Adolf Merckle, one of the world’s richest men, committed suicide yesterday by throwing himself under a train, Bloomberg reports. Financial difficulties, and particularly great losses he suffered on Volkswagen stock, are being cited as the key reason he ended his life:
[Merckle's company] VEM was caught in a so-called short squeeze after betting Wolfsburg, Germany-based Volkswagen’s stock would fall. Merckle lost at least 500 million euros on the bets on VW stock, people familiar said on Nov. 18. VEM lost “low three-digit million euros” on VW stock, the company said in November.
A “short squeeze” sounds inconspicuous enough; you wouldn’t tell it by Bloomberg’s language, but Merckle’s Volkswagen bet lost out to one of the most masterful hacks of the financial system in history.
For those of us who don’t live and breathe finance, this is that story.
In 1931, Austro-Hungarian engineer Ferdinand Porsche started a German company in his own name. It offered car design consulting services, and was not a car manufacturer itself until it produced the Type 64 in 1939. But things got interesting for Porsche long before then.
In 1933, he was approached by none other than Adolf Hitler, who commissioned a car designed for the German masses. Porsche accepted, and the result was the iconic Beetle, manufactured under the Volkswagen (lit. “people’s car”) brand. Today, Porsche’s company is one of the world’s premier luxury car brands, while Volkswagen (VW) is itself the world’s third-largest auto maker after General Motors and Toyota.
Three years ago, Volkswagen found itself fearing a foreign takeover. Porsche, the company, decided to step in and start buying VW stock ostensibly to protect the landmark brand, widely fueling market expectations that it would eventually buy Volkswagen outright. Of course, this isn’t quite what came to pass.
For three years, Porsche kept accumulating VW stock without telling anyone how much it owned. Every time it purchased more, the amount of free-floating VW stock would decrease, driving the stock price up slightly; your basic supply and demand at work. Eventually the share price became high enough that, to outside observers, it wouldn’t have made any sense for Porsche to buy Volkswagen. It would simply have cost too much.
To explain what happened next, I’m going to first tell you about a financial maneuver called shorting.
At any given point, only a certain amount of a publicly traded company’s stock is floating freely in the market. The rest is held in various portfolios, funds, and investment vehicles. Now, everyone’s familiar with the basic idea behind the stock market: you buy stock when it costs little, and you sell it when it costs a lot, profiting on the difference.
But that assumes a company’s value is going to increase. What if, instead of betting a company will go up, you want to make money betting the company will go down? You can — by selling stock you don’t own.
Say you borrow a certain amount of stock from someone who already owns it. You pay a fixed fee for borrowing the stock, and you sign a contract saying you will return exactly the same amount of stock you took after some amount of time. So, you might borrow a thousand shares of Apple stock from me (I don’t actually own any, but play along), pay me $100 for the privilege, and sign an obligation to return my stock in 3 months. At the time, Apple stock is worth $10 per share.
After you borrow the stock, you immediately sell it. At $10 a share, you get $10,000. Two and a half months later, another rumor about Steve Jobs’ health sends AAPL crashing to only $6 per share for a few hours, so you buy a thousand shares, costing you $6,000. You give me back those shares. Because you successfully bet the company would go down in value, you earned $4,000 minus the borrowing fee. This is called short-selling or shorting the stock, and the downside is obvious: if your bet was wrong, you would have lost money buying back the shares that you have to return to your lender.
Now things get kinky.
When Volkswagen’s share price exceeded the point where it made sense for Porsche to buy the company, a number of hedge funds realized that Volkswagen shares have nowhere to go but down. With Porsche out of the picture, there was simply no reason for VW to keep going up, and the funds were willing to bet on it. So they shorted huge amounts of VW stock, borrowing it from existing owners and selling it into circulation, waiting for the price drop they considered inevitable.
Porsche anticipated exactly this situation and promptly bought up much of these borrowed VW shares that the funds were selling. Do you see where this is going? Analysts did. According to The Economist, Adam Jonas from Morgan Stanley warned clients not to play “billionaire’s poker” against Porsche. Porsche denied any foul play, saying it wasn’t doing anything unusual.
But then, last October 26th, they stepped forward and bared their portfolio: through a combination of stock and options, they owned 75% of Volkswagen, which is almost all the company’s circulating stock. (The remainder is tied up in funds that cannot easily release it.)
To put it mildly, the numbers scared the living hell out of the hedge funds: if they didn’t immediately buy back the Volkswagen stock they were shorting, there might not be any left to buy later, and it isn’t their stock — they have to return it to someone. If their only option is thus to buy the VW stock from Porsche, then the miracle of supply and demand will hit again, and Porsche can ask for whatever price it wants per VW share — twenty times their value, a hundred times their value — because there’s no other place to buy. They’re the only game in town.
And that, my friends, is called a short squeeze.
Porsche’s ownership disclosure sent the hedge funds on such a flurry of purchases for any Volkswagen stock still in circulation that the VW share price jumped from below €200 to over €1000 at one point on October 28th, making Volkswagen for a brief time the world’s most valuable company by market cap.
On paper, Porsche made between €30-40 billion in the affair. Once all is said and done, the actual profit is closer to some €6-12 billion. To put those numbers in perspective, Porsche’s revenue for the whole year of 2006 was a bit over €7 billion.
Porsche’s move took three years of careful maneuvering. It was darkly brilliant, a wealth transfer ingeniously conceived like few we’ve ever seen. Betting the right way, Porsche roiled the financial markets and took the hedge funds for a fortune.
Betting the wrong way, Adolf Merckle took his life.
Christopher Mahan said,
January 7, 2009 @ 10:02 pm
Nice explanation; well written!
So how many years of Porsche net profits does this represent?
Brandon Craig Rhodes said,
January 8, 2009 @ 12:21 am
Why, then, are news articles talking as though the 75% goal is still months in the future? Did they sell some of the stock after reaching the 75% goal and are now trying to work their way back?
Ivan Krstić said,
January 8, 2009 @ 12:26 am
Brandon — yes, after drawing major ire from German financial regulators and just about everyone else involved, Porsche sold off a part of their VW stock and options, I believe to the tune of 5% of each.
