volkswagen shares and aiming for a controlling
majority of 75%.
A lot of hedge funds sold short Volkswagen share and hoped that Volkswagen’s share price would sink with the economy.
The shorts had borrowed 12.9% of Volkswagen’s common stocks. Some did not borrow the shares at all. Their bets were naked:

Conventionally, the trader will "borrow" securities
from a current shareholder, typically a bank or prime broker, agreeing
to return them on demand. The seller delivers these shares to a buyer,
who takes full ownership and likely does not know that he is
participating in a short sale. When the seller wants to "unwind" the
position, he buys back equivalent shares in the market and returns them
to the lender.

…
Naked short selling is a case of short selling without
first arranging a borrow. If the stock is in short supply, finding the
borrow can be difficult to arrange.

On Sunday Porsche announced that it had bought an additional
7.6% of Volkswagon shares and had acquired options from other
shareholders to buy another 31.5% of shares.
With 94.1% (20+35+7.6+31.5) of Volkswagen shares effectively taken
off the market and further buy demand from Porsche, the price for still
outstanding shares went up.
The folks that lend 12.9% of Volkswagen common shares are now
asking the shorts to give them back. The shorts have to buy those in a
market that can only provide half of them or settle in cash at current
market prices.
That drove the share prices up into lunatic highs, 1,005.01 euros
at the top, and will ruin the hedge funds that made these deals.

Writes the FT:

“I have hedge fund managers literally in tears on the phone,” said one London-based auto analyst.

It
is rumored that hedge funds lost some $10-15 billion on their
Volkswagen bets. I am not sorry for these people. They wanted to play
in the casino and they knew the risk.

It is fine to short a stock when one expects it to go down. But it
was well known that Porsche had the intend to buy as many Volkswagen
shares as it could get. There was no good reason to bet against its
ability to do so.

Following the Volkswagen jump today, the DAX30 index, which includes
Volkswagen, jumped up 11% and road killed lots of index short folks.

The current downturn will likely see more of such strong market
reactions upwards and downwards. With each one the believe in ‘free
markets’ will be hit and the myth of ‘deregulation is good’ will be
exposed for what it is.

That’s fine with me. Especially when such market troubles squeezes those who profited from the false believe.

If we really need to go through another depression lets hope that
it will hit the players just as much as the normal folks. That is
likely the only way to prevent another credit bubble and bust for the
rest of our and our children’s life.

Posted by b on October 28, 2008 at 20:11 UTC | Permalink

Comments

Short squeezes are a way of life in the markets and short sellers know the risk. In this case, if traders short a well run company, then the cost is great. Times are tough for all car makers but this does not mean VW and Toyota are the same as GM and Ford.
But there is an unfounded anger at short sellers when they identify and short weak, indebted companies that made bad bets. And there is a desire to steal their profits when they do. If you will recall the total ban on short selling of 799 financial companies that caused an 800 point Dow rally on September 15 or 16 (iirc) I’m convinced that was simply intended to drive up the price of these companies so that insiders could sell. In other words, the government intervened to take money from some and give it to others.
While the world is filled with more serious problems than those of poor oppressed short sellers, it is nevertheless, a sign of how “committed” the U.S. government is to free markets.

Posted by: Lysander | Oct 28 2008 21:23 utc | 1

about cars:
General Motors is reportedly asking for $10 billion in taxpayer money to grease a merger with Chrysler. That is on top of $25 billion in cheap loans just promised by Congress for “technology development.” wsj com
Automotive giants General Motors and Chrysler may still receive a bail-out from the US government – taking money from the controversial $700bn rescue package that was originally intended to stabilise America’s flailing financial institutions. 1st post.uk
See also reuters
Daimler ‘gave’ Chrysler to Cerberus: biz wk…It is worth ‘nothing’: autoblog
Hmmm… what was all that crowing about a free market (US)?
And how exactly is Porsche, always glam image (orginal Ferdinand I believe, finally gave in to Hitler to design the first Volkswagen, see wiki or the like) going to up sales of cars in a recession, or depression? What are these gamblers banking on? Casino madness.

Posted by: Tangerine | Oct 28 2008 21:31 utc | 2

I admit I’m weird, but I think credit bubbles and busts are obsolete now.
The economic model has to change in some fundamental ways. No I don’t know what to do or how to do it, but I expect it to happen in fairly short order.

