Hedge funds and VW: what a pile up!
If ever there were a country and a people that signalled their distaste for hedge funds, private equity and the self-defined alternative investment industry, that country and people were Germany and the Germans.
It was this famous quote of April 2005 to the German popular newspaper, Bild, by the then Deputy Chancellor of Germany, Franz Munterfering, that didn't exactly represent a "come-in-and-make-yourself-comfortable" message to the rocket scientists of financial services:
"Some financial investors spare no thought for the people whose jobs they destroy. They remain anonymous, have no face, fall like a plague of locusts over our companies, devour everything, then fly on to the next one."
There will be some pathologists of the economic mess we're in who'll argue that Munterfering was spot on. But we can have that debate tomorrow or the next day.
Today let's ponder the marvel of the €22bn (£18bn) loss incurred over just two days by hedge funds and other short-sellers of shares in Volkswagen AG.
We know there is a loss of that magnitude, because the aggregated short positions in VW - or the sum of all those bets on a fall in VW's share price - have been equivalent to 11% of the business at a time when the shares have been soaring.
In fact on Monday and Tuesday, VW shares rose an extraordinary 348% - which is enough to burn to a frazzle anyone wagering that the stock would decline - after Porsche disclosed it had taken out financial contracts that would give it a controlling stake in VW.
Shares in a company tend to rise, when a corporate bidder arrives on the scene. But in this case the increment was way beyond normal human experience: at one point yesterday VW became the most valuable company in the world, worth more even than Exxon.
You may ask why VW's shares have risen quite so much in so short a time. And the explanation is that there are very few of its shares available to trade, as the German state of Lower Saxony controls more than 20% of VW stock with voting rights.
When the share price started to rise, those who had bet on it falling had to scramble to buy, to cover their short positions and limit their losses (they had borrowed shares, and had to buy them so as to be able to repay these loans).
Which hedge funds have been wounded, possibly mortally?
Not, in spite of widespread press reports to the contrary, Marshall Wace of the UK.
It has incurred a tiny loss on VW, of just €5m, and the value of its core fund is up a tiny bit on the month.
So the hunt is on.
Those in the somewhat stressed hedge fund world say those most likely to have been seriously burnt are the so-called quant funds that try to replicate the performance of stock-market indices by buying and selling a few representative shares - because they are more likely than others to have taken out short positions in a mechanistic way, unmitigated by human judgement ("computer says yes").
Inevitably some traders and investors are calling foul.
They're furious with Porsche - because the astonishing surge in VW's share price was precipitated after the maker of the City traders' favourite vroom-vroom disclosed on Sunday that it had acquired financial contracts (cash-settled options) to buy more than 30% of VW.
If it exercises those options, it would have almost 75% of VW.
What annoys the hedgies is that they feel Porsche has been less than clear about its intentions towards VW - since in March Porsche said that the probability it would take its stake in VW to 75% was "very small indeed".
Some of the hedgies are therefore complaining to the German regulator, BaFin.
Which, in view of German attitudes to hedge funds, may represent the supreme triumph of hope over experience - and a slightly surreal postscript to the years of super-boom for debt-fuelled investment.
UPDATE, 09:38AM: More mayhem in the shares of German car makers this morning. VW's price fell as much as 56% at one stage, while Porsche's rose by more than a third. And Daimler's climbed by a fifth.
Why the rollercoaster?
Well Porsche said it would be helping out the squeezed hedge funds by settling "hedge transactions in the amount of up to 5% of the Volkswagen ordinary shares" - which has the effect of releasing 5% of VW's stock on to the market for trading.
But it added that it was still "committed" to raising its stake in VW to 75% - and would buy VW shares at prices that were "economically justifiable".
Does Porsche's decision to offer respite to the hedgies amount to an admission that it had somehow behaved improperly in the way it released information about its intentions towards VW?
No hint of that.
Porsche said allegations of price manipulation by it were "without any foundation" and that it denied "all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves."
And, with that, it pressed down on the accelerator and vroomed off.
I'm 
© MMIX~RS~q~RS~~RS~z~RS~12~RS~)
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So the short sellers got caught with their trousers down. That's the way the cookie crumbles.
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Ha ha ha!!! IN YOUR FACE Hedgies !!!!
Strike one for the good guys!
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I hope this is another sector of the financial 'services' that is mortaly wounded by their greed
Crying all the way to the bank, whoops sorry, Bankruptcy courts hopefully
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How my heart bleeds
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So the hedge funds are going to complain to the German regulator because the share price realistically represents the value of the VW company. And Porche have changed their position on purchasing the VW shares since the hedge funds drove down the price to make that change of attitude possible.
Much as I realise that hedge funds think the share price should be nothing more than an arbitrary number, similar to 26 red on a roulette wheel, it is difficult not to read this blog without a very broad grin across the face.
If they have "Bollinger bands" at the top of their graphs, perhaps it would be prudent to draw "tap water" bands across the bottom.
ROTFLMAO
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When will shorting be banned? How can one sell something one does not own, nor take possession of if bought? Rooseveldt got it right in the 30s by prohibiting shorting
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A drop in the ocean.
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How did we all cope before Hedge Funds?!
Back at home, Gordon Brown seems to have stopped concentrating on the economy from when he wakes until when he sleeps and has decided to wade into the debate about Russell Brand and Jonathan Ross.
The show was on over a week ago. 400 000 people listened. 2 complaints for swearing were received.
The media stirs up public interest. 10 000 people complain... None of whom listened to the show, I would guess, or they would have complained earlier.
None of the people who chose to listen to the show complained about the content.
Gordon Brown is so keen to deflect attention from his management of the economy he's decided to jump on this passing bandwagon.
Pathetic. He needs to focus.
The show was funny, by the way. Everyone lighten up!
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I'm sorry I can barely stop laughing.
It couldn't have happened to a nicer bunch of chaps.
If you live by the sword you can die by the sword.
I read the story yesterday when it broke and was amused greatly. Oh to have been a fly on the wall in some of the hedge fund offices when the disaster dawned on them.
I imagine there are a few bank and insurance executives thinking et tu Brute this morning.
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I cannot get too excited about this VW issue because it is basically a zero sum game. What one guy wins another guy loses.
What are not zero sum, though, are the bonuses these hedge fund managers will have paid themselves over the last few years.
If they get wiped out it will be the pension funds and investors who are left holding the losses. The hedge fund managers will just retire to the caribbean with their wealth.
This is true across the board. People ask where has all the money gone; the answer is in the pockets of the bankers and hedge fund managers.
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The true irony, of course, is that the toys these traders will be throwing from their prams will invariable be Porsches.
(snigger)
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In view of the current extraordinary market conditions, why shouldn't Porsche change its mind?
Hedge Funds are the epitome of what can be wrong with the financial services industry. They do not create wealth - their aim is to skim as much as possible off the top of what is created by others. Stock and commodity markets should exist to enable real investment, bona-fide insurance etc. In fact, they are largely engaged in speculation (gambling) and other parasitical activities. Yet again these activities are having a devastating effect upon the lives of many millions of people.
This time there must be root and branch reform. Financial "services" should play a much much smaller part in the economies of the future.
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Who cares if hedge funds lost £18bn. The money has not vanished. If hedge funds lost £18bn then real investors gained £18bn which is GREAT news.
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The hedges have been trimmed! (not in German this time!)
Ho Ho Ho ;-)
with a little schadenfreude
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I was in Germany in 2006 for a week visiting a giant machine manufacturing plant. The manual workers had dignity and the products were superb.
I lament Britains decline. We have been fooling ourselves for a decade about the value of our Financial Services industry. The King is clearly naked but still paying himself a bonus for bet dressed monarch.
All the decent jobs in the UK have been scoured away for two generations.
RP made the point last month that the government was crowing about building a UK industry to supply the government if that is not an Ouroboros what is?
I do not think that we have it in our national character to rebuild from this one. We have become a nation of washed up debt druggies formerly addicted to the illusion of celebrity high living.
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GOOD!
A salutary lesson to the hedge funds.
May they all go the same way.
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Wait for it, the taxpayer will have to bail them out.
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Ha ha! It goes to show that shares can go up as well as go down! LOL
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The Germans have a word for it - Schaudenfreuda.
My worry is that the hedge funds (which may include our rescued banks, by the way) will ask the taxpayer to bail them out and worse still some politician will agree to do so.
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OK a few billion quid wipes out or hurts these people and they hopefully will lose their houses and assets.
But RP lets keep the agenda going
What about these updated home loan figures?
1. Are they new loans
2. Are they remortgages
3. Are the downsizers
This is important in terms of any recovery because if they are not new then nothing has changed
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Maybe not a flight to quality, but a flight away from total rubbish.
What makes me laugh is watching the NEWS channels.
CNBC with it’s sound effects Boom’s Whoosh’s etc all to make it feel like we’re in some action movie the BBC will be doing it next with Peston absailing in to give us the latest update.
SKY NEWS morning market open from the city with the reporter lurching around, as the market opens asking is it up or down.
News papers showing a photo of a trader with a big smile on his face following a day of rising stock prices and the next day head held in his hands following a day of losses.
It’ll totally hysterical! Some funny things do come out of the Credit Crunch.
Some Thoughts.
The impact of high Taxation.
Property prices have been pushed higher not only by easy loans but also by the Tax’s on the purchases.
Bear me out here….
Buyers have either subconsciously of consciously added the cost of Stamp Duty of their new property to the sale price of the property they are selling. “ So pumping up the price” everyone did this.
Stamp Duty has been a big factor in forcing property prices higher.
This maybe counter intuitive.
The same it true of many other decisions we make the fact is we all consider how much tax will we pay and how much will be left after we’ve paid it.
The net effect is that we increase our prices and our charges to make up for the cost of the taxes.
This drives the bubble.
With low taxation the economy would be more stable this may appear to be too simplistic a view, but as with the Stamp Duty example above subconsciously or consciously we all try to compensate.
Government borrowing has been out of control the worry is that it is set to get even bigger. The goal should be to reduce it to nil.
But that will never happen so we will see more bubbles.
HOT AIR Stock market Values
Why would anyone be surprised to see share prices fall 50% or more?
Most have only had 10%-20% asset value the rest is HOT AIR or expected future profits, goodwill an expectation of good things like dividends.