Alex said,
January 8, 2009 @ 6:37 am
Ivan, great article! According to Bloomberg and various automotive news sites, Porsche now owns 50% of VW stock. It will be interesting to see whether it will continue with the same practice.
sony said,
January 8, 2009 @ 6:51 am
Is what Porshe did (hiding the fact that they had a majority share of VW) legal? If it was, then the person in charge of purchasing the VW stocks should be given a huge bonus, because it’s pure genius, albeit quite evil.
Edwin said,
January 8, 2009 @ 8:18 am
“Porsche said Oct. 26 that it owned 42.6 percent of Volkswagen and had secured options for another 31.5 percent”
That’s probably the setup that scared the funds.
bart said,
January 8, 2009 @ 8:39 am
Nicely written indeed. Im quite into finance, but never really got any of the explanations on shorting. You’ve just made it very clear.
And I love reading about this kind of manipulation.
Kris Tuttle said,
January 8, 2009 @ 9:14 am
Well written account. There’s something strangely wrong about this but since the victims are largely hedge funds that have few friends these days maybe it doesn’t matter.
In the US we have filing requirements to make massive accumulations of public shares get noticed after hitting certain threshold amounts. There’s still room for some funny business but this Porche scenario is a off the charts.
I guess the CFO deserves a bigger bonus than the CEO this year. Could the do it again with another German industrial company? If not why wouldn’t they?
Lucas said,
January 8, 2009 @ 10:17 am
Thank you very much for this nice-written and easily-understandable article.
Lucas
Ivan Krstić said,
January 8, 2009 @ 10:22 am
sony — it’s legal in Germany, but it sounds like it won’t stay that way for long. This episode raised a lot of eyebrows in German financial regulation circles.
Kris — at the moment, I doubt Porsche can so much as sneeze while looking at the stock market without inviting regulator scrutiny, which is why they can’t do it again. And the rumblings are that disclosure laws are going to change soon, making this type of thing impossible in the future.
Emily said,
January 8, 2009 @ 10:24 am
Thanks for that extremely well-written article. I’d not properly understood how all this happened until your article made it clear.
Definitely very good writing! :)
Ken Garrow said,
January 8, 2009 @ 10:35 am
Great Story!
Pavel Swiatkovski said,
January 8, 2009 @ 10:55 am
Ivan, and what will happen with VW? Foreign takeover?
Ivan Krstić said,
January 8, 2009 @ 10:57 am
Pavel — the deed is done at this point; it was a domestic takeover by Porsche.
Salvatore Cantale said,
January 8, 2009 @ 11:08 am
Great story and super-well explained! Some more details: Porsche owned only about 42.6% and had 31.5% on cash settled options (At expiration/exercise, you do not get the stock, but the difference between the VW price and the strike price). In Germany, you do not have to disclose your position in cash options. However, I believe that amount of VW stocks was in the hands of the issuer(s) of those options that was(were) delta hedging. So 42% owned by Porsche, 31.5% by delta hedgers (let’s call it that way!), another 20% or so by the Lower State of Saxony. That amounts to about 94%. With about 12% of VW short at that time, the competition for those 6% still floating was very harsh…
Henrique said,
January 8, 2009 @ 12:20 pm
Thanks, that was a very interesting read. The history behind the facts…
Simmoril said,
January 8, 2009 @ 12:36 pm
Ivan, That was a great recount of the events that transpired. Thanks so much for putting it in terms even I could understand!
Ray said,
January 8, 2009 @ 1:39 pm
What a great way to go, different then our American cliche of shooting yourselve. Maybe it was symbolic of what happen to him in the market.
Jim said,
January 8, 2009 @ 2:47 pm
“We used to make things. Now we just stick our hands in someone else’s pocket.”
– Anonymous
Steve Lowe said,
January 8, 2009 @ 3:19 pm
Nice story. Not only a good explanation of short-selling, but also a cautionary tale for people who think they can take on big corporations in the “free” market, especially one with as few disclosure rules as Germany’s. I can’t decide whether to despise Porsche for their market manipulation, or admire their audacity and brilliance. Probably a bit of both.
Hirman said,
January 8, 2009 @ 3:37 pm
Thank you for elucidating some difficult financial concepts. I enjoyed reading your article.
John said,
January 8, 2009 @ 4:51 pm
Can someone explain to me why it would be illegal to do this? I thought such takeovers happened all the time. In other countries are there rules where companies have to disclose how much stock they own of other companies?
Francisco said,
January 8, 2009 @ 6:18 pm
I think that this proves once again the brilliance of Porsche’s engineering; financial engineering instead of motors in the case but engineering nevertheless.
Al_Haqque said,
January 8, 2009 @ 8:18 pm
It’s downright moronic to take your own life because you own a bunch of small pieces of colored paper.
Ceasar Sulit said,
January 8, 2009 @ 9:14 pm
I “Stumble Upon” your site, read this lucidly written “plain English” article which I found very engaging and educational. I had to Google “billionaire’s poker” and “market cap” to fully appreciate your analysis, so now, I know 2 more buzz words.
I’m a little lost though. Porsche started accumulating VW shares to thwart-off a possible foreign takeover – not to take the hedge funds to the cleaners (since Porsche could not have envisioned what the hedge funds would do 3 years later, right?). But when the hedge funds started shorting VW shares, you said “Porsche anticipated exactly this situation”. Are you saying Porsche took a risk 3 years ago by deliberately putting the market at play and to later on exercise this ambush?
Thank you. Count on me as a repeat visitor.
Puneet said,
January 8, 2009 @ 10:40 pm
Very well written! Helped me understand short-selling better. Cant decide whether to loathe or admire Porshe!!!
Stephen said,
January 9, 2009 @ 1:18 am
In the United States, if you own 5% or more of the company in question, you are required to disclose it. As a result, this type of thing isn’t really possible here, and there are an awful lot of funds holding 4.9% of certain companies.