Posted by: rapt | Oct 28 2008 21:33 utc | 3

One week before the election and we have $2/gal gas and a 890 pt
stock rally. Bush & Co. are pulling out all the stops to get McCain elected.

Posted by: ecoli | Oct 28 2008 22:38 utc | 4

He who sells what is not hisen,
must pay up or go to prison.

Posted by: Buckaroo | Oct 28 2008 22:54 utc | 5

Did people who knew about secret, CIA-led coups use that information to game the stock market?
As someone on another forum says, paraphrasing, “i think this is one of the most important things i have read in many years of reading about politics/economics/Presidential doctrines…” However, if you follow Fisman’s line and apply it to the contemporary picture, it’s like a kick in the head. A can of worms, that could very well be dangerous, if not deadly.
In other words, Fisman has pointed to a path, and I suspect, it would take a demigod to follow it or a warrior who is not afraid to die. A hero’s journey, one in which the protagonist[‘s] very well may not coming back from. Sorta like a Gary Webb, Fisman has cracked a fissure to a monomyth. A call to an adventure.
Who will step up and save us?
NO ONE, we have to save ourselves.
Kafka was wrong, in that he wrote, “The Messiah will come only when he is no longer needed.” I don’t know about you, but I can’t wait that long. We are they ones we have been waiting for. We need an army of Gary Webb’s, because they can’t take us all out. One truth teller can be taken down, however a herd of us stands a chance.
“We are all tattooed in our cradles with the beliefs of our tribe; the record may seem superficial, but it is indelible. You cannot educate a man wholly out of the superstitious fears which were implanted in his imagination, no matter how utterly his reason may reject them.” ~ Oliver Wendall Holmes, Sr.

Posted by: Uncle $cam | Oct 29 2008 3:02 utc | 6

What’s to keep a Warren Buffett, say, from redeeming his $3B perpetual preferred shares and 30% guaranteed interest underwriting position of say, GM, to Treasury,
then gaming the system by buying $3B worth of shorts, which along with his latest
redemption to Treasury, will tank GM, force a leveraged buyout, or if Buffett is
lucky, have the Treasury step in? Then he takes the $12B he just made shorting GM
into the ground, runs back to Treasury, and buys back his shares for $3.001B just
in time to ride the wave of hold and go long momentum players until GM hits $9.99,
then he cashes out, and crashes GM back to where it was before that gamey wizard
insurance underwriter came along and picked it up off the sidewalk. I mean, really?
Imagine you’re a Brazilian before Buffett made his real currency play, then watched
as your industrial exports went into the tank on the stronger real, only to have Buffett fire-sale his real position so he could game the GM-Treasury bailout deal,
and everything you’d been working for for a decade, torn up like trifecta tickets.
They don’t call them whales in Vegas for nothing. But Vegas doesn’t bail them out!!

Posted by: Buffalo Bill | Oct 29 2008 3:48 utc | 7

U$5) Google quote EBS – Emergent BioSolutions Inc. (NYSE), which I’d done for the last few weeks. Then late two weeks ago, EBS shares started to surge upward against the market trend downward. I did the research on ownership and market share, found EBS is run by former Saudi banker to the Carlyle Group, a majority stake holder, as a Defense IDIBNB monopoly through Rumsfeld on anthrax vaccine contract, then called my broker to predict an anthrax attack the coming week, to help McCain’s image.
“You’d better get your shots!” I warned, “they’re going to hit the stock exchange!” My broker laughed and said I was nuts, but not nuts enough to bet serious green on my own pre-emptive forensic economics research, so we just bet $5 I was TGIF loopy.
Last Monday through Wednesday, days after the upward surge in EBS, banks across the NE received white powder envelopes, but the story was quickly hushed.
So I made $5, which is more than I would have made buying EBS that Monday AM,
when whomever had bid it higher the week before, started dumping their shares.
Being Carlyle controlled, not surprising no reporter made the connection to EBS.
Carlyle made their weekend fuckit money, and got jiggy. The truth is out there!