Strip those things away and it is amazing that share prices are as high as they are today!
The equity market could easily fall to 20% of it’s 2007 average.
So where has all the money gone well “ it was never there in the first place “ it was just HOT AIR or unrealised profit.
Where does that leave us investors well my guess is a return to fundamentals of
Energy
Housing
Food
ENERGY
Renewable “where it makes financial sense Rare!”
Nuclear “difficult to invest as a private investor construction etc”
Gas “only through shares, difficult to invest in”
Oil “only through stocks” and for the next few years unlikely to see much higher prices due to aver supply.
HOUSING
High housing prices will return with a vengeance buyers will need to take some pain over the next 18-24 months the thing with property it that the cost of carry still works through rentals but now more than ever location will be the key.
Be carefull if you are considering investing in bombed out house builders as thy are quite likely to be taken over for pennies when they are worth pounds, the vultures will make sure of that.
Better to invest in buy to let.
FOOD
Buy a Farm or farmland for the long term.
Invest in food co’s that have direct supply chains.
Supermarkets exposure to land and non-food will prove only to drag them down.
GOLD
Well it’s not worth anything to anyone except as jewellery or for flashy teeth.
Only if they find gold has some industrial benefit will it be worth investing in.
The era of using Gold to trade with has well and truly gone.
But who knows.
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You language is spot on: these were "bets" and just that. The stock market was intended as a mechanism to provide investment to businesses. Anyone who just takes a short leveraged position is just gambling and not providing any meaningful investment - so let 'em burn!
Furthermore, where did the €22bn go? To those who bet on VW shares going up. It is pretty much a zero-sum game. It is not like they had a big bonfire of Euros!
Like any gambler, the hedge funds should not bet more than they can afford to loose. If they do, then they make their own bed and lie on it. The fact that they are crying to the regulator just shows that they are an arrogant bunch who seem to think they have some divine right to big profits and bonuses!
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FINALLY!
Now that my faith in God is renewed, can we replicate the same effect another 1000 times till all of those locusts are out of business for good and have to flog ther Ferrari's?
And they have the audacity to complain that Porsche did not tell them in advance of their plans? sure, and they should have laid the red capret as well!
Go the Germans! Well done. And thank you.
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I hope they do take it to the German finance regulators. The Germans are already talking about prosecuting bankers
and I'm sure the state attorney will have a lot of sympathy for UK/US hedge funds that tried to force down the value of government investments in Volkswagen. When they messed with VW the hedge funds took on the German government and bit off a bit more than they could chew.
Schadenfreude.
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I imagine there is one or two city traders whose plans to buy a Carrera GT with their Christmas bonus have fallen short!
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Please excuse me for being dull. The HF people did not actually 'Borrow' the shares did they? I thought they made a contract to sell some at some time in the future (at a lower value?).
Could anyone put me right on this, please?
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Good, these hedge funds can cause a company to fail, now they know how it feels
Happy Christmas
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It is hard not to be satisfied at the thought of a few of these locusts losing everything but I guess you can bet your bottom dollar we, in the wider economy will pay for this debacle. If the funds go down with big debts they will leave creditors, quite possibly the pension funds they borrowed the shares from, unpaid.
I suppose that suitably expunged of thier debts the greedy individuals who have again caused so much harm will be back in the market within a year, betting with our money.
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This whole practice of trading "promises" is whats bringing countries to their knees.....
Perhaps as has been already stated the whole area of short trading and futures should be consigned to history.....its just a set of wealthy people gambling with other peoples lives .
The Nat Rothschilds of this world wouldnt be missed....They create nothing,employ few people and just make a few friends rich, while destroying companies,jobs and lives.....for fun.
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You may note the absolute lack of any sympathy whatsoever here. I can't possibly guess what the reason is for this....
Could it be that the public don't actually like all of those uber-high powered brokers and fund managers who have made such a killing from crashing the share prices of our banks through short-selling? Could it be that people don't actually like these people making billions at our expense, leaving the UK tax-payer (of which I am, thankfully, not one...) to pick up the bill?
I think I might just crack open a bottle of champers at lunch today to celebrate them finally getting a semblance of a come-uppance for their greedy exploitation of the markets.
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We are in the middle of a giant economic mess and there is still short selling, and hedge funds and stock markets going up and down. When is someone in power going to realise that the system is seriously flawed and do something about it. I am tired of hearing about how and why it happened with nobody suggesting how it can be prevented from happening again, and doing something about it-NOW!
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The comments below say more about the people writing them than the issue.
If the German Government is concerned about the rights of its investors and companies to operate and invest in an un-manipulated manner, then it should not permit Porsche to create a false market in Volkswagen shares. That does no-one any favours.
It is clear that in today's economic environment the VW share price should not be exhibiting this volatility and performance. The ramifications of Porsche's strategy are now far beyond it managing to reduce the effective cost of taking over VW - with impacts on 'normal' investors (I exclude hedge funds from comment as the term appears to over excite too many on here), index-linked funds, etc.
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Now there's an interesting sport. Hunting Hedge funds.
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1. there is a serious point to be made: We are all suffering due to market failure. Markets fail due to information asymmetry- I know things you don't. VW/Porsche used derivatives to (potentially) transfer control without disclosing the transaction in a timely manner. As a result losses were incurred by various investors including hedge funds. If this type of "secret" trading occurs, markets will not be efficient and all of us will lose.
2. To those who are expressing joy at the losses: Whose money do you think hedge funds are investing? It's probably a portion of your pension, or your insurance company.
3. Finally, when will Robert Peston and the BBC stop lumping Hedge funds with Private equity? They are totally different - I got so mad about this I wrote a book on the subject: http://www.icaew.com/index.cfm/route/160216/icaew_ga/en/Technical_Business_Topics/Thought_leadership/Private_equity_demystified_An_explanatory_guide
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The shorterr sellers are now even shorterr ,even Black Beard had his day, lol!
The hedge funds hang about the London financial markets the way way pirates used to hang about the coves of Cornwall
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Shares drop at record levels. Robert Preston writes scare-mongering blog about how the city is in trouble. Shares rise at record levels Robert Preston writes scaremongering blog about how the city is in trouble.
Can I have a job at the BBC too please?
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As my father-in-law would say, "there is a God, after all".
In the midst of the doom and gloom, we get a little something to bring a smile to the face. A little sign that those who play fast and loose do get caught out now and again. And wow, their trousers must be on fire...
Just a pity I didn't dump my B&B shares a week before they became toilet paper and switched them to VW.... ah, I can dream!
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They sold shares at a high price that they didn't own in order to make a quick gain hoping the price would fall.
When the price rises they have to buy the shares to settle their sales they have to pay more and make a massive loss.
Serves them right!
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So.. The pound is up, the FTSE's up, mortgage lending's up, interest rates are falling, inflation's falling and some hedge funds have taken a bit of a kicking - HAPPY DAYS!! :-)
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I am not sure I really understand the comments here.
Hedge funds run your pensions. Your pensions have lost out €18bn which has been transfered to Porsche. You could have actually bought a Porsche instead. Now you have lost part of your pension instead. Hey ho.
Hedge fund managers do not have much of their own money in the funds. Your money ladies and gentlement, your money.
And a lot of the losses will be from index trackers and from banks trying to hedge against other products.
And lets say a bank goes under and it needs to be bailed out by Gordon when he can drag himself away from messers Brand and Ross. He bails it out with your money. Yes ladies and gents, your money.
And lets just question what the value of Volkswagen is? is it €250bn? the largest company in the world? I can see lots of people rushing out to buy cars when they are losing their jobs or they cannot get credit.
Can we get away from this national obsession with a culture of hatred and envy and just focu on Jonathan Ross a bit more?
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Robert, I'm not sure if you think this is bad news, or you have your tongue firmly tucked in your cheek.
Frankly, I've only stopped laughing long enough to write this very short comment.
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So what about the costa del crash ?
How about the Banks exposed to billions of subprime Spanish loans ?
Hey that would be Gov't favourite Santander, aka Abbey, aka B and B , aka Alliance and leicester.
Talk about having all ones bad eggs in one basket!
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#35
If a company has to declare it's position then shouldn't hedge funds - but then that would undermine how hedges work - in other words what is good for the goose is good for the gander...
PS, were you one of those wiped out in your gambling or have you been at the nutty fruit-cake too?
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I've really enjoyed this story - the idea of VW briefly becoming worth more than XOM as hedge funds scrambled to pay 1000 euros to buy back stock they'd shorted at 200 euros is some welcome light relief at a time of widespread economic gloom. You couldn't make it up, could you? I've always been against short selling, and think a ban might be considered - but this is a far more effective deterrent.
One thing I don't understand, though, is where these short sellers actually borrowed the shares from - can anyone explain this? If Porsche owns 74% and the regional government 20%, how is it that there were enough shares available to be borrowed?
Be that as it may, this story will surely contribute to more prudent and conservative investor behaviour.
One other thought; if dealers earn bonuses by making profits for their employers, which is fair enough, does this work in reverse in a case like this, and can investment houses claw back some of the losses made by the idiots who thought it a smart move to short VW? Negative bonuses would be a really interesting twist to the story............
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Dear oh dear, where to start.. There is so much misplaced gloating here it's hard to decide..
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This story also raises an interesting side-issue - the market in Porsche and other high-performance sports cars.
Back in the 87 crash, the price of used 911s (and similar) dropped to rock-bottom levels as City types sold in panic, and many enthusiasts got bargains; is the price of used sports cars falling now?
Perhaps the price of a used 911 might be a useful barometer of the financial system?
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There's nothing wrong with short sellers. Laugh and snigger all you like, but point the finger elsewhere.
Here's why:
Have they been working above and beyond the law? No, not that I've heard. So, if we don't like their methods, we should be blaming the REGULATORS for allowing it, not the short sellers who are working wthin the law.
Next, we need to stop and think (rather than just snigger because they have lossed lots of money and we haven't). Think, and then post a comment.
RP says: "they had borrowed shares, and had to buy them so as to be able to repay these loans". Question: who lends short sellers all of these share? Fund Managers (someone correct me if I'm wrong). What funds? Our managed pension funds maybe?