Bob said,
January 9, 2009 @ 3:18 am
Al_Haqque- when they are the vast majority of you’re life’s work, those small pieces of paper mean a hell of a lot to you. When they’re taken away in an underhanded, yet completely legal scheme? That would break a lot of people.
paulhokangsang said,
January 9, 2009 @ 6:11 am
How could Porsche be allowed to purchase shares quietly without disclosure of their holdings or triggering a mandatory take-over offer? This is tantamount to a hostile take-over. In most countries, once a company holds more than a threshold of say 25% of a listed company, they would then have to make an offer for the rest of the company at the same or higher price.
Paul Ho KS
IgorD said,
January 9, 2009 @ 8:36 am
I’ve read “The Wages of Destruction: The Making and Breaking of the Nazi Economy” so I was somewhat familiar with the fact that the whole Porsche company was built with “other people’s money”. It is fascinating how they successfully continue with the practice, making money on the same VW they robbed in the 30’s. Truly fascinating story.
Ron said,
January 9, 2009 @ 8:42 am
Amazing story!
Kennon said,
January 9, 2009 @ 9:46 am
Why are so many clamoring for regulation and/or thinking there is something wrong with this? I think this was a brilliant move by Porsche, and shame on the funds for falling into the trap. Even the analysts advised against it; if there is no disincentive to make foolish decisions, then nobody will ever learn.
It is, however, a cautionary tale for investors to not assume that hedge funds somehow magically always go up. Sounds like somebody needs to read some Taleb re: risk.
Ian said,
January 9, 2009 @ 11:38 am
John, yes. other countries have rules about this sort of thing!
So the UK has the ‘Panel on Takeovers and Mergers’, more usually known as the Takeover Panel, which insists that anyone buying more than a particular percentage of a publicly listed company has to declare that fact and either make a bid for the entire company or refrain from buying more shares for a week to enable everyone else to react. Similarly. once their ownership gets to a certain point, they have to offer to buy the lot.
Without wading through their entire 250-ish page code, it’s likely that Porsche would have had to declare the level of their ownership long before they did.
Ben said,
January 9, 2009 @ 12:03 pm
Thanks for taking the time to explain this in a way thats so easy to understand.
James said,
January 9, 2009 @ 1:16 pm
From what I understand, he didn’t take his own life because he owned a bunch of small pieces of colored paper (which he still did even after the transaction), but because he lost a copious amount of pieces of colored paper.
Ian said,
January 9, 2009 @ 1:21 pm
Having done the wading :) in the UK, you are required to:
1. Disclose all shareholdings above 3% in a public limited company
2. Disclose any changes of more than 1% after that
3. Make an offer for the company once you have more than 30% of the shares.
So there’s no way it could have happened if VW had been a UK company.
Does anyone know what the rules in Germany are?
Eric said,
January 9, 2009 @ 2:23 pm
Well done.
Dan said,
January 9, 2009 @ 5:23 pm
In many countries, there are laws that compel takeover offers. So when you reach a point where you hold X% of a company’s stock (where X varies by jurisdiction, but is often around 40), you have to make a good-faith effort to buy out the other shareholders and take over the company. It doesn’t have to succeed, but you have to try.
Many countries also have disclosure obligations, where parties that own over Y% of the shares of a company (where Y also varies, but is usually around 5) have to disclose it. At the time of this happening, Germany had very weak versions of both of these laws.
Takeovers do happen all the time; it was the surprise of this one that makes it noteworthy. They’re usually quite predictable, in that you can follow how a company is building up their control of the target, and have a pretty good idea when they’ll launch their effort. In this case, no one really had any idea what Porsche had – they just flipped their cards (disclosed their ownership) one day, and made everyone else react.
Heerendra said,
January 9, 2009 @ 9:35 pm
Extremely well described about causes of a sad demise of a business man. Please write more about shares and share stakes.
Almir Ribeiro Américo said,
January 9, 2009 @ 11:04 pm
My congratulations for this superb article!
I guess there are plenty of undisclosed details in this mysterious episode, notably the Porshe’s successful strategy for quietly and steadily accumulating such big amount of shares. I guess it would not be possible in countries like USA or UK, where the financial press is very aggressive in investigating the market. I would incentive Ivan Krstic to go further in this history and write a book disclosing the whole thing with his talented style. I could then translate the book into Portuguese. I’m sure there would be a huge demand for such a book here in Brazil. Think about it, Ivan! My congratulations for you!
andrew lee said,
January 10, 2009 @ 1:03 am
Two important things to note here:
1.Porsche announced their intent to acquire or at least be a large shareholder in VW years ago. VW is their largest parts supplier and Porsche needed that relationship protected. So I don’t think it was a financial play from the beginning
2. Sure they profited in the transaction but it was probably a pleasent surprise. They are in the business of making cars, not trading for gains. It was no surprise they were building up a stake and VW certainly knew. The shareholder registry is open for anyone to see. What pushed the short squeeze was the option contracts. And that was the undoing of the hedge funds themselves.
Viktor Mirovic said,
January 10, 2009 @ 4:48 am
This story makes “Barbarians at the Gate” (the magnificent book on the greatest buy-out in financial history of RJR Nabisco in 1987) look like a childrens’ bedtime story. I agree with Almir Ribeiro Américo and recommend Ivan to transform this into a book which will become an instant bestseller.
The Great Train Robbery (1963) was a criminal act but inspired many because of its touch of adventure and Robin Hood-style “beating the system”. Porsche’s cunning plan has a far more compelling plot: effectively it moved the market with one of the worlds’ premier brands, played it nicely by the book contrary to the modern white collar pirates like Mr. Madoff and made an exceptional return for its shareholders. The architects of this plan should be nominated immediately for this is what true capitalism is all about.
As Mary Poppins would say it: supercalifragilisticexpialidocious…!
Thank you Ivan for this wonderful story.
Adam said,
January 10, 2009 @ 5:32 am
Can Porsche legally purchase shares over a 3 year period without disclosing how much was bought? Doesn’t Porsche have shareholders? Doesn’t VW shareholders like to know who are the largest shareholders and what percentage of the company they own? All this information is included an annual report.
Additionally, while it might seem genius it also sounds like Porsche manipulated people who lost millions only to benefit themselves. Regardless of their financial dealings, I have to admit Porsche design is the best in the world. I love my Porsches.