Posted by: Che Herazad | Oct 29 2008 4:08 utc | 8

only peeps who have owned a Volkswagen Beetle might have wondered if its an organic form, or who knows, perhaps something species-like beyond our current understanding

Posted by: jony_b_cool | Oct 29 2008 5:39 utc | 9

Volkswagen shares plunge after Porsche offers to sell shares

Hedge funds lost as much as €30bn (£24bn) after their move to short sell VW backfired when Porsche revealed it had secured 74pc of the equity and planned to seize control of its rival. This sent the shares soaring as funds scrambled to buy VW shares to close their short positions.
Porsche said today it planned to selling up to 5pc of its own stock in the carmaker to smooth volatility.
“Porsche SE intends — depending on the state of the market — to settle hedging transactions in the amount of up to 5pc of the Volkswagen ordinary shares,” the Stuttgart-based maker of the 911 said. “This may result in an increase in the liquidity of the Volkswagen ordinary shares.”
…
The two days of frantic trading has led to what is thought to be one of the heaviest losses on a single company’s shares ever taken by hedge funds.
“This is without question the biggest single loss on a single stock in the history of hedge funds. It’s a bloodbath,” said Laurie Pinto, a broker at North Square Capital, a division of Winterflood.
…
Hedge funds had staked hundreds of millions of euros on VW shares falling in line with other car makers – short selling the equivalent of 13pc of the company’s shares.
As well as the hedge funds, investment banks’ proprietary desks are also believed to have short sold Volkswagen shares.

Posted by: b | Oct 29 2008 11:41 utc | 10

It’s a new fashioned short squeeze, the first one I know of in the age of derivatives.
Over in Germany, Volkswagen shares are being squeezed, and Porsche seems to have created huge profits for itself — at the expense of hedge funds and perhaps an investment bank or two. I do not know if this is legal under German law, but it sure is fun to watch.
It is also nice to be able to write about a stock price going up. I haven’t had occasion to do much of that this year.

Posted by: floyd norris | Oct 29 2008 14:18 utc | 11

I do not know if this is legal under German law, but it sure is fun to watch.
Yep, was 100% legal move. One might say even pre-approved as BAFIN, the German SEC, publicly confirmed the rule in question just weeks ago.

Posted by: b | Oct 29 2008 15:58 utc | 12

So what b is saying, assuming I’m reading him right, is that VW becoming the largest company on the planet yesterday doesn’t represent capitalism at its peak. If anything, it represents capitalism at its nadir…
What we saw happen to VW’s stock price has nothing to do with wealth creation; it has everything to do with squeezing the shorts, especially naked shorts. And until most of the toxic waste generated by the derivatives industry works its way out of the economy at large, we’ll continue to see more and more short squeezing taking place in markets across the globe.
It’s ugly; it’s nasty; it’s heartbreaking. It’s equivalent to watching someone go in and out of an almost never-ending series of epileptic seizures, despite the fact that doses of anti-convulsives have all been titrated up to their maximum flow rates!
And I’m sure that Alan Greenspan isn’t getting much sleep at night these days, just knowing that if there was a man on the planet who could have prevented this series of epileptic seizures from occurring throughout the market, he was this man!
Plus if there’s any lesson to be learned from this seizing up of the credit markets, it is that paper wealth on Wall Street isn’t worth a damn if it doesn’t have the strength of the real economy on Main Street to back it up!

Posted by: Cynthia | Oct 29 2008 16:34 utc | 13

VW Shares Plunge, a Day After Surge
Shares in Volkswagen were nearly halved on Wednesday after the controlling shareholder, Porsche, took steps to ease a squeeze on short sellers that more than quadrupled the stock in days.
Porsche itself had prompted the meteoric rise in VW stock with its announcement on Sunday that it had effective control of 74.1% of VW, leaving less than 6 percent in the market.
“In order to avoid further market distortions and the resulting consequences for those involved,” Porsche said, it intends “to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares.”
“This may result in an increase in the liquidity of the Volkswagen ordinary shares,” it added.

Posted by: Roller Coaster | Oct 29 2008 16:41 utc | 14

Cynthia and b,
and 20% of VW is owned by the German state of Lower Saxony. I thought that part of the reason for that was to help ensure that VW acted in the social interests of the state in which it is a major employer.

Posted by: ralphieboy | Oct 29 2008 19:49 utc | 15

r’boy,
I’d like to think that a public entity, as a large shareholder of a publicly-traded company, would act in the interest of Main Street, whether it’s left or right of the pond. But I imagine that a shareholder, either public or private, has little, if any, say-so in how its company shares are traded on Wall Street, whether it’s left or right of the pond.