So the people are who are managing our funds are lending out (our) shares, which in the normal course of short selling are devalued. They then take back these devalued assets into their portfolios and add the their cut for lending out the shares to their own bottom line (not to OUR funds).
Please, someone in the know tell me if I'm wrong.
So who should we be blaming? The regulators or the fund managers (who are supposed to be looking after us but are merely lining their own pockets). Take your pick.
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Oh dear. Oh dear. Oh dear.
Where Oh dear = 6Bil. Can't win them all.
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#38 rjmghome
1) If you are proposing that someone at Porsche bet against the hedge funds by betting that VW shares would go up, then this is insider dealing, and I bet it is illegal in Germany as most places.
What more likely happened is Porsche merely took advantage of VW depressed share price to pick up a bargain. There is nothing wrong with that!
2) People rejoice because those who make ridiculous bets, as opposed to rational investments, will be driven from the market because they cannot afford to take the losses that they are making.
It may be "our" money, and it may result in short term losses for our pension and insurance funds, but it is better in the long term to have stable markets that give realistic returns.
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#19 + #21
Whilst I'm in agreement with the sentiment here of "they got what they deserved" I also can't help wondering if this will create another bail out situation.
Also, let's not forget, it is highly possible that pension funds will have been using hedge funds or as part of their investment model and if that is the case then those pension funds will be damaged as well.
Some would argue the hedge funds getting a kicking is good news but I don't think it's as simple as that.
I could be wrong.
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#9
Could not agree more - another demonstration of the power of the media to manipulate the public into faux outrage over nothing.
At least it stopped them talking down the housing market some more......and fortuitously prevented them from reporting the actual drop of only 8% (based on completed house sales, year on year) as opposed to the usual speculation of 2-3 times that amount that is now the prevalent belief amongst the public at large, thanks to the media.
Anybody want to buy some houses bye the way - I have a large and enviable selection!?
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#45
"Hedge funds run your pensions. Your pensions have lost out €18bn"
Isn't that the point, Hedge funds and more importantly their managers, gamble with other people money which is why any sane, morel, thinking person sees them as bad and uncontrolled - one (bad) decision by a HF manager can wipe out someone else's future, be that a pension fund or a trading company that is forced into bankruptcy.
It seem to me that pension funds have swapped the Maxwell's of the world for something very similar in hedge funds...
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Hedge-funds and shortsellers crying about Porsche beating them with their own weapons? Laughable.
More annoying, index driven fonds crying about VW boosting the Dax?
Hey, what happened with Porsche, VW and the shortsellers happens every day at any stockmarket. Ok, at a far lesser scale ands normaly with the opposite winner.
But have you ever heard any crying, when a profitable company was bought by hedgies, scliced in several cuts, sold piece by piece, pumping the debt in the last remaining part that the went bancrupt?
Do you think, any of the shortsellers would cry a tear for the ordinary shareholder of VW, if their bet had worked out and VW lost worth?
Do you think any index fond would cry, if VW would have lost through the hedgies manipulation?
Yesterday they cried about the need to buy VW at such a high rate, because they had to mirror the index, do you hear anything from them today, as the othe 29 members of the Dax 30 have a big comeback?
It is true, in a normal world, all this betting, shortselling, speculation, simply would be forbidden, but as long as it is not, brokers are the last people I want to hear crying, if for once a big company was not torn down by them, but showed them a big, big middle finger.
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Damn, who are these Hedge Funds so I can take out a short position on their shares. I'm on a winner.
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#50
Wasn't Porsche buying as the hedges were selling....
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Thank you, thank you, thank you Porsche!
Ok, so I'm no better off and no worse off than I was when I woke this morning but
I've laughed so hard, I'm crying.
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@ 50
Where the shortsellers where able to lend 12 % of VW stocks, as only 6 % are available on free market is a question, that is asked from many now.
I think you have to consider, that Porsche does not own 74% of VW yet, but only about 43 and have options for another 31.
So, if you are a Bank, holding VW shares, give Porsche an option, meaning to to sell them these shares, let's say, next spring, why shouldn`t these bank lend these shares for a few days to a shortseller?
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I'm not sure this blog really reflects the position accurately. Maybe I'm missing something, but let me explain how I see the VW share price issue.
Porsche has not actually bought any more shares in VW. Rather they have taken out options to buy about 30% of VW. They have not disclosed the strike price of the options (ie the price they'll pay to acquire the stock when they exercise the options).
For every option over which Porsche has an option, someone must have an equal and opposite written option position, ie an agreement to sell Porsche a VW share at the strike price. Although we don't know the strike price, I'd be pretty confident it isn't 300% higher than the price on the day(s) Porsche bought the options, ie the strike price won't reflect the big rises in VW's price over the past couple of days. There may be some premium over the market price on the day(s) concerned, but not much, given that the extreme price movements in VW only started after Porsche announced its intention to increase its stake in VW to 75%. So the announcement was the trigger, not any abnormal activity in the derivatives market.
The question is, would knowledge of Porsche's intention have had an impact on the cost of VW shares, and therefore on the options Porsche took out? Given what happened after the announcement, I think we can conclude it would have had an impact on the VW share price/options cost. However, at the time of entering into the options trades, only one party knew of Porsche's intentions, and that was Porsche itself.
If this is a fair reflection of how the trading took place, then I think there can be very little doubt that it will be in breach of the Market Abuse Directive.
Finally, a word on who gains from these trades. There is only one winner, and that's Porsche. They have options to buy shares at X per share, where X is almost certainly a much lower price than the current market price. On the other side are various current holders of VW shares who have taken the opposite side of the options trades, and will therefore have to sell shares at a price much lower than the current market. If 11% of the shares were shorted and has caused losses of EUR 22 billion, and Porsche has options to buy about 30% of the company, then existing holders of 20% of VW have suffered opportunity losses of about EUR 40 billion.
Whilst Hedge Funds may or may not deserve sympathy, I think the existing holders of VW stock (representing the 20% discussed above), many of whom may have been long term investors, probably do deserve some thought. Given that many are probably large German pension schemes and banks (German banks still have significant holdings in major German companies), I suspect Porsche isn't goping to get a sympathetic hearing from any element of the German state, including BaFin, the regulator.
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Shorting should be illegal - it encourages and prays on decline, the fall in banking shares wouldn't have been so bad without these parasites.
They deserve this and I hope a lot of them fail....maybe somone should short the Hedge Fund Company stocks and profit from the demise of the hedge fund...see how they like it.
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I remember the 80's VW advert which said "This is the man who bet a million on black when it came up red ... This is the man who moved into the smart money just as the smart money moved out"
coming up : "these are the hedge funds who sold short when the market went long"??
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38:
Check the rules of the German stock exchange, they are not the same as the London one. Actually most European ones operate in a completely different principle. They are different in protection of minority shareholders and also on first to inform. There are also rules on indicative shareholding announcements.
Remember the arrest warrants against Marks and Spancer France execs?
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Amen Boilerplated
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#45. At 10:17am on 29 Oct 2008, fattybadger wrote:
I am not sure I really understand the comments here.
Hedge funds run your pensions. Your pensions have lost out ?18bn which has been transfered to Porsche. You could have actually bought a Porsche instead. Now you have lost part of your pension instead. Hey ho........
So you are trying to tell us that the Funds in charge of boosting our pension funds were SHORTING VW?
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It's schadenfreud all round for the hedge funds. And a brilliant coup for the German model of capitalism.
Hedge funds have done more to destabilise the global financial system than anyone else. They rank as more dangerous even than the toxic debt of derivatives.
They are responsible for record fuel and food price inflation, runs on banks, destabilising currencies and bankrupting nations.
They run off with their loot leaving taxpayers to foot the bill for a ruined banking system, or the IMF to bail out bankrupt countries.
One hedge fund manager boasted in July 2006, "I want to be known as the man who bankrupted Iceland."
Well he's got his wish now he can pay for it.
The IMF should require hedge funds, not the taxpayer to provide the money for the bailouts that countries like Iceland need at present.
This will prevent the moral hazard of hedge funds behaving recklessly and bearing no cost or responsibility for their actions. They have undermined the very basis of our prosperity as a capitalist society and run off leaving ruined economies and the taxpayer to pick up the bill.
The future of hedge funds and financial derivatives will be top of the agenda for the forthcoming Bretton Woods II.
Our favourite bank manager, Captain Mainwaring will be in the chair, in spirit at least!
Just the man to deal with all that toxic waste.
Chelyabinsk
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"GERMAN CAR-MAKER PORSCHE REVEALS THE WORLD'S MOST EFFECTIVE HEDGE-TRIMMER"
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Well done Porsche !Looks like the hedge has been clipped rather short!
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This is the best news I have heard in weeks.
I really do hope that the people who have caused so much misery and harm by their behaviour have now been caused some misery themselves.
Hopefully the alleged 'regulation' of markets/banks etc that Brown and others are talkng about will deal with these people. I will wait and see.
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Good for the Germans. They like the French are keen to protect their industry. Unlike the UK, where the likes of Slater Walker and Hanson asset stripped British industry until it had been destroyed.
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Fattybadger - my comments are well justified and well understood.
Firstly, the type of hedge funds that are under the kosh here are Quant Funds, those that supposedly follow the fortunes of only a select few Companies on a particular exchange believing that there are higher earnings to be made focussing on individuals rather than tracking the market as a whole. Quant funds usually attract more professional investors than pension funds as they tend to be higher risk. Pension funds traditionally hold their funds invested in banks and other blue-stock chips and don't involve themselves in short-selling due to the inherent risks associated with it, as has been highlighted above.
Secondly, I don't keep ANY of my money in a pension fund. I invest my capital in property. At 22 I feel that this is the sensible option. I am currently looking to release over £100k of equity on a property at the moment so that I can purchase another property, and as I have a very cordial relationship with my mortgage provider this should not prove to be a problem. £100k equity release at the age of 22 - I'd love to see the pension fund that could match this.
Thirdly, as I said, thankfully I am not a UK tax-payer. I don't like people wasting my tax monies so as far as I'm concerned Gordon Brown can do whatever the hell he wants. If that means buggering up the future of the UK economy by leveraging the Government to Hell and back, so be it. It's not on my shoulders and it's not with my money.