Sven said,
January 10, 2009 @ 5:43 am
I don’t get the criticism of Porsche. What is wrong in punishing the despicable act of shortselling? Just look at what shortselling did to several companies in the past year…
Rainer said,
January 10, 2009 @ 6:59 am
Thanks for the well written article.
I am, however, amazed how Porsche would have been legally allowed to buy that much of the VW stock silently. In Germany, we have the Wertpapierhandelsgesetz (Stock Trading Law), which states in its paragraph 21 that, once you own more than 3% of a company’s stock (there’s other, higher thresholds, too), you are obliged to annnounce this to the emitting company. The company is then obliged to publish this information. (http://www.gesetze-im-internet.de/wphg/__21.html, bad translation: http://translate.google.com/translate?prev=&hl=de&u=http%3A%2F%2Fwww.gesetze-im-internet.de%2Fwphg%2F__21.html&sl=de&tl=en).
So I cannot imagine how the fact that Porsche held 75% of VW’s stock could have been kept a secret…
Johnny Abacus said,
January 10, 2009 @ 9:51 am
The big issue that you glossed over was what amounts to naked shorting.
Someone in the system was selling the same stock multiple times. It may have been more subtle than that – perhaps someone loaned out a stock and also sold a put option on it, etc. Indeed – this is the only way a “short squeeze” could possibly happen.
I’m sure that there are ways that such transactions can be legal; that being said, anyone who engages in such dubious practices deserves all of the negative consequences (when they happen) and more.
Stephen J said,
January 10, 2009 @ 1:00 pm
As a pretty big fan of Volkswagen/Audi, I have been following this from time to time and am completely baffled by one thing that I hope you can clear up for me.
How on earth does a company that is basically a boutique, high-end sports car company buy out one of the top three auto companies in the WORLD?
Were there some kind of shadow investors that fronted the cash? Where would Porsche get the money to buy the shares. Even if they looted their own cash reserves, they would still need cash on hand for operating expenses, and in this credit market, it seems expensive/impossible for them to spend their cash on VW stock while borrowing for day-to-day expenses.
Sorry if this seems like a dumb question, loved the article by the way!
Volker Hirsch said,
January 10, 2009 @ 1:05 pm
Ivan, this is a very nice account of how shorting works (or, incidentally, does not work). However, you are simplifying things a little: Under German law, a takeover offer has to be made whenever a the shareholding exceeds 30% of the shares of the target. This was the case in late March 2007, and Porsche made a mandatory offer on 28 March 2007 (they also made an offer for all shares in Audi on 16 September 2008). I do believe – and I think this is identical even in the US – that options (not to be confused with executive options) for shares trigger (additional?) mandatory takeover offers or indeed disclosure requirements (unless you are an executive of the company in question), and this is because you can not actually exercise corporate control in any way when you are merely an options holder. It is therefore not nearly as dark and wild-west as you made it appear (although the German public did indeed act very, very surprised over all this).
I also think that some background could have been added: Ferdinand Piech, a member of the Porsche dynasty, used to be VW’s CEO and then their non-executive Chairman of the Board. However, there seemed to have been a little bit of a family feud between two strands of the Porsche family…
There are two more aspects that deserve noting, namely:
a) the 20% holding of Lower Saxony. There is a law in place (probably illegal and constantly challenged by the European Commission) whereunder no one can hold more than X% of the voting rights as long as Lower Saxony (the German state where VW’s HQ and biggest German plants are based) has a shareholding, effectively preventing the acquisition of full control. Porsche did not like that law but will have impacted short-term corporate control.
b) the history of Porsche and the Porsche family in relation to VW as well as the old-fashioned German industrial culture; for decades, the takeover of large German companies was virtually impossible due to solid cross-shareholding blocks regularly involving Deutsche Bank (Daimler Benz), Allianz Insurance and a number of families and concerns. This was not, however, due to profit maximization or greed, etc but an old-fashioned closed-shop attitude coupled with a sense of entrepreneurial responsibility for the affairs of the state. I doubt that the Porsche board had really been scheming this in order to make a mint through a short squeeze. They were after more! They were after control of the German car industry (Porsche, VW, Audi; bear in mind that the latter two also own Bentley, Lamborghini, Bugatti, etc). Only BMW and Mercedes-Benz are left now that Opel (GM-owned) and Ford are struggling under the woes of their US holding companies.
Ivan Krstić said,
January 10, 2009 @ 2:06 pm
Thanks for the comments, all.
Rainer — VW never actually held 75% of VW stock. They held a little over 40% in actual stock and the rest in call options; the latter is what allowed them to fly under the radar. I chose not to go into details on call options because it would have significantly complicated the explanation.
Volker — great comment. As you point out, the control by Lower Saxony has been a big pain for Porsche, and they’ve been suing about it relentlessly; I’m curious to see what comes of it.
R Scott Carlson said,
January 10, 2009 @ 2:31 pm
Stephen J – you are not wrong to wonder whether Porche had help in perpetrating this crime. The story was closely followed by leading financial players in a little-known Axis power ally: Thailand. Ever heard of their ‘Whiskey King’? And is in not at least possible that the Tata group was the ultimate ‘customer’?
Michael Sand said,
January 10, 2009 @ 3:29 pm
Nicely written and simple to understand. Hopefully my old Beetle will have appreciated in line with the stock.
David Niergarth said,
January 10, 2009 @ 11:15 pm
Great writing, really! FWIW, I posted a link to your article on Hacker News two days ago. There are 50 more comments there.
Samuel said,
January 11, 2009 @ 12:52 pm
Excellent post! Great explanation! Most people can’t explain this stuff well enough !
Matthew J said,
January 11, 2009 @ 12:57 pm
Great story – thanks for posting
rick said,
January 11, 2009 @ 12:58 pm
This really calls into question the basic advice to invest your personal savings in the stock market. It is a gambling club run by the rich fueled by the poor. We really should be investing in our government (bonds) to bail it out of major debt not corporations that are crying about losses.
I’ve completely lost interest and respect for banks and the stock market. Where should I invest?
