How Porsche fleeced hedge funds and roiled the world’s financial markets
economist.com
economist.com
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.
So its important to remember, Porsche wasn't fleecing hedge-fund managers, but hedge-fund clients.
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?
Only the pigeon can put down a deposit on a Porsche 911.
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?
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).
That said, it's still income you wouldn't otherwise have.
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.
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.
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.
Anyone who speculates by unhedged shorting has to expect to go bust occasionally. That's just part of the game.
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.