I love seeing this type of thing unfold, as the people that are losing out are NOT the general public, they are professional investors and the like. If the World has any justice, this will cause the odd broker to lose their job and financial security.
But most of all, it's not happening to me.
The joy of schadenfreude.
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Laugh?
I nearly disgraced myself :) Agree 100% with post 9 btw. Surely GB has enough on his plate at the moment, indeed perhaps J Ross should have a plug back at the PM.
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There are a few suggestions on here that if the hedge funds lose money then it is our pensions funds that are the ultimate losers as they are among the investors in the hedge funds. However the hedge funds have presumably borrowed the shares from other pension funds in the first place, and the latter will now be better off as the share price has risen. So on average won't our pension funds be unaffected?
Anyway, as #53 implies, the best solution may be to ban pension funds (especially passive, tracker funds?) from lending out stock. Then perhaps the whole shorting industry would just disappear.
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If VW yesterday at 1000 Euro / stock had a worth of about 300 billion Euros, and Porsche today sold the promised 5% "to help out the shortsellers" at, let`s say 600, they made about 9 billion cash today.
And if the fixed price for their 35% options is around 200 Euro, they'll buy almost halve of them with this 9 billions. In other words: for nothing.
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This is great news. I could buy a VW and tell people that I drive a Porche!
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This looks like a clear case of naked shorting to me - since the hedge funds were scrabbling around to find available shares after Porsche upped the stakes, it's fairly obvious that the funds had shorted the shares without ensuring that there were shares available in the first place.
It is widely believed that the Lehman Brothers collapse was exacerbated by this practice - for more information on the phenomenon, Patrick Byrne (CEO of internet seller Overstock.com) has a very informative site at http://www.deepcapture.com/
There may be some Italian-American gentlemen choking on their meatballs this morning.
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A few have made good points on here about who is loaning the stock for the hedgies to short.
This then poses the question of, apart from the fees gained for manipulating stock that doesnt belong to them, what the institution owning these loaned shares actually has to gain by allowing this kind of insidious behaviour to take place with assets owned by them, on behalf of, as has been said loudly enough "our pensions".
Could it be that the fund managers are taking much longer positions on these shares and as a result see that an organisation like VW is, over the long term more likely to prove more profitable than not? Or, do they not give a stuff, so long as they get their cut? Are they behaving unethically?
On reflection, maybe those who got burned by HBOS & B+B also had the same thoughts originally. Look where that got them...
You should only gamble what you can afford to lose. Even a schoolkid knows that.
Oh and by the way, those grumbling about "your pensions, ladies and gents, your pensions"... do you think that many of us, thanks to Gordon and Geoffrey Robinsons pillaging 10 years ago have got any pensions worth the paper they are printed on anyway?
Finally, some of you may remember that there has been a long history and quite a degree of synergy between these two companies... IIRC, a couple of years ago, didnt VW step in to stop Porsche being bought out by venture capitalists? Or was it the other way around?
Eitherway, its about time the hedgies got a timely reminder that values go up as well as down. :-) Maybe they wont play quite so fast and loose next time.
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fatty @ 45
Hedge funds run your pensions
No, they don't - what they mainly do is manage vast sums of money on behalf of High Net Worth Individuals.
That's the idle rich to you and me.
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# 53
I cannot speak for all investment funds. However, I have had responsibility for running lending programs in a number of large funds. I can state categorically that none of the lending fees went into our bottom line. All lending earnings net of the program's costs went into the fund for the benefit of investors. Do I think some investment managers take a cut of earnings for themselves? Yes I do. Can you do anything about it? Yes. If you are in a defined benefit pension scheme, ask one of your Member Trustees for the scheme's lending policy and details of how lending revenue is shared. You probably won't get the actual percentage splits (tend to be covered by non-disclosure terms), but you should get confirmation that the fund manager can't take a cut. If you have defined contribution pensions and/or ISAs invested in unit trusts/OEICs, ask the manager of the Funds you're invested in for details of their lending policy and who gets what out of the fees. Switch Funds if you don't like the policy, and assuming you have the choice in your DC pension.
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Haaahahaha! Hahaha! Ha Ha!
That is all.
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Robert
The FSA are assembling a group of external advisers (crisis team) to deal with the UK insurers.
One of the options being considered is to relax rules on accounting and capital requirements! Words fail me. Surely strengthening the capital base is the only show in town.
If this work is beyond the capability of the FSA, does it not beg the question: Are the FSA fit for purpose?
You could not make it up!
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KAIZEN in the factory ...
SZUN TSU in the takeover bid of VW ...
= Management by PORSCHE
(a nice German guy)
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forbid short... go back to investing!
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#45... would love to agree, but actually vanishingly little of our pensions is in hedge funds' hedge funds are mainly an ego vehicle for the manager, where people who think they're good at trading can swing the bat with someone else's money for a bit. If it works, they make millions off the "two and twenty" system (2% of initial investment plus 20% of all profits go to the manager) and can retire happily; if it doesn't, they can either go and work for another fund and try it again (maybe changing plusses to minuses...) or go back to a mainstream financial job with the record of having been a "hedge fund manager".
The losses are to wealthy individuals and risk-taking money managers who invest in these funds. But they knew the risks.
More of a concern is more traditional and risk-averse institutions whose investments in the German equity markets (DAX, for example) have been buffetted by the ludicrous swings in that index's value. Anyone, for instance, who took a short position in the DAX to hedge some general European equity exposure will have been severely burnt through this rather dubious behaviour by Porsche. I hope it doesn't push any traditional and non-vulturous managers over the edge.
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Just like most ordinary folk I have no sympathy for those hedge funds who lost money on their bet that VW shares would go down and it was good to learn that on this occassion these smartarses have been outsmarted. It's all well and good banging on about how greedy and reckless our bankers have behaved but the same also applies to these hedge fund managers.
It also raises the question should the stock exchange operate as a gambling casino where people bet, by the hour, on which way shares in certain company's will fluctuate. Perhaps at this moment in time it would be useful to remind everyone working there that this institution was originally set up to help businesses to raise capital for future long term expansion based on sound business experience and expertise.
If we are to progress from being a debt ridden nation, living on borrowed money from overseas, to one that can pay its way in the world , then perhaps the people working in this institution should concentrate their efforts a little more on what is good for the UK economy overall and a little less on making a quick buck for themselves
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"This is great news. I could buy a VW and tell people that I drive a Porche!"
My Skoda is even better value for money now.
Did they change the name of the 911 in America? It is like having the Rover Lockerbie.
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re 17.
I have highlighted many times the fact that as a nation we are obsessed by having something for nothing and that has been the root cause of all this problem but also wanting more and more in the way profits whether it is personal gain or corporate gain and now paying a very high price for not being self sufficient in areas we once excelled.
All those skills handed down for generations have been lost just because we all wanted cheaper and cheaper goods.
We cannot sustain continuous growth its absurd, the planet cannot survive. The latest reports are telling us that by 2030, which is not far off we will need two planets just to sustain the current lifestyle not any further expansion. What were you doing in 1986, if you want to think how close we are to disaster?
That means each and everyone of us is guilty unless you are reading this living as a hermit!!!
but we have another British disease and that is self depracating Why I have absolutely no idea. The media seems to have instilled it in our culture for reasons best known to themselves, whereas other Countries have a pride, not only in themselves but the work they do, the Country they live in. They want the World to see them in the best possible light- not us it would seem, we just moan about everything, criticise each other when we often know very little about the work someone does and have no pride in looking after the environment we all inherited.
We need to bring back personal & social responsibility as well as commonsense, pride in the work people do, not continuous battering by the media for this sector or that sector. We have a fantastic health service, with people who we should all be immensly grateful to, who do an amazing job day after day. One which many of us could not stomach for one day and its free. People should live in other Countries where they have to pay before they begin to criticise our wonderful NHS. We have teachers who day after day work in often very challenging environments, firemen, police, people who work in factories, people who work in shops, all contributing to our own lives and yet for some strange and bizzarre reason we hold up pathetic 'celebs' as role models. We even have to watch them congratulating themselves when they have already been more than obscenely rewarded for doing very little.
There is no such thing as Eutopia anywhere in the World but you could be living in many places far worse than here!!
We need a sea change of attitude in the UK and we need it right now.
We all need to accept that if our children and grandchildren are going to have any life at all we are the ones who have an enormous responsibility that we don't destroy their futures.
This financial fiasco may well be the wake up call the World needs and if it doesn't respond why worry about the financial markets, it will be of no importance to any of us
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Hmm - mine and your pension fund has lost £18 million that has passed to one of the richest families in Germany - no wonder all the posts on here are of such a celebratory nature.
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#81
"This is great news. I could buy a VW and tell people that I drive a Porche!"
In the same way that people buy a Skoda and tell people they drive a VW? Except that in the case of Skoda it's true!...
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Let me see if I've got this right. Porsche buys options on 30% of VW stock at an undisclosed strike price. The owners of some shares decide, in the meantime, to earn a slightly higher return by lending shares to short sellers; they'll get the shares back and sell them to Porsche at the agreed price. The short sellers think they can sell, buy back lower, make a profit, and return the shares to the owners. So far so good.
This raises a number of questions. Should Porsche have declared its purchase of options? I don't know what the rules are here, but I'd guess not.
Should the lenders have told the borrowers, "I think you should know that these shares are under option to Porsche"? Again, probably no reason why they should disclose this, indeed it was probably confidential, market-sensitive information.
It seems to me that we're left with the conclusion that neither Porsche nor the share lenders did anything wrong.
The hedge funds thought they knew better than the market, i.e. that VW's share price would fall.
But hang on a minute - wasn't it a well-publicised probability that Porsche was going to buy VW? I seem to recall that the German authorities actually announced a change in their rules specifically intended to make this takeover possible. Any autos analyst could, presumably, have predicted that VW was going to be acquired by Porsche.
So, bottom line, the short sellers were short of brains and short of knowledge as well as short of stock. Shame.
Meanwhile, the winners here seem to be Porsche. Porsche is a respected industrial company, maunfacturing good products, employing thousands of skilled workers, and contributing to the economy. In my book, that makes them the good guys, and its nice when the good guys win.
Short sellers have made lots of money in the past by right calls. This time the call was wrong (actually, pretty stupid) and they lost. Seem fine to me..........