In every way our highest government has been inundated by officials from corporations, ex-employees of Monsanto are littering the FDA and the EPA, and ex-ceo Henry Paulson sure looks like the ice cream man when he steps into government only to dole out money like some Robin Hood catering to the super-rich.
Chris said,
January 11, 2009 @ 3:40 pm
@Rick “It is a gambling club run by the rich fueled by the poor. ” That’s an inaccurate over generalization. It’s true that many everyday people invest in the stock markets, but there are also massively rich investors such as hedge funds, pension fund owners and other finance professionals that invest in the market. In the specific example cited in this account, Porsche successfully executed its strategy because of the bald greed of major financial professionals, people and organizations who had the experience and expertise to understand complex financial transactions. Additionally, these same greedy professionals were warned by industry analysts that they were entering into a highly dangerous position, yet they accepted the risks none the less, ignoring advice to be cautious. I am not very sympathetic to those who lost money as a result of Porsche’s strategy primarily because “mom and pop” individual investors are not likely to have been affected as few individual investors engage in risky transactions like short selling. Of course, I don’t feel sorry for individuals who lose massive amounts of money in casinos, either. Ultimately they went into a risky situation driven by greed and that’s just not generally considered to be good financial planning.
amine say said,
January 11, 2009 @ 4:00 pm
That’s in my opinion ‘the game’ of market. Some loose, even their lives, other get billions. Everyone knwos the rules. Porsche isn’t to be blamed.
amine say said,
January 11, 2009 @ 4:01 pm
BTW Ivan how does your comments system work without any anti-spam system?
Really strange that your blog isn’t already submerged by spam!
Tom said,
January 11, 2009 @ 5:28 pm
Great article. While I appreciate the need for rules and regulations, the problem here seems to be that all the clever hedge funds with their bright whiz-kids and wealthy people seemed to forget:
Don’t bet more than you can afford to lose!
If Mr Merckle – with his own money – wants to risk going bust on one large gamble, that’s his business. A fund manager spending other peoples’ money has no such right.
Raagaa said,
January 11, 2009 @ 10:43 pm
Very good Write Up !!! Keep up the good work.
Björn said,
January 12, 2009 @ 3:11 am
A story greatly told.
Dhruv said,
January 12, 2009 @ 5:49 am
Great article. I think what Porsche did was a little evil, but its not illegal.
wow, what a move!
Roy said,
January 12, 2009 @ 8:50 am
Nice article to read, i stumbled over this some minutes ago, read some reactions, and your reactions on those.. I’m not really familiar with stocks and stuff, but I can tell that i’ve learned something today.
Especially about the short-selling, I never really thought about it that way. The most impresive (or not, as I actually don’t know what I’m talking about) is that they could keep the fact that they had 75% of those stocks a secret.
Now I’m gonna go now, have to do stuff for school. Again, it was nice to read your article.
Fabio said,
January 12, 2009 @ 10:13 am
Having worked for the Italian Stock Exchange a while back as a so-called “watchdog” the most astonishing part of this story is – ironically – the lack of regulation to prevent this situation! I must say I’m not familiar with German regulations but things must chance because in US, UK or Italy (to name markets I know better) this wouldn’t have happened legally, full stop.
Also, the finance dept at Porsche made a great job for the company in terms of profits but I hope you all agree with me that a carmaker shouldn’t gamble so hard on finance, they should build cars and eventually use derivatives to cover the business from fluctuations in currencies, raw material prices, etc. – all the rest is pure and risky “greed” to me. At the end of the day the history of finance created loads of overnight millionaires at the same speed as it crashed them shortly after.
However, really nice article and good commentary, well done!
Benjamin Beenhacker said,
January 12, 2009 @ 1:50 pm
Thank you for the very good explanation. The whole story and what else we have learned about the world’s financial system depresses me, because I sense that, in our lifetime, we will see this whole thing end, and not in a graceful way. The current crisis is not the end, but it made many people aware of what is going on around them. The french revolution will feel like a merry-go-round compared to what will come once this train wrecks.
ioan said,
January 12, 2009 @ 3:42 pm
a very good article. Well written. Good comments and good addings by mr hirsch.
i might as well add the following: it’s not a crime what Prosche has done. in europe is a common, known thing.
e.g. Continental (tire company among other things) took over VDO Siemens (automobile parts) in spring 2008 i think, by july it was taken over by Schaeffler (another big familiy owned automobile parts company). So the hunter became the hunted.
Beautiful “coup de grace” would the franch say :)
It was intelligent orchestrated and applied with german precision.
Sandra said,
January 12, 2009 @ 9:43 pm
Hi Ivan,
Thank you for the clear, concise explanation of short selling. I have heard the term bandied about in the media but have never been quite sure exactly what it entailed. I StumbledUpon your site and have bookmarked it. Will there be future business primers?
Sandy
Harry said,
January 12, 2009 @ 10:30 pm
I would have liked the story to be more in-depth considering as how when the European stock market went to quarterly reporting some years back, Porsche refused and went off the market. They explained that they were a development company and reporting every quarter that they were spending tons of money on R&D made no sense, as it would only drive their stock price lower, losing the funds they needed to continue R&D. The following 3-4 years Porsche was the most successful company in Europe winning numerous awards.
It is time the US dropped this quarterly reporting madness and took a more long term view of businesses like they did before this mania ensued. This market madness only fuels the greed factor and look what it has done to most companies. A couple of bad quarters and they are in chapter 11. Where do you think Porsche got the money to buy VW stock?
Frank said,
January 12, 2009 @ 10:50 pm
Evil? Beating shorts at their own game? Personally I love it!
Peter said,
January 12, 2009 @ 11:06 pm
I don’t live and breathe Finance but I do understand short selling and I do drive a Porsche, so a couple of comments and questions
Ivan I am not sure where the data on paper profits (30-40 billion Euros) and actual profits (6-12 billion Euros) came from. Is the former an estimate of what Porsche would have realized if they cashed out their holdings at market peak on VW in late 2008, and the 6-12 billion Euro number is what they actually realized in exercising or selling a portion of the options to get down to a 51% ish equity level?
