How Porsche fleeced hedge funds and roiled the world’s financial markets(economist.com)
economist.com
How Porsche fleeced hedge funds and roiled the world’s financial markets
http://www.economist.com/finance/displaystory.cfm?story_id=12523898
9 comments
Get real. Hedge fund managers were taking insane salaries out of their companies, in the most extreme case, $3.7 billion (http://www.bloomberg.com/apps/news?pid=20601087&sid=a0Of...). Perhaps now its not the most attractive job niche, but Top Ramen isn't in the picture.
So its important to remember, Porsche wasn't fleecing hedge-fund managers, but hedge-fund clients.
So its important to remember, Porsche wasn't fleecing hedge-fund managers, but hedge-fund clients.
I get a feeling that it's complex on purpose and the whole finance world could be simplified greatly. Kind of like many telecom provider's marketing strategies.
I used to think this too. but it turns out that maturity transformation (one of the financial worlds main businesses) actually is pretty complex.
"They may struggle to sell 911s to hedge-fund managers for years and years to come," says one investor.
Or now a 911 is even more required, to claim that you did not get fleeced by them. Appearance is far more important than fact, right?
Or now a 911 is even more required, to claim that you did not get fleeced by them. Appearance is far more important than fact, right?
What's the difference between a hedge-fund manager and a pigeon?
Only the pigeon can put down a deposit on a Porsche 911.
Only the pigeon can put down a deposit on a Porsche 911.
Excellent hack. I don't get a good perspective on why the hedge funds didn't see it coming, though.
Plenty did. This is one of those articles that pretends hedge funds are one big unit, but, in reality, you can find hedge funds on every side of every trade. I would be surprised if no hedge funds made money from this.
"Hedge funds quickly did the maths, concluding that they could be caught in an “infinite squeeze” in which they were forced to buy shares at any price."
I don't get it. How can you force someone to buy a share at any price? If it's possible why don't more people do this?
I don't get it. How can you force someone to buy a share at any price? If it's possible why don't more people do this?
By shorting the stock.
http://en.wikipedia.org/wiki/Short_selling
Basically, the hedge funds thought the stock would go down, so they "borrowed" or "rented" the stock from someone else and immediately sold it. The idea is by the time they have to return the stock the price will have fell.
Ie, if the stock is currently worth $100, and they borrow 1 share and immediately sell it, they have $100 and owe 1 share. Later, on the date they have to return 1 share, they go and buy 1 share and give it back. If the share price then is $80 they made $20 on the transaction. If the stock went up to $120 then they lost $20.
So, they shorted the stock, because they thought it would go down, but then the amount of stock available to be bought plunged right as they had to return the stock. So, there was a huge demand for the stock right as the supply was drying up. As such, the price went very high, but they were forced to buy it anyways to due to the previous agreement (that they had to give the stock back).
http://en.wikipedia.org/wiki/Short_selling
Basically, the hedge funds thought the stock would go down, so they "borrowed" or "rented" the stock from someone else and immediately sold it. The idea is by the time they have to return the stock the price will have fell.
Ie, if the stock is currently worth $100, and they borrow 1 share and immediately sell it, they have $100 and owe 1 share. Later, on the date they have to return 1 share, they go and buy 1 share and give it back. If the share price then is $80 they made $20 on the transaction. If the stock went up to $120 then they lost $20.
So, they shorted the stock, because they thought it would go down, but then the amount of stock available to be bought plunged right as they had to return the stock. So, there was a huge demand for the stock right as the supply was drying up. As such, the price went very high, but they were forced to buy it anyways to due to the previous agreement (that they had to give the stock back).
Thanks for that.
The only other question is why hedges decided to short VW's stock. But the article kind of explains that: Porsche's previous buying up for VW stock pushed VW's stock too high for VW's profitability.
It startles me, if it's true, that 1) Porsche knew they had pushed VW's stock too high, 2) Porsche knew the hedges would know this, and try to short them, and 3) the hedges would lose huge amounts when it transpires that Porsche actually had most of VW's stock anyway, leaving only a small fraction of available stock, which all the hedges would scramble to buy back, hence fill Porsche's pockets, to fulfill their short contracts.
I guess i'd only be illegal if the German courts can prove Porsche misled (manipulated) the market into believing their was more stock available than there actually was.
The only other question is why hedges decided to short VW's stock. But the article kind of explains that: Porsche's previous buying up for VW stock pushed VW's stock too high for VW's profitability.
It startles me, if it's true, that 1) Porsche knew they had pushed VW's stock too high, 2) Porsche knew the hedges would know this, and try to short them, and 3) the hedges would lose huge amounts when it transpires that Porsche actually had most of VW's stock anyway, leaving only a small fraction of available stock, which all the hedges would scramble to buy back, hence fill Porsche's pockets, to fulfill their short contracts.
I guess i'd only be illegal if the German courts can prove Porsche misled (manipulated) the market into believing their was more stock available than there actually was.
Isn't that what hedge fund do themselves everyday ?
That always sounds strange to me... why would you lend you stock so somebody else can make money out of it?