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There's me thinking that "to edge" is to protect yourself against large swings in the share price.
If these edge funds are losing money at a time when they are suppose to be the most stable then those running them should be sacked.
Thing is we all know someone them found out that they can make easy money by shorting while paying people to sit on share forums to spread rumour and talk down shares.
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When are you going to cover the story that Larry Elliott of the Guardian si calling the UK economy -
'Mutton dressed as lamb'?
Sterling has fallen further than during the ERM crisis as imternational investors dumpt the currency.
The VW story should be covered form one simple angle: Porsche would be breaking the law if the did what they did in the UK... whay are they being allowed to aget away with it? What is the purpose of the EU?
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Do the hedge funds deserve this? Of course they do. Do we care? Not in the slightest.
The people who run these funds are arrogant, raucous, flawed individuals who prey upon genuine businesses for profit without a thought to the consequences for the lives of others. They would say, of course, "That's the market for you".
So to the hedge fund managers and founders everywhere let me just say: "Tough. That's the market for you".
And three cheers for the Germans!
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# 83
Lending fees can be attractive to long term holders of stock, which is why they lend. You also need to remember that not all lending is to allow other investors to short stock, though in this particular case almost certainly the bulk of borrowed stock was, indeed, to settle short sales.
What else do fund managers gain from lending? Well, bizarre though it may seem, long only managers may well want to see stocks they own fall in value (or at least underperform the market). Why? Well most long-only managers are measured versus a benchmark, eg a manager of UK equities will have an outperformance target of, say, 2% versus FTSE All Share. They will also have a risk budget, usually expressed as a tracking error target (eg 4%). So a performance target of 2% with a tracking error of 4% means a manager is targeting a range of performance versus FTSE of +6% to -2%. They are not targeting a particular return for the Fund. If FTSE is down 40%, then the manager has been successful, allegedly, if their Fund only falls by 37%. In that case they've beaten FTSE by 3% when their target was 2% outperformance.
They achieve their target by overweighting versus FTSE the stocks they like, and underweighting the ones they don't. OK, so how would this work in the case of VW? Well before Porsche announced their intention, VW represented over 6% of the DAX. Let's say I'm a manager that thinks VW will underperform and my benchmark is the DAX. At over 6% of my benchmark I really can't risk holding no VW. If it outperforms, I'll struggle to hit my target return (eg beat Dax by 2%). So I'll hold VW, but underweight it. I'll invest maybe 5% of my portfolio. If VW underperforms the index, then my portfolio will go down by less than DAX (because I have less invested in VW than the index), and I will outperform my target.
So, if I lend out VW I get a fee, further boosting my Fund return. If the borrower short sells VW and the price does indeed fall as a result, then DAX will fall more than my Fund because I've underweighted VW. That means it helps me outperform my benchmark and, remember, I have the lending fee from loaning my VW shares as well. So I outperfrom my benchmark, which is my aim, as opposed to targeting any absolute return on my Fund.
Does running Funds that way make sense? There are plenty of people who question it, but it's the way most of the investment world works, despite the growth in absolute return Funds in recent years. Of course if you want absolute return on equities, that requires shorting in order to hedge the market risk out of the portfolio. So you can't have it all ways, I'm afraid.
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#59
You suggest we all manage our own money? Don't really understand again.
My pension fund is down over 40% this year. And that is not a hedge fund just in European index funds (who may also have suffered from this market manipulation arguably more than hedge funds)
I don't see why people revel in losing money? I am pretty disappointed when my pension falls. I would be extremely disappointed if part of the fall in my pension went to swell the coffers at Porsche by them manipulating the market in shares.
Just grow up.
You losing money bad.
Porsche making money at your expense bad.
However it happens.
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Incidentally, there's a good article on Bloomberg about this matter, entitled:
"Porsche Climbs, Volkswagen Drops on VW Stock Supply Increase"
The value of the 5% of VW that Porsche has agreed to release to help clear the short positions is EUR 10.8 billion. It's that increase in Porsche's net worth that is behind the rise in their value today, nothing to do with building high quality performance cars or the logic of acquirinf control of VW.
Actually, maybe Porsce should give up that line of work and move into fund management. They'd be pretty good in Hedge Funds!
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The hedge funds involved should be destroyed. Utterly.
If Porsche can do anything to assist this process by refusing to sell any shares at all below E100,000 each, then it should.
Any tracker fund dealing in shorting shares should be closed down immediately.
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jaypee28bpr,
thanks for your comments and shedding some light on this practice of lending out shares.
Still stuck on one point though. How might a lending policy benefit a portfolio if the probable outcome is that the returned stock will have fallen in price? The fee will surely only cover a percentage of this loss, even if the manager doesn't take a cut.
Thanks again.
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#45, #95 and others
There seems to be some concern that the losses of these hedge funds are going to nobble everyone's pensions.
If your pension is a final salary pension then it is up to the company to make good any shortfall, so as long as the company doesn't go bust it probably won't make any difference to you.
If your pension is a money purchase (=defined contribution) pension then it depends whether or not you have chosen to invest in hedge funds.
Finally, some (not all) public sector pensions have no pension "fund" at all - pensions just come straight out of taxes.
I would be surprised if many people's pensions are invested in hedge funds.
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If short selling isn't entirely pernicious then the best part of it is and on that basis I would outlaw it.
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# 97
Sorry, can't agree with your logic. I'm not sure if you're aware that Porsche had previously stated they had no intention of taking control of VW. So, that's the knowledge all market participants had when Porsche then acquired options over 30% of VW this week.
I'm not sure precisely how Porsche have structured their options. They may be exchange-trades or OTC. In either case, it's unlikely that existing holders would know of Porsche's activities. So I agree that the stock lenders have done nothing wrong, as they had no information about what Porsche was up to.
However, Porsche knew their intention towards VW had changed. They also knew that it would almost certainly be price sensitive. By entering into options they will have achieved a better price than they would had the wider market been aware of their intention. That's almost certainly a breach of the Market Abuse Directive. It's unlikely they'll be allowed to trouser the EUR 11 billion profit on the 5% of shares they're offering to release to settle short sales.
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97:
You are right, most analysts would know it, but many hedge funds (worse, investment funds) outsourced the analyst departments... Many of them fragmented their portfolio to such a degree that even if they had analysts, wouldn't have time to listen to them.
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1OO
And if the EU forced the UK to switch to the regulations of the stock exchange to the block shareholding model - what would you say then?
Ownership structures vary so much in Europe that a single "model" would not fit at all. Worse than that: the UK is the most dissimilar in this respect.
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The world begins to drastically cut interest rates as we enter the deflation phase where cheap money hits cheap money, but nobody spends.
Thats the news now not VW!
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My understanding is that Porsche would have had to declare it options if the number of free floating VW shares fell below 5.0%. If free float is less than 5%, it has to make a stock market anouncement which results in suspension of the company (VW) from the DAX index. This would have been the honourable solution.
The free float was technically just under 6%, but as tracker style fund are obliged to hold shares roughly in proportion to the company market cap vs the DAx market cap, these funds had to have large holdings of VW shares before the current price spike so the "real" free float was very small.
These trackers were probably also loaning shares to HFs. As the price of VW share shot up these tracker funds were obliged to up their holdings of VW shares, VW was 27% of the DAX market cap at peak.
Hence it was not just the hedge funds getting burnt it was also the tracker style funds (where ordinary people had their money) having to buy rapidly decreasing number of shares at inflated prices (at a rate which increased with the share price!). The hedge funds may have taken most of the hit but a substantial minority of the losses will be suffered as the tracker funds have to unwind their holdings of VW as the share price has started to drop.
Porsche was not the only one to know what was going on, there were several banks working for them who would have relished the opportunity to burn a few hedge fund in the process by loaning them the shares they had ageered to sell to Porsche in January. These banks internal hedging outfits would of course not have been shorting Vw by some strange coincidence.
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The good thing about this, is that we have been shown the way to recover profit from the hedgies
Find a sucker punch for the hedgies to short, and move in behind it. The taxpayer desperately needs to find money from somewhere, and this technique should be very effective at buying our way out of recession.
Just like Soros showed us that betting against political decisions of the ERM was the way to destroy it. They gave us no quarter when the boot was on the other foot.
Gordon, are you listening? Chance to redeem yourself after selling off the gold reserves, & make us rich. The pound is being shorted heavily NOW. Announce that the pound will not be convertible for a period of two months (just long enough to trigger the margin calls) starting from midnight tonight, and watch the shorties bleed straight into our wallet. The profit from that would wipe out our public-sector debt overnight.
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Here we go, Brown confirms £700bill on new army vehicles
Always the same, borrow to buy arms in a time of crisis but not in a time of war
How many kids have been killed in our present wars because of inferior equipment?
Agh, forgot the economy didnt have a liquidity problem then.
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jaypee28bpr,
excellent post @102 to my question @ 106. And they say these things work at the speed of light - how did that happen?
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The gleeful comments by the posters on this sight does surprise me a little I would have thought there would be more concern to the implications for the wider economy.
You have to be either very stupid or very naive if you think that all Hedge Funds do is short Sell companies to put average people out of work. If this was the case how have they made so much money over the last 5 or 6 six years of upwards market and lost so much in the last year of downward market.
In fact most Hedge Funds run a strategy that is long/Short. i.e. they Buy assets they deem undervalued and Sell Short Assets that seem Overvalued.
Now if a Hedge Fund has lost 10 to 20% of it's value in one trade they are very likely to get a lot of redemptions by their investors. If this happens they will be forced to raise the capital by selling their long positions therefore putting more selling pressure on the market.
So a cynical attempt of profiteering by the brokers in marking the price up 300% + knowing short sellers would have to pay up to close the position will in turn backfire on them as the Hedge Funds forced now to sell there holding in long positions driving down the value of solid profit making companies and for every Hedge Fund that goes under there so ends a steady income stream for the banks that were making money in commission and lending the stock to short.
On a further note given that most sane people accept that we are heading into a recession can anyone really blame a hedge fund for looking at a car manufacturer (buying cars is one of the things that most people stop doing when they are feeling the pinch) and think it is overvalued.
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It's taken me until now to quell the laughter!!