On “How on earth does a company that is basically a boutique, high-end sports car company buy out one of the top three auto companies in the WORLD?”. Porsche almost certainly has the highest profit per vehicle of any automaker. They have turned their noses up at extreme growth (like BMW) and maintained pricing. They know there market. When Porsche introduced the Cayman they priced it above the Boxster in contravention of all convnentional thinking of convertible vs hardtop pricing. Because they could. They could have chosen to sell the car at 2/3 of what they chose and still made a health profit. They would have sold 3 times as many vehicles. But then when the economy soured or tastes changed they would have all of that factory capacity. Porsche would rather make $50K profit on one car than $10K each on 5 cars. So when business is good, they rake in huge profits, and when sales fall off they don’t have enormous fixed costs.
GM can make $100 Billion in sales and lose $20 Billion. Porsche can make $7 Billion in sales and sock away $3 Billion in profit.
Porsche and VW have a long intertwined history, and at various points one has looked at buying the other. The last few years Porsche has not been shy about it’s interest and holdings in VW, and the expectation of the Porsche community had been that a takeover was likely a matter of time.
The economic downturn probably catalysed things as an affordable time to move, and also Porsche fully expected their own sales to soften as people buy fewer $100K cars.
Like most others I am surprised at how little disclosure German law seems to require, but this is not a surprise. The size of the options holding was. I assume that has a complex backstory involving some large VW stockholders. I can’t imagine that there would be that kind of volume on options on VW.
And for those who think this is some kind of crime by Porsche, you have it backwards. Porsche is investin in VW. The people who got reamed were specultating on and oping for VW failure. Porsche wants to run VW and improve the company. This is not barbarians at the gates. The people who got burned were speculators who bet on VW’s failures. Porsche will be happy if VW succeeds, VW workers are employed, and VW customers drive better cars. The people who lost money shorting stock they did not own would have happy if VW collapsed, VW stockholders lost their money and VW employees lost their jobs. Because then they would have made money on their purely fictional securities play.
Who’s the bad guy now?
Zack said,
January 12, 2009 @ 11:20 pm
I think that this story should serve as a warning to those who want to get involved in crafty investment practices. There will always be someone or company out there craftier than you. I think what Porche did was kind of repugnant and should be better regulated against but I guess capitalism is a eat or be eaten.
Rob said,
January 12, 2009 @ 11:45 pm
There is a man dead, ruined by this game. Yet most of you are so complimentary of the clever tactics.
Look in the mirror. Is this the world you want to create for your children?
Nate Byerley said,
January 13, 2009 @ 12:13 am
Great post. I would love to learn more about the market through this kind of lens. Any other good market related posts? I’m thinking: derivatives. Hedge funds (same as mutual funds? just a rebrand? less regulated?) Do tell.
Kurt Mueller said,
January 13, 2009 @ 12:24 am
Porsche, under Wendelin Wiedekin (sp?) has been expanding its line of offerings beyond their iconic sports cars and includes an SUV whose underpinnings are shared with a VW model. Their history is full of these collaborative undertakings – a close relationship between the two companies extends to familial control as well as joint product development. Porsche endeavored to shore up VW against possible takeover to preserve its vast R+D capability for its own benefit and my guess is that the plan evolved into this legal “rip-off” as events played out.
BTW, for what its worth, NYT reported recently that Porsche drivers in the US self identified at Republicans more than owners of any other make. Hence, I drive a BMW so as not to be so identified.
johnny said,
January 13, 2009 @ 12:53 am
Well done, a very good explanation.
norman scott said,
January 13, 2009 @ 1:47 am
Oh yes! I want a Porsche! I want to be associated with a brand that slays the financial pirates in the worst way possible… by taking their money away! Hooooray for Porsche.
dave said,
January 13, 2009 @ 2:07 am
Shorting isnt evil nor is quiet accumilation of shares.They are just tolls in the investors toolbox.These tools didnt fail merkle rather old fashion greed did when merkle wagered so much of his fortune that if it didnt go his way he wouldnt have enough to play another day.Putting all your eggs in one basket is the deadliest strategy and oldest strategy.You win or lose big.Its plain old stupidity and greed that makes one go all in.If he had only wagered 1-5% of his fortune he would have suffered much smaller and sustainable losses.
Rob said,
January 13, 2009 @ 2:59 am
Great article! Thanks for the clear explanation!
Astrid said,
January 13, 2009 @ 3:19 am
Given that many politicians in Germany compare hedge funds to locust, there is not much love lost for the greedy losers of this deal. Porsche knew they did not want to have VW taken over by a foreign buyer. We all have seen what can happen to good companies once they are devoured by the hedge funds. Good for the workers who are paid decent wages, and the city that receives it’s share of taxes. The managers in the German car manufacturing business are often still engineers and not just CEO’s to look at the share holder value, they have a passion for their trade and it shows. I congratulate them for being clever and often still very conservative, especially now looking at the big three in Detroit, it seems to pay off what they are doing in Stuttgart and Wolfsburg.
Joel said,
January 13, 2009 @ 3:46 am
One of the most famous short squeezes here in the US occurred in the 1920’s with the stock of another car maker: the Stutz Bearcat. James Brooks, the finance writer for the New Yorker in the 1950’s and 1960’s, wrote it all up in an article that made its way into his book “Once in Golconda”.
george said,
January 13, 2009 @ 4:25 am
i am curious as to how to get the porche profited from this ? they accumulated the shares in vow , and short squeeze happened after the disclosure – apart from the 5% they sold due to pressure from regulators to help with the short squeeze how does porche realize any profit from this ? s
Mervat said,
January 13, 2009 @ 4:45 am
Wow.. very informative.
Yet (as mentioned by Ian) it’s strange that Funds didn’t know the ownership of Porsche as to VW stocks!!
Even here in Syria, persons must disclose of 5% and more of their shareholdings and any changes thereof.
Wendell said,
January 13, 2009 @ 5:16 am
Anyone who can take down a hedge fund is fine with me. Lets have more stories like this.
Sorry about the suicide. Greed sucks.