Posted by: Cynthia | Oct 29 2008 23:43 utc | 16

Germany’s Crash-Test Dummy

Posted by: Anonymous | Oct 29 2008 23:51 utc | 17

rapt wrote at 3:
I admit I’m weird, but I think credit bubbles and busts are obsolete now.
yes….but not for some time yet?
The lenders / legislators / regulators of last resort – the top of the heap – that is Nations – be it the US, the UK, Germany, Switz., etc. thru Central Banks, as well as the weak global institutions that exist (IMF, World bank, others), and local deals (e.g. Russia to lend to Iceland, Sovereign funds who take stakes in banks, etc.) are desperately pumping money in, to support the present system, prevent a meltdown, mayhem, strife, reinvigorate confidence, etc.
They are kicking the last bubble upstairs, so to speak. The last!
That might work for a while? What do I know.
What happens when several countries default? Iceland…Ukraine…Argentina bis..other ex-USSR countries? Then a domino effect sets in, rapidly, thru systemic failure and the desire to move forward and be done, just do what others do, join the club?
The end run would seem to be the canceling of all debt and a new world currency.
High weirdness! Pass the popcorn. No, drinks and peanuts all round. On me.

Posted by: Tangerine | Oct 29 2008 23:59 utc | 18

We simply should not accept any new currency unless it is based upon something real. Gold, silver, copper, electron volts, pork bellies, I don’t care, just make it a real commodity. Otherwise we can trust that these same boobs that gave us this mess will continue to use their unique “power of the press” to control and enslave the world, and we can be sure that millions will continue to starve in a world with plenty of food.

Posted by: Li | Oct 30 2008 2:39 utc | 19

Cynthia,
there are limits to the state’s ability to control things, but also tools to help it do so; i.e., the “Volkswagen Act” that limits any VW shareholder to a maximum of 20% of the votes, no matter how many shares they hold. This was an attempt to enhance the state’s ability to keep VW acting in the state’s interest.
The EU just overturned this law, but as I understand, the new law is only slightly amended.

Posted by: ralphieboy | Oct 30 2008 13:07 utc | 20

r’boy,
What you are saying here reminds me of what James Galbraith has to say about how the EU vs the US will weather the financial storm…
BILL MOYERS: What’s the worst-case scenario you think about late at night?
JAMES GALBRAITH: Right now the thing that troubles me most is not the United States. The thing that troubles me most is that the same ideas of deregulation, of free markets, were applied in the construction of modern Europe. And the Europeans don’t have the institutions of the New Deal, a central bank that can lend as necessary.
BILL MOYERS: Right.
JAMES GALBRAITH: Government that can borrow as necessary; that can take the initiative. They have expanded themselves into Eastern Europe in a way in which Communism was replaced by nothing. And a financial collapse is going on there now is, in many ways, more profound than the one we are experiencing here.
BILL MOYERS: But we’ve seen Gordon Brown, the Prime Minister of Britain, step forward in a way that our own government hasn’t and try to orchestrate a European-wide response to this.
JAMES GALBRAITH: That is true. And that is, you know, collection of the finance ministers getting together over the weekend to try and do this on an ad hoc basis. Mercifully, we have the institutions of government in this country that can act. The Europeans are winging it. They have to go against their charter of the Central Bank, against the Maastricht Treaty and its restrictions on government spending, government deficits. They- that problem is a systemic problem. Our problem is a policy problem. We can solve our problem.
…What Galbraith is essentially saying is that Europeans aren’t as fit as Americans to weather the financial storm, simply because Europe, unlike America, doesn’t have any vestiges of the New Deal in place to help Europeans better weather this storm…
Here is Bill Moyers’ interview with Galbraith in its entirety…
http://www.pbs.org/moyers/journal/10242008/watch2.html

Posted by: Cynthia | Oct 30 2008 14:59 utc | 21

Cynthia,
In the sense of banking regulation, Europe doesn’t have the New Deal mechanisms in place, but Europe has always been a lot more New Deal on as social security, health care and welfare, and a lot more state-oriented in education.

Posted by: ralphieboy | Oct 30 2008 15:32 utc | 22

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