Not all financial centers have consistent rules, and it seems that Porsche's "loan-and-buyback" , whilst shady from an ethical pov WAS allowed by the system.
With luck, many HFs are mortally wounded! Outstanding news indeed!
If they were unaware of the systemic risks that short-selling could result in, then they have demonstrated their unfitness to survive.
Financial Darwinism rules!
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#24 "The fact that they are crying to the regulator just shows that they are an arrogant bunch who seem to think they have some divine right to big profits and bonuses!"
It seems to me that a lot of people here think that they have the same *divine right* to borrow recklessly and splurge the borrowed money on good living !! When the taps were turned off, they, too, complained that the banks were not lending anymore !!
Sounds familiar ??
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So hedge funds have taken a hit - "Oh dear, how sad, never mind" I hope it seriously spoils their Christmas!!
Seriously, at the heart of any new global regulation of the financial markets should a simple rule: "You are absolutely forbidden to trade in anything that you don't own". I wouldn't dream of borrowing my neighbour's lawn mower, then sell it, and hope to buy another one for less then give the new one back to my neighbour. Can someone please explain why it's alright to do the same with other people's investments?
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So the stockmarket casino has claimed a few hedgefund victims.
When will the system be adjusted to make the market about actual investing and not gambling ?
Pension Funds should not lend their clients Shares!
The clients get paid nothing the fees go to the management company.
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if you buy something for 3p your overheads are 2p and you sell it for 6p you make a penny profit do this often enough and you will become very rich. my old grandfathers quote. hedge fund managers ,bankers and city trades take note !
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Several Banks would still be independent if it wasn't for shortselling.
I've been saying this for years !
So when will the Spanish Banks start falling over ?
And of course how are the Building companies getting on ?
One Welsh one in administration recently.
Glad I'm not looking to buy a house.
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109:
No, I wasn't aware that Porsche had said that they had no intention of taking control of VW, thanks for pointing that out.
This said, I suppose they're at liberty to change their minds if material facts (such as the outlook for the industry, and the share price of VW) change significantly and this is, no doubt, how they would explain their change of mind. They might add that an economic slump creates a logic in favour of consolidation.
But I do seem to recall that German regulations were changed in order to make a takeover of VW by Porsche possible (please correct me if I'm wrong on this, but I think I'm remembering this correctly). So the possibility existed, and company intentions are subject to change with circumstances.
More generally, takeovers are a risk that short sellers run - if the shares of a company get cheap enough, a competitor (or even, for that matter, a sovereign wealth fund) might well decide to move in. That's what happened in this case, and I don't think hedge funds are going to get a lot of sympathy over this.
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Enjoyed the report Robert.
It's very good to see that a whole European nation can understand that these hedgies are ruining our collective economies. When times are good they regard themselves as superheroes of the financial world and think themselves to be invincible. I was genuinely upset to see Porsche tried to make amends, to a limited degree, and I believe the financial world would be a better place if we let these money grabbing Hedgies fall into the pit they have created. Of course it would be devastating initially but we would recover.
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##5 From what I can gather, Porsche plotted and planned their takeover of VW over a long period of time. They carefully bought options to be exercised just in time for their takeover, The fact that the hedge funds did not see this coming and did not do their sums properly is purely their own fault.
Porsche announced that they would like to own 75% of VW. Lower Saxony owns 20% of VW.
Any reasonably competent junior school child can tell you that if you take away 75 sweeties from 100 sweeties and let another child hold 20 sweeties, then there will only be 5 sweeties left on the table !!
From all the reports that I have read, it seems to me that each and every one of those hedge funds thought that *THEY* were *entitled by some divine right* to that magical 5% and when too many turned up to claim their prize, the market did what markets always do when the supply is seriously outstripped by the demand, it zoomed up like a rocket !!
This just proves my theory that many of the hedge fund gamblers are semi-educated barrow boys who cannot do simple sums !!
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115:
Great thoughts!
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Like my grandfather used to say: Don't spend the money that you don't have!! Anyone who sells something that they borrowed with money that they ALSO borrowed and as a result loses gazillions of dollars along the way should know that it is fair game...
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A worrying CDS update....
http://www.nakedcapitalism.com/2008/10/how-credit-default-swap-settlements-are.html
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#109 It seems to me that you expect Porsche to announce to all and sundry every step of their thinking processes !! Have you ever heard of business confidentiality and industrial and commercial espionage ?? You do not spread all your cards face-up on the table in a stud poker game !!
Porsche play their cards as close to their vest as possible in the best traditions of business !! All kudos to them !! More suckers, the hedge funds for not seeing this !! Having lost the game because of their reckless betting, now they want their chips back !!
Ha (as in half of a HaHa) !!
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Hello Robert - wondering if you'd care to comment on Rusal (Russian Aluminium Company, 57 percent owned by tycoon Oleg Deripaska), and its seeking of a waiver on a $4.5billion loan reportedly provided in part by the (soon to be nationalised) Royal Bank of Scotland?
Isn't this where government ownership of Banks gets a little messy?
Also be interested in your thoughts on the beneficial shareholdings by RBS of at least 128 companies registered in tax havens (62 in the Cayman Islands, 29 in Jersey, 7 in BVI and 4 in the Bahamas, and how that sits alongside government policy.
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The author seems to have missed a fairly obvious element to hedge funds (the clue's in the name). If they short a stock, there's a fair chance they will have bought either listed or OTC call options to HEDGE the risk of a surge in the price...still, the article seems to have pleased a lot of people, so that's nice.
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1O9:
Directives have no legal power, only that member states have to introduce the appropriate law (quite a few UK laws are challanged because they do not meet the principles of the corresponding directives) although the Commission can fine any company for not following expected behaviour even if they do not breach the law.
Also I would be very surprised if OTC deals were such regulated even though 8O% of all security deals are OTC.
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102#
Very informative, thank you :-)
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6 : itreallyis42 wrote ...
"A random number similar to red 26 on a roulette wheel"
Is it being pedantic to point out that on a roulette wheel 26 is always black ?
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Those who live by the roulette table, die by the roulette table!
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#118 "On a further note given that most sane people accept that we are heading into a recession can anyone really blame a hedge fund for looking at a car manufacturer (buying cars is one of the things that most people stop doing when they are feeling the pinch) and think it is overvalued."
The simple answer is *YES* !! As a previous comment said, they should have done their analysis better.
VW is not "just any car manufacturer" !! They also produce a whole host of other kinds of vehicles !! Many of them are just as useful whether there is a recession or not. Food still needs to be transported to the shops and VW makes lots of vans that do just so !!
When people can't afford to drive to work any more, VW mini- and micro-buses are just handy for the bus companies !! Not every city have huge serpentine monstrosities, oops sorry, I mean bendy buses, trundling along their streets !!
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34
On Bloomberg TV last night, Professor Harry Markovich, Nobel prizewinner for Finance and Economics in the early 1990s, proposed a 4-point plan to help sort out the global financial mess we are in, and to prevent it happening again. His plan was greeted with obvious enthusiasm and relief, if not awe, by the presenter and a senior financial industry guest.
His thesis is that the financial world is not suffering from a lack of liquidity at all, but a simple lack of communication and transparency. These latter two shortcomings account for the fear and refusal of banks to lend to each other. They have no transparency about each others' exposure to credit default swaps and other derivatives and so are afraid to lend. ($60 trillion represents a large elephant in the corner.)
Prof Markovich's plan is simple. His first step would be, globally, to have governments get together and OBLIGE all financial institutions to be subject to a MANDATORY world-wide census or survey which would identify the exact whereabouts and volume of ALL CDSs. Then a global database would be created (and updated annually or even monthly). To my shame, I cannot recall the third step (!), but the fourth was to make the information visible and transparent to all governments, regulators and investors for present and future remedial and preventative action.
The financial industry guest was certain that the computer/IT mechanisms already exist to carry out the vital initial census on the huge scale necessary. She was truly excited about the eminent professor's practical plan. The presenter asked if Markovich had yet told the authorities of his proposals to address this root cause. He said he had not, but had had his initial approach to the Wall Street Journal turned down! He was grateful to Bloomberg for the opportunity to air his proposals.
Surely this is the very sort of idea that heads of governments should be seriously considering at the forthcoming Washington summit in November. Yet I have seen no follow-up in the media - on Bloomberg or anywhere else! Has anyone else seen anything? How do we get potentially macro-solutions like this brought to the attention of appropriately senior people?
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Who ever said the Germans don't have sense of humour?
Shares can go heruaf as well as unter!
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Ahh the usual tirade! Get that lynching mob out.
Once again, a fundamental lack of understanding of Hedge Funds. Gordon Brown (and it would seem the general public) may believe that short selling is a one way trip to multi million pound bonuses, this clearly shows that it is not.
Short selling is ultimately more risky that going long because the rewards are finite (the stock can only go to zero) and the risks are infinite. The purpose on the long/short method is to "hedge" risk (hence the name)
The crying foul bit is quite right, if porsche are lending out twice as much stock than is available in the market this is blatant price manipulation. However if it is not against the law in Germany so be it, the hedgies should have done their research on who holds sales, CFD's and options.
There is always a lot of vitriol on this blog about how the root of all evil is hedge funds. Have any of you considered why a hedge fund would consider shorting a company? I'm sure it is not a random choice ("let's go and destroy that company because Dave from West Brom works there..."). Choices will be made depending on management, direction, financial position etc. Which all come down to quality of management and the quality of staff in the company.
So the downfall of any company has more to do with the staff being too idle, stupid or incompetent than some blokes at hedge funds
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#58
'A large and enviable selection' of houses.
If ever there was an oxymoron needed for these current times!
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#115 Your idea would work *IF* the pound is really shorted !! Unfortunately it is not !! It is down because of the flight capital fleeing for safer shores, Japanese Yen, to name one !!
Making the pound non-convertible will only destroy its value further and justifying the flight of yet more capital !!
It will also collapse the British economy since most material things are imported (bought abroad) and foreigners will *NOT* accept payment in non-convertible pounds !!
That was the problem Malaysia had when it made the Malaysian Ringgit non-convertible. Luckily, they had gazillion of tons of palm oil which could be sold in the open market for USD and so they used those USD to buy what they needed.