Jack U. said,
January 13, 2009 @ 5:31 am
Everything done here was 100% legal and is actually a critical function of the market (shorting) despite what people say. Shorting has always played an important role for price discovery in any market.
You can get hurt more shorting, because the amount you can lose is theoretically unlimited (a stock price can go up an infinite amount). When buying (going “long”) your maximum risk is the amount it cost to buy the stock, because zero is a low as a stock can go.
Now, what this geniuses have been doing is acting like pikers in the markets. They see “can’t lose” trades, and take them. We all know trades like that are setup as sucker bets almost always.
They did this with real estate, financials, the dollar, I mean these guys bet right into the “locks” (bubbles) like all the unsuspecting schmucks like you and I are suppose to, but not them.
My conclusion is either the big boys took their eye off the ball while all the easy money was flowing, got high and forgot how the system works, or for whatever reasons these major oversights were manufactured for some intent I am not clearly sure of. Either way, colossal failures.
Best free advice for today: Any time you see a lock, no brainer, or a trend that everyone is jumping on – often taking the opposite position is the profitable one.
Gary said,
January 13, 2009 @ 7:32 am
That’s it – I’ll never buy another Porsche again.
John Amonoo said,
January 13, 2009 @ 8:24 am
Great elucidation, Ivan. No matter how good (or Bad) shorting may seem, those taking part in are aware that that they are taking a risk by buying or selling stocks. One side side hope to win when the stocks fall; the other side hopes to win when the stocks rise. We must not allow ourselves to be so greedy as to take unsustainable risks… well if we make serious losses we might “not live to regret it”, just like Merckle!
John Wetteland said,
January 13, 2009 @ 9:02 am
Thank you for this clearly written and informative article. Porsche has always been a company which has excelled because of engineering prowess. Since the Romans, this application of reason to control of our physical world has been the tag line of civilization. It is sad, however to see that this proud company has made such a great profit from an “short squeeze”, which has no more honor than a card trick.
Janine said,
January 13, 2009 @ 9:34 am
I thought that when a company owned more than 20% stock in another company it had to file something with the SEC.
Manny said,
January 13, 2009 @ 9:45 am
Hi, Thanks for good article and a number of informed comments. Did IBM and Microsoft not do the same a number of years ago: buying back their own stock/shares? Is there a story there somewhere?
ian said,
January 13, 2009 @ 10:21 am
im not sure i see too much wrong with this, if porsche did not step in the people betting the stock would go down would have forced the stock to tank no? while it seems porsche did buy too much stock, kinda like a hostile takeover, they also saved vw no? And vw’s stock went up, good for many at vw no? Did the stock tank when porshe sold its shares and made its 6-12 billion? Did porsche implement any changes while they owned so much stock? I dont see anyone getting hurt hear except those that bet the stock would go down. and also thank you for the great article , very informative, and easy to understand.
alan kent said,
January 13, 2009 @ 10:45 am
This has been the talk of insiders here in munich for some time, I spoke with a man who is a long time specialist in automotive werks, he informed me that porsche has a special internal bank that only makes specialized fianancial moves.
This internal bank for some many years since the mid 80s has played the markets in a very profitable way.
He himself explained to me the special mechanisims of their fund manipulation.
it was quite interesting.
Paul said,
January 13, 2009 @ 11:29 am
First rate article, very clearly written.
I have to say I’m impressed, and amused. I could care less for the individuals who lost here, if you ask me Porsche has likely done Volkswagen a favor, and made some serious change at the same time. Good move.
campbell cairns said,
January 13, 2009 @ 12:05 pm
Nice article Ivan – amazing bit of financial piracy. Happily one feels little sympathy for the victims.
It is a bit off topic but you seem to have been directly involved in OLPC and to have an interest in finance – why didn’t they try market OLPC as a commericial product? The insistance that putative developers should subsidize the device seems a really poor way of getting it onto its feet. I see the inroads the webbook and the kindle are making and I wonder what went wrong and what could still be done to set things right.
nucco said,
January 13, 2009 @ 12:46 pm
What I find wierd is how a man worth over $9b will kill himself over the loss of a few hundred million dollars???
(Ok, I am way too naive to understand the implications of the loss), but where I am, that’s what nearly everyone is thinking)
Jay said,
January 13, 2009 @ 1:46 pm
One of the best articles on this I have read. Shorting together with the mortgage derivatives are the culprits for our current financial disaster. They suspended it in both Europe and the U. S. and it should be outlawed forever. Real estate speculators borrowed money to flip real estate, going in for ever more until the market tanked. Same thing. Speculation on borrowed money is the most dangerous feature in finance. It was illegal until Bush (or was it Clinton?) did away with the regulation. Now look what it got us.
Ivan Krstić said,
January 13, 2009 @ 2:05 pm
Let me answer some questions:
Amine Say — I use Akismet for spam detection, and moderate the remaining comments by hand.
Peter — the numbers on actual Porsche profits are from The Economist.
Sandra, Nate Byerley — Finance and business aren’t my usual areas; I work on information systems security. There are reasonably likely to be future articles on finance, but it’s not something I focus on.
Janine — the SEC is an American regulator; neither Porsche nor VW fall under its jurisdiction.
Campbell Cairns — OLPC didn’t rely on a developer subsidy model. It relied on selling laptops to purchasing countries at cost.
nucco — VW wasn’t the only thing he lost. His entire business empire was coming apart, and Volkswagen was just the single most visible, most concentrated loss.
oesterle said,
January 13, 2009 @ 4:09 pm
nicely written, excellent post
Zina said,
January 13, 2009 @ 5:16 pm
wonderfully written piece of work
John G said,
January 13, 2009 @ 6:47 pm
A great article I was looking for a simple explanation for short selling and this can’t be more clear.
Steve T said,
January 13, 2009 @ 9:10 pm
I think it is time to sell my Spyder and buy actual stock in Porsche.
Steve
dave billander said,
January 13, 2009 @ 11:32 pm
Has society become that calloused? I read the comments and notice only what is missing: A man gave up his life over this matter. Though not at fault, the contribution to such act was by another man. Who could feel good about that?
