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A come-uppance of sorts. The mother of all short squeezes

October 31st, 2008 · No Comments

The tables are turned, for once. Could be the mother of all short-squeezes. The crying wolf of the victims is especially noteworthy. Shorting, by legal or illegal means, can really create havoc on companies, some examples:

But apparently, there is still some poetic justice in the universe at least for some:

Volkswagen Saga: Major Short Squeeze

  • We are obviously not involved with this “greatest short squeeze in history” as Volkswagen (VLKAY.PK) is on a German exchange and I wouldn’t touch something this random and crazy with your 10 foot pole but some interesting developments – first Porsche (which is trying to buy shares of Volkswagen) agreed to sell 5% of their stake to let some shorts cover. Already their investment might go down as one of the greatest ever at the prices they are going to be able to sell at.
  • Porsche Automobil Holding (POAHF.PK) on Wednesday said it would sell up to 5% of its stake in Volkswagen AG to meet unprecedented demand for the Wolfsburg automaker’s stock after arguably the biggest short squeeze in stock-market history.
  • The move’s designed “to avoid further market distortions and the resulting consequences for those involved,” Porsche said — but laid the blame for this week’s massive rise in VW shares squarely with the short sellers themselves.
  • The scramble for Volkswagen shares, already apparent during the last two months, intensified when Porsche over the weekend revealed that it had increased its equity stake in VW to 42.6% from about 35%, and more crucially, that it had options to buy another 31.5%.
  • Porsche shares vaulted higher, rallying 35% as the luxury automaker’s market capitalization reflects just a fraction of the valuation of its VW holding.
  • The stake sale could lead to profits of roughly 1.5 billion euros, Commerzbank analysts said, estimating that Porsche’s strike price was 100 euros and that the VW shares are sold at 200 euros each. (nice trade!)
  • Second, and more interesting are some of the names involved on the short side again some of the “best of the best” in hedge fund world are getting blown up on this trade. It is really amazing to see these same names in so many stories of similar ilk – SAC and Highside are among the largest and Greenlight is run by a respected value guy who is supposed to be conservative. Live by the sword, die by the sword I suppose.
  • Goldman Sachs (GS) and Morgan Stanley (MS) both denied they were involved in this but their stock prices were hammered Tuesday before the denials – somehow I think where there is smoke, there is fire especially with Government Sachs. If you see so many of your customers in on a trade – I doubt as a prime broker your trading desk is NOT piggy backing. But that’s ok, our tax payer money will make sure they offset any losses at the banks.
  • Hedge funds around the world absorbed a punishing blow Tuesday, as soaring shares in Germany’s Volkswagen AG created one of the biggest losses from a single bet in recent memory.
  • The funds are expected to face billions of dollars in losses, according to prime brokers familiar with the positions, because they were wagering that VW shares would fall. Instead, shares of the big German auto maker soared 82% Tuesday. VW shares are up 348% over the past two days and 267% in the past month — as short sellers rushed to pay ever-higher prices for shares they need to exit from positions.
  • Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital and Highside Capital, according to people familiar with the funds.
  • With VW shares pushing astronomical levels, some hedge funds are calling foul. They are accusing Porsche, already a 42.6% VW holder, of misleading them about its intent to gain full control of VW. (hold on while I shed a tear here…. kind of reminds me of the investment banks crying foul on naked short selling; something they and their clients benefited from for yearsbut when it was turned on them they cried about it) On Sunday, Porsche disclosed it held so-called cash-settled options to potentially acquire another 31.5% of VW, which could give it a near-75% stake in the German auto giant. Many funds had been focused on Porsche’s previous statements, which they say suggested Porsche would not make such a move.
  • Some of these firms say they are writing letters to regulators or are considering doing so, asking that Porsche’s actions be examined. (hedge funds to regulators: “we demand a bailout”)
  • The biggest problem is that Porsche appears to control over 70% of Volkswagen and didn’t have to disclose that fact,” a move that would have to be disclosed in most developed markets, says Max Warburton, an analyst at Bernstein Research. “Under German law they don’t have to disclose what they’re doing, but earlier this year they put out a press release denying speculation that they would build” their Volkswagen stake to these levels.
  • Although investors in Germany must disclose when they accumulate a stake of as little as 3% in a public company, they aren’t required to report certain options that track a stock’s movements but don’t give a holder an underlying vote. (I just find the kettle calling something black hilarious – “lack of public disclosure” claims by hedge funds? hah – if the rules are too vague then don’t play on that jungle gym)
  • Somehow karma appears to be involved here….

We have one comment to make here. It’s curious how some fall on their own knives, and then cry foul. The biggest problem seems to be that Porsche didn’t have to disclose their position, and they are screaming about that.

However, keep in mind that hedge funds didn’t have to disclose their positions (and now they do, but not to the public, but to the SEC only, and the SEC has been a pretty useless institution so far..)

Tags: Short Selling