Unless Britain has gazillion something that can be sold in the open markets, making the pound non-convertible will totally ruin the British economy !!
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# 106
Check my post at #102 for more details of why fund managers might be willing to lend shares and take a risk on their value falling.
It might seem a bit perverse that managers should be indifferent to some of their holdings falling in value (or at least underperforming the benchmark), but that's the way many Funds are run. Most managers are judged against a benchmark (mainly institional/pension fund managers), or on a peer-relative basis (retail funds), ie I want my Fund to do better than yours. I'm not too fussed if I lose money, so long as you lose more! There is a limit to this, as most managers' fees are a proportion of assets managed. But it holds true in everything but the kind of extreme market losses we're seeing at present.
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#97
"Porsche is a respected industrial company, maunfacturing good products, employing thousands of skilled workers, and contributing to the economy. "
Very amusing. Porsche, my friend, is one of the biggest hedge funds in the world. According to their own financial statements, last year Porsche made a huge amount more from trading in the markets than they did from selling cars. This year, given that they're not making any money from cars, think of Porsche as a hedge fund with a side operation in the automobile industry.
Behind the usual hysteria currently surrounding these matters, and the glee at the news that hedge funds may be in trouble as a result of all this, take a look at the facts. Look at what Porsche have done in the market. Look at how they've done it. Hate hedge funds all you want, but please do not make Porsche out to be some sort of white knight for the masses in all this.
To the BBC:
"But VW shares fell 37% in trading on Wednesday as Porsche said it would help to solve the hedge funds' problems."
Simply laughable reporting. Porsche have decided to help out the hedgies(!!!)....or, Porsche are panicking. Here comes the regulator....
Let us see how well respected they are when the dust settles on this.
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Such wonderfully cheery news today - Jonathan Woss and Russell Brand suspended and hedge funds lose a fortune gambling on Volkswagen.
Ahh....bliss. Gives you that nice warm feeling inside as if you've just drunk a mug of Horlicks.
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I don't know how I'm going to be able to sleep tonight.......errr like a baby no doubt.
During these difficult times, its nice to know that some of the people responsible for getting us here have had their fingers burnt, or rather chopped off.
No sympathy at all, their bonuses over the past few years are SOLELY responsible for the London property boom and their belief in themselves as the masters of the financial world, is as many have always believed - a myth. I suppose these are the same people who predicted Oil at $200 a barrel by Christmas.
Next time I change cars, I will give VW a very good look.
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#126
I agree short sellers might not get much sympathy, but they aren't the biggest losers here. As someone else in the thread has pointed out, the biggest losers are probably Quant Funds that seek to track an index very closely. VW went from being 6% of Dax to 27% in 2 days, forcing Quant (tracker) Funds to buy ever more shares at ridiculous prices. It's very likely that large numbers of individual Germans and their corporate pensions too will have suffered as a result. The VW price will fall back much closer to where it was before the Porsche announcement once the options have been exercised. As this happens, the proprotion of DAX represented by VW will fall, and the Quant Funds will sell. So, they will have bought at inflated prices, and will sell at deflated ones, thereby losing money for people who were holders of VW remember, not short sellers.
To put this in context, on Monday (I think) 29 of the 30 stocks that comprise the DAX fell in price, only one rose. Yet the index was up (when every other major index globally was heavily down). Yes, you guessed it, VW single-handedly caused DAX to rise. Not an example of market efficiency, I'm afraid.
Incidentally, the average UK pension scheme has about 10% invested in Europe ex UK equities. Many use index tracking or enhanced tracking strategies for this exposure, so this has cost plenty of people in the UK too.
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It's likely that several of the funds short of VW equities were so in order to hedge their long position of VW securities..i.e to hedge their exposure to lending VW money...that would be perfectly sensible risk management to protect their investors' money in a normal market environment...hardly parasitic as others seem to be making out...
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As ft reported that hedge funds caught up with vw share and lost $20 billion within days, anyone knows any positions especially short-sell of uk banking shares by hedge funds and if these are 3-months positions, most uk banks were shorted in september, so the hedge funds have to cover these short-selling positions in december, any prospect to get hedge funds caught by uk banking share.
What happens if some soverign funds or insurance funds start to take huge positions on UK banking stocks such as HBOS priced 80p and total market value 4.3 billion which is less than 10% of its height, RBS priced 63p and total market value 10.3 billion which is again less than 10% of its height. These two giant banks once the shining jewels of uk financial industry combined market value is less than £15 billion, if someone even some hedge funds start to build up huge positions for example taking 75% of all the issued shares of both banks with £10 billion cash, anyone can imagine what will happen to all those shorted positions held by the hedge funds. does this sound the alarm bell.
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@ #121
I think that is correct. I think there needs to be an application of the concept of insurable interest for credit default swaps too.
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# 132
Like it or not, there are rules to prevent the misuse of price sensitive information, and this appears to be what Porsche have done here, albeit unintentionally. There are rules, applicable EU-wide, that limit the way investors can trade when they possess, or may possess, price sensitive information.
As has been highlighted in a number of posts already, the Hedge Funds are not the biggest losers here. The big losers will be tracker funds, in which most investors will be ordinary individuals saving for their pension, through ISAs etc. If you have investments in European equities through a mainstream investment company, you're probably one of the losers. If you don't mind Porsche making billions out of you and others like this, fair enough. I'd be pretty outraged, though. Incidentally, my exposure to Europe ex UK equities is zero, so from a personal wealth perspective I'm indifferent to what BaFin does in this case. However, market manipulation definitely does not benefit individual investors ever, and that's what Porsche's activities amount to.
I will be very surprised if the trades that were executed at inflated prices are not reversed.
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#139
Ah I see, so every other car manufacturer in the world is in dire straits but VW are fine. Even though they're not making any money from selling any vehicles at the moment.
Oh, and by the way, one of the main reasons Porsche want to own VW is so they can get round the emission laws and continue making their own non environmentally-friendly cars.
What a lovely bunch.
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HAHA. They deserve all the losses and more for the way their pratices are negatively impacting the world economy and are morally based on greed.
VW is a good honest company which is being affected by people out looking to make some short term profits.
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The financial wizards of the world have proven themselves, yet again, to be a bunch of puffed up idiots, arrogant and totally unable to get the basics of their own job right.
Hey dumb*sses you're meant to make money, not lose it hand over fist!
Did you learn nothing from the sub-prime mortgage mess or the recent collapse of stockmarkets around the world?
Why were these morons being paid bonuses? Why was so much of our money left in their hands? Why weren't they regulated more tightly by national governments and financial authorities?
It is good to enjoy a bit of schadenfraude at the expense of these short-selling city boy spivs, but why aren't they all in jail for being involved in a morally objectionable practice which should actually be a crime?
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Whilst I find it superficially hilarious that short-selling - a technique I find intrinsically wrong- went so wrong, the loss of such a huge amount of capital will help to increase the job losses, which we must surely be looking to avoid at this point in time.
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# 147
Great post. I agree BaFin is going to have some fun with this. I'd also add it's very generous of Porsche to help out the poor Hedge Funds by crystallising some of the EUR 11 billion profit they've made this week (regulator permitting) by selling 5% of their VW holding.
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I am left with some doubt as to whether all of those shares were really borrowed by the hedgers before they sold short. However, if they were lent and the lenders are now hit with an unrecoverable debt from a bust hedge fund, why does that so cheer me up?
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Short selling has been going on for time immemorial and every one knows is a major gamble simply because the exposure is technically unlimited whereas if you go long when things go wrong the price can only fall to zero.
Gambling in a limited supply share is compounding the risk factor but so long as people are prepard to are prepared to pay others to gamble/invest on their behalf then its a case of buyer/seller beware.
We need to remember in the UK that the vast majority of the FTSE 100 index hardly does any business in the UK and it is merely a listing zone.
Way more money is traded in currencies and fixed interest bonds than in the FTSE. It is only because we know some of the FTSE names that we believe it matters a lot.
In fact it matters very little given where the real money is moving 24/7.
Robert accepting there are calls for an investigation into your sources and possible reprecussions there.
Your desire to constantly sensationalise and personalise financial affairs when reporting shoudl be totally dispassionate is doing yourself and all the BBC readers great disservice.
Anyone can throw out big numbers but without establishing the core problem which you sometimes do, or putting things into perspective which you rarely do they mean nothing.
Please stop sensationalising serious news and control you ego so we see things as they should be.
If the BBC can suspend Jonathan Ross for overstepping the mark there seems no reason you too can't be replaced by doing the same.
Facts will always speak for themselves sensationalism is a momentary madness and impossible to maintain as we all get bored very quickly now.
So please cut your personal opinion given it is becoming less balanced by the day and leave opinions to those who contributer to your site.
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# 126
# 132
From Bloomberg, details of Porsche's position on its holding of VW until 26 October:
"Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show early this month that a stake of as much as 75 percent would be ``not realistic'' because of market turmoil."
Hard to see how Porsche can claim that what they've done this week isn't market manipulation based on the CEO's position, stated so recently. They are claiming innocence, of course.
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As a' man in the street' joining in for the first time I am amazed at the depth of knowledge on such serious events that we are experiencing.
Can I presume that someone in power is taking note ???
I live a simplistic existence, going to work, coming home, waiting at night for good news.
Can anyone explain naked shorting - as an electrician I always wear gloves
Thanks,
PS
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149:
Good post.
Actually, next time you change your car you might consider a Porsche - you might get a nice cheap 911 being sold off by a former hedge fund manager.....
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Seven months or so ago Porsche said they had no intention of acquiring further VW shares. Not seven months ago, nor seven weeks ago, nor seven days ago, did the hedgers tell us of their intentions. Permitting short selling of any type gives the gambler an opportunity to manipulate markets that is not given to the genuine investor.
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My mildly humorous remark that it was the revenge of the son of a customs official from Braunau am Inn in Austria - who actually set out the idea of a Peoples Car (Volks Wagen, geddit?) - has been moderated out. Oh dear.
Whilst I know the moderators do a diligent and very hardworking job that nice bit of PC (or was it PR?) really is a 'Bridge Too Far'.
Cummon guys, the war was over 63 years ago and it wasn't like I said that building the Wolfsburg plant and staffing it with 7000 slave labourers so good Germans could drive down the Autobahn and holiday at New Sevastopol was a good thing or anything..