Juan said,
January 13, 2009 @ 11:37 pm
As sad as it sounds, I would assume there are numerous people out there who have been on the receiving end of hedge funds tactics (including the one where the person committed suicide was working) who see some sort of justice in all of this.
Great article by the way, sort of reminds me of the Eddie Murphy “Trading Places” movie at the end with the orange futures.
rob said,
January 14, 2009 @ 11:49 am
Here’s the thing that I hate about this sort of play – none of that had anything to do with the real value of VW, or whether they were performing well or poorly. You could say “if VW wasn’t selling cars their stock would go down” but in this scenario I’m not entirely sure that would be true.
Gaming the system to its own ends is bad for economies at large. Like lots of people are saying “its deliciously evil” – yes, but the operative word here is “evil.”
In the end, Merckle was a degenerate gambler (how else do explain a 500 million euro wager?) , and the accountants at Porsche a bunch of swindlers (i’m sure they took special pride in collecting the shorting fees). Its an interesting story, but mostly because it reveals how far the market has traveled from its original intent to provide capital for industry. It has now become a system for providing wealth to boards of directors by any means necessary.
Forrest Haag said,
January 14, 2009 @ 2:27 pm
Damn! That makes my C4S about as solid of a car purchase as I have come to know it was….. way before that maneuver made Porsche (the company) as solid as a 356C4 crank!! The company won’t bee fool enough to be participating in doling out rebates and bailouts to all of those folks that believe GM and the Japanese can build a “sports car” either…………………..
Justin said,
January 14, 2009 @ 7:13 pm
I dont have any sympathy for the Hedge fund guy. They tanked oil profits, pun intended, and the world economy. Let em burn like they burned the rest of us.
Good on Porsche for saving a local company, only wish someone in the USA would do the same.
Erica Ryan said,
January 14, 2009 @ 7:55 pm
Excellent, excellent article. It takes a massive genius to understand something so complex and be able to break it down so well for those of us who don’t. My husband works in finance and now I’ll understand at least one small bit of what the heck he’s talking about. Your article’s getting a big stumble “I like it” from this reader!
Mike said,
January 14, 2009 @ 10:37 pm
There is a card game called Hearts in which you are penalized for each heart that is in your hand at the end of the game. So during the game you are trying to shed your hearts. The only exception is if you can get all the hearts (what’s called “shooting the moon”) before your fellow players know what is going on. In that case each of the other players get stuck with all the negative points. It seems to me that Porsche successfully “shot the moon.” I also have little sympathy for short sellers, who much of the time are trying to artifically manipulate the stock price of companies downward for their own financial benefit.
Excellent article. Thank you.
Josh said,
January 15, 2009 @ 1:07 am
welcome to the investment world, it is truly a battle for investment survival. Anybody that thinks that there is no manipulation and scheming going on is either naive or an idiot. The list of manipulation by the mutual fund industry, the investment banks, and the federal reserve is long enough to write multiple volumes.
We are learning the hard way that the stock market is not a friendly place. If you don’t like that, keep your cash in your house or the bank. Nobody cared about this stuff when the stock market went up all the time , only when they lose money and want someone to blame, then its everybody else’s fault: the short sellers, Porche, etc.
no risk, no reward, but if you can’t handle the risk, stay away instead blaming everybody else and crying and whining for a bailout or worse yet the ultimate self absorbed act of killing yourself.
Don’t cry for the shorts, but don’t blame them either. Most of them can take a loss like a man.
Kit said,
January 16, 2009 @ 12:01 pm
Brilliant. This is what the goal is, and those who think Porsche is in the business of making cars probably think Ray Kroc was in the hamburger business.
John said,
January 17, 2009 @ 4:33 am
People would be well advised to invest their own money for themselves, and not delegate that responsibility to know-nothing mutual fund or hedge fund managers. These Wall Street and High Street parasites will take your money when they are successful (2% of the total you invest, and 20% of any profits in the case of hedge funds) but will not pay you back when their wild bets go sour, as with Volkswagen. Steer clear of these so-called “helpers”, invest with a discount broker, sell when the market goes irrationally high, and buy when it collapses. Or, just keep your money in the bank. You’ll do a lot better that way, in the longer run.
Porschephile said,
January 17, 2009 @ 3:48 pm
Ivan said:
“Kris — at the moment, I doubt Porsche can so much as sneeze while looking at the stock market without inviting regulator scrutiny, which is why they can’t do it again. And the rumblings are that disclosure laws are going to change soon, making this type of thing impossible in the future.”
Porsche does not need to do it again. They already had what they wanted. Not exactly the prettiest move, but goddamn clever.
Phil Metzger said,
January 17, 2009 @ 5:21 pm
A. You can’t fix stupid or in this case greed
B. Whatever Porsche paid their CFO was probably nowhere near enough!
Rafael Martinez said,
January 31, 2009 @ 2:59 pm
Hello,
I have read (more or less) all the comments, and I think you are missing the main point. The actuation of the German regulator (BaFin) was “criminal”.
According with information published Porsche informed BaFin about the accumulation of cash options. But BaFin did not make this information public. This is clear unacceptable, but the worst of this history is that will be very difficult punish Porsche or the banks who sell the options because BaFin was informed.
Yes, we all know that the SEC is rubbish (e.g. case Madoff), but in my humble opinion, the only reason we do not have a Madoff in Europe is because we have been a bit luckier, not because we have a better market watchdogs.
Regards from Spain
Soora L Ramgopal said,
February 2, 2009 @ 2:51 am
Brilliant! Goes to show that only money begets money!
Varun said,
February 2, 2009 @ 3:31 am
Worth a movie or a novel! What an innovative and awesome way!
Rock on Porsche!
Miguel said,
February 2, 2009 @ 7:39 am
Hi. I had this article on “My Favourites” waiting for some time-off to read it. I only focus on economics as an hobby (In fact i´m not even familiar to many of the terms used), even so your article was very clear. Thank´s a lot. Cheers, Miguel, Portugal.
Jejar said,
February 15, 2009 @ 10:23 pm
Thank you for elucidating some difficult financial concepts. I enjoyed reading your article.
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