You have to pay to borrow. If you're a small shareholder, your shares are available for your broker to lend if you borrow money against them; a large institution is usually able to negotiate rates at which it will lend its shares.
Humm... as a sort of hedging against the stock going down?
It's not really a hedge. A hedge would be something with an inverse correlation -- so when the stock went down, your borrowing income would go up. In general, the opposite is the case: if the stock goes down, but the borrowing cost is the same in percentage terms, your borrowing income goes down. The exception is if the stock goes down and demand for shorting goes up so fast that the interest rate on borrowed stock goes up. Even then, it will almost certainly be a small cushion (losing 49% instead of 50%) not a hedge.
That said, it's still income you wouldn't otherwise have.
That said, it's still income you wouldn't otherwise have.
Better question is why you would sell short stock in a company that someone is known to want to buy?
It's always like that - someone sells, someone buys. It's always exactly 50/50.
>why would you lend you stock so somebody else can make money out of it?
You think it's going up, so you keep it. They think it's going down, so they borrow it from you and sell it.
They'll return it eventually, so you don't care - you don't need it right now.
You think it's going up, so you keep it. They think it's going down, so they borrow it from you and sell it.
They'll return it eventually, so you don't care - you don't need it right now.
thanks GeZe. That made a lot of sense. I am usually extremely confused while reading financial news, I can't make sense of the jargon.
I'd say that they were clever, but a similar short squeeze attempt on the United Copper Company in 1907 set off a panic that might have destroyed the US banking system if JP Morgan hadn't stepped in to prop it up. Playing games like that in a time like this isn't what I'd call 'responsible'.
This sort of stock market manipulation is illegal in US. Nothing to be proud of. Germany already started criminal investigation. Hope that people directly responsible for it will go to jail.
It sounds as if all Porsche did was to buy some options and some stock, why should it be illegal? Why is any time somebody loses money on the markets now a "failure of the system" and new regulations are being called for?
I think they did not even exert the possible squeeze, the price only rose because of fear that they might exert it.
Maybe such a squeeze should be illegal (asking for an infinitely high price for stock), but it is difficult to imagine a viable law for it? I suppose going short always carries an infinitely high risk.
I think they did not even exert the possible squeeze, the price only rose because of fear that they might exert it.
Maybe such a squeeze should be illegal (asking for an infinitely high price for stock), but it is difficult to imagine a viable law for it? I suppose going short always carries an infinitely high risk.
Why should the Porsche managers go to jail? How exactly was what they did immoral?
Anyone who speculates by unhedged shorting has to expect to go bust occasionally. That's just part of the game.
Anyone who speculates by unhedged shorting has to expect to go bust occasionally. That's just part of the game.
Stock market manipulation for whatever reason can cause lots of problems for other people. At times like this it can cause a market panic. Just because you have more money doesn't mean you should be able to fix prices. That's why entities who own more than 5% of a stock are restricted in what they can do (in US).
A market panic is when everyone rushes to sell at once; this seems like the opposite of a panic. Those who had long positions aren't complaining. And I can't see that Porsche was fixing the price of VW stock; they were apparently doing little or no selling so the price must have been set by other traders.
As far as I know no (German) laws were broken.
When it comes to market manipulation it's very hard to say what's legal and what's not, that's why investment banks have huge compliance departments who have immense expertise in these areas. It's unlikely Porsche had that kind of legal advice so could have accidently broken the law. The brokerage/advisory firms they used could also be liable, as regulated firms have an obligation to inform the regulator if they believe a client is commiting market manipulation.
I doubt anyone will do jail time for this, if even any laws were broken. And if Porsche settles for the maximum 1 million Euro fine, that's not even 1/1000th of the profits they made on the backs of the shorts. It's not like their aspiration to takeover VW was any kind of a secret in either the auto or finance worlds.
Frankly, I have no sympathy for market speculators who got reamed here by shorting VW. I do have some sympathy for people who were short the DAX index as a broad-based hedging strategy and got trapped by the leap in the DAX. Then again, "the market can remain irrational longer than you can remain solvent" is a true today as it was 75 years ago.
Frankly, I have no sympathy for market speculators who got reamed here by shorting VW. I do have some sympathy for people who were short the DAX index as a broad-based hedging strategy and got trapped by the leap in the DAX. Then again, "the market can remain irrational longer than you can remain solvent" is a true today as it was 75 years ago.
Hey, Porsche figured out how the US Government has allowed the banks to drain our 401ks during the last year!
Does anyone know if Porsche are well connected politically? I'm starting to suspect that the markets are being manipulated (well, opportunities are being taken at the very least) and given that governments are moving against private business (nationalising banks etc), this is a worry. Are Porsche privy to insider information they have used to their benefit? Before you scoff, consider that all European countries intercept communications within their borders. It's generally accepted that they do this for financial leverage, not to fight terrorism.
Because they'll all be eating Top Ramen for the next 20 years.
I think it's interesting how many different types of failures of transparency we've seen in the financial markets over the last few years; it seems like the system is so complex that very few people, if anyone, can understand it. Lawmakers are going to be expected to "do something" about the financial system. I'm loathe to think of the typical elected person, often so because of their people skills or personality, debating an issue of this type.