GC
alias Russell Brand
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On the BBC Radio 4 Today program Mr peston suggested the above problem was caused by automatic selling by computer programs. Is it really the case that Hedge Funds have automated short selling based on stock price?
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#82
Great link. Very informative and prophetic considering when it was written. I'd love to hear RP's views on this.
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#147 redRobson7
Interesting post about Porche being a hedge fund.
http://ftalphaville.ft.com/blog/2007/11/13/8834/it%E2%80%99s-a-porsche-no-it%E2%80%99s-a-hedge-fund/
Your post has well and truely put the kibosh (or is it Ki-Bosch) on this blog and subsequent posts.
PS I have been wondering for a while about how Porche have been able to buy up VW who are obviously much bigger than them (vehicle market share wise).
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# 135
As far as I know, all EU States have now implemented the Market Abuse Directive. I will be surprised if Porsche get to keep their gains on this one!
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147:
It's certainly true that many of the large companies are in the thick of rather interesting financial deals, which is not that surprising as most of them are self-financing and investment opportunities are rather limited (or they perceive them as such).
Daimler burnt its fingers very badly back in the 1980s, when it tried its hands in rather complicated foreign exchange deals at a large scale.
Ford is a financial company that also produces cars, but really only because that's the way of selling financial products.
So I'm not at all surprised that Porsche is in the game too.
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I can't keep up with this, but if shorters have been shafted, it sounds right.
HOWEVER, IS NOT THE NECESSARY CONSEQUENCE A LAW THAT REQUIRES SHARE REGISTERS TO BE MADE PUBLIC AND ALL ORDERS TO SELL ACTIVATED ONLY IF THE SELLER ACTUALLY OWNS THE SHARES TO BE SOLD?
That is, action an order to sell shares only if there is evidence that the seller is the owner. Publication would also reveal actual owners of companies and, perhaps, cool the market by slowing the hypercativity.
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re #114
Plausible but not true in this respect:
Tracker funds need to hold a fixed percentage of VW shares corresponding to their 'share' of the index. That share does not change with their share price, only every 6 to 12 months (or so) when the index is reviewed.
However, if the index fund was gambling by lending out some of its shares to be shorted, then that is a different matter. But the shares have to be bought back by the borrower - not the index fund itself.
An honestly run index fund is NOT affected by this unless its borower defaults.
When the British Army had to punish a native, it was generally felt better for all concerned (other than the native) for the execution to be in the most spectacular fashion possible, being tied astride a gun carriage. This also had the advantage of offendig their religion.
Those shorting these shares should be destroyed in as spectacular a fashion as possible.
u
r.
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Man in street now totally zonked.
'As with the repatriation of the Structured Investment Vehicles onto the balance sheets of C and other money center banks, the true significance of CDS comes when the markets function smoothly, as after a default event like Lehman. The trigger event putting a single name CDS contract in the money results in a liquidity-raising event for the seller of protection, who must fund the purchase of the debt at par less recovery value - whether or not the other party actually owns the debt'
Is this how they talk ??
No wonder we look to electronicturkey for sound advice
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Hey hedgies, have some!
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Re 151
If a tracker fund holds the right proportion of shares to start with, then it *does not* have to buy more shares if the share price rises (as the value of its holding rises anyway).
Only 'dodgy' tracker funds that hold just a few 'representative' shares (such as other car manufacturers) will be affected and they deserve to fail.
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Re 153
If you (to your own principles) short some shares, which you have actually borrowed, you can still be caught out if others (with fewer principles) also short them but buy them back before you.
It was a maxim of 'Yes Minister' that you had to be 'clever' or 'honest' (no example of both was offered) in the City. However shorting shares is not honest enough for others to rally round and help the honest. (The clever need no help).
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(long delay in moderation - over 90 minutes) which will make responses a bit slo.o.o.o.o.o.o.o.o.w.
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#139 Your reply is well noted as was Volvo's sales number today the largest truck maker in the world that managed to shift 115 Units in a quarter so forgive m when I see a valuation of 250 billion USD for "not just a car company" and I think to myself I am glad I am not insane enough to be long at these levels. But then again that could just be poor analysis on my part.
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Re 154
Actually hasn't HMG (Her Majesty's Government) taken options to buy shares of around 10 billion in these very banks? So this may already have happened.
Wouldn't it be good if the bank's share price rose dramatically in December as HMG took up those options and the hedge funds were unable to buy back.
Unless of course our revered Prime Minister sold the shares in November at a low price. Like our gold reserves.
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Man in street again.
'There's no real problem with shorting stocks as long as you actually borrow them, but if you short while claiming to have borrowed stocks when you have not, it destabilises the stock in question'
No wonder we are in a mess, nobody knows what on earth they are doing.
Man in street lost for bananas to take a metaphor from ET.
Bon voyage ET
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BaFin has now announced a formal investigation into VW trading for possible market manipulation.
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Would everyone please stop beating up on hedge funds... this crisis is hitting us far harder than most people. I have to worry about the drop in price of three houses and lord only know's what's happening to the residual value of my lambo.
I've never understood the 'British Condition' of letting jealousy turn to anger at those who are more successful...
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I think I have got the right end of the stick here...
Traders are betting with other people's money - frequently that of the pension funds we will rely on for our future.
So when we laugh at the misfortunes of traders, ultimately we are laughing at our own loss.
Having said that, this comment in the BBC news headlines was funny... for just a moment...
"...because Porsche had not declared the proportion of VW shares it controlled, traders may have been indirectly and inadvertently borrowing shares from Porsche, selling them to Porsche, buying them back from Porsche and then returning them to Porsche."
Perhaps the traders will agree that a review of the regulations is necessary, since the above scenarion is legal within the German market at present.
Just a numbers game?
I take Mr Peston's point that in this instance, the speculators who rely on mathematical modelling of market movements may well be those who lost out and that those using human judgement may not have.
Having read one or two blogs from mathematical modelling speculators... it couldn't happen to a nicer bunch!
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#140
Thanks for the comments-will investigate further.
Can only assume that this will never be seriously adopted by the puppets in so called 'power', as the puppet masters who hold the real strings of power, will make sure that no transparency of any sort exists. Don't forget the old saying-'knowledge is power'.
#94 Great comments.
#77 Your smugness astounds me-but then you are only 22.
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The moderators have deserted their posts! (pun intended)
They must be getting their latest Mandy edicts (er....I mean briefings) about what is and what is not allowed through.
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Brilliant an engineering company out smarting the bankers.
I once read that all finance people at VAG had to have been engineers before moving into finance.
Perhaps a few more engineers should move over into finance, after years of risk assessments and working on inadequate budgets they might well make a betetr job of running the economy .
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Stellarbluesky wrote:
"How do we get potentially macro-solutions like this brought to the attention of appropriately senior people?"
One newspaper report provided a link to the email address below.
bankingcrisis@parliament.uk
The Parliamentary Finance Committe are asking the public to put forward questions to be directed at representatives of the government, Bank of England and FSA, called before them.
I'm not sure that such an approach would have the required impact, but I put forward a few questions that I had thought of despite having no expertise in finance.
• Are we, the public, entitled to a full and clear explanation of the effectiveness of current government funding measures within the banking system, through periodic audit and comprehensive reporting, in language understood by the many, not the few?
• Furthermore, could such reporting be required to indicate where funding has not brought about the remedy which it sought to provide?
• Since the cost to each taxpayer is considerable and highly specific in purpose, is the government and Bank of England politically willing to provide full and clear explanation, understood by the many?
• It has been suggested that some government measures are very likely to attract considerable return on investment by the Treasury. Can and will such returns be reported on in each instance?
• Where individual institutions apply funding in ways which are currently allowed under fiscal regulation, but recommended for review, can this be made clear?
[Such requirements may in the eyes of the public, be the best way to hold to account, extraordinary government decision-making being taken on our behalf in the middle of a parliamentary term.]
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Regardless of wider issues, I am overjoyed that a manufacturing company is sticking it to the hedge funds. The more of them that go bust the happier I will be. If I had my way all hedge fund managers' performance bonuses would be retrospectively taxed at 100% as a modest contribution to the cost of sorting out the problems they and the other charlatans in the finance industry have caused.
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Dear M
Apologise for breaking house rules.
Dear Man in street - - sorry to confuse you.
If you read between the lines then you will see that I have been advocating naked shorting all along my journey.
Let me explain.
The key factor should have been evident to all and sundry when I was stuck in traffic on the way to work in Istanbul, but I forgot to mention that I drive a 2001 model VW Golf with a brand new battery.
This precipitated Porsche, as they saw I had invested heavily and the whole thing snowballed.
Yes, a lot of the financial 'speak' can only be understood if you put a chopsticks up each nostril and a woolly sock on your head.
It's rather like explaining the rules of cricket to Americans
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Whilst it was amusing to see the "hedges burnt" (if you use that one tomorrow Peston - I'll sue!), I'm afraid the impact is yet again on the little man.
Having just looked at the holdings for several pension funds, many of them have bought into funds, which in turn have bought into Hedge funds - such is the pyramid system of investment - no-one knows what they are really buying.
I have seen a £40m loss on one particular fund - who shall remain nameless - and this is an investment fund with many pension fund clients.
I also am astounded that this could happen in the first place. If you read the BBC article it says
"It meant that because Porsche had not declared the proportion of VW shares it controlled, traders may have been indirectly and inadvertently borrowing shares from Porsche, selling them to Porsche, buying them back from Porsche and then returning them to Porsche. "
....now that's a successful business model for you....
We will be doing the same with Government debt soon - it lends the money to banks, we pay taxes to refill the coffers, we borrow money from the banks to do so, they make profits, the banks pay back the money the government lent it......but sadly the loop doesn't come back to us in the form of rebates.
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#143 - Rowan_p
What are you trying to say?
I knew it was a conspiracy - all those hedgies out to get me.
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It's easy to enjoy the schadenfreude, but who pays, in the long run, for this debacle?
Is it us - the weary punters - savers, investors, workers with pension schemes - Bill Brit? I suspect it might be.
I approve of alleviating the symptoms rather than being martyrs to our malady, but we need to share the benefit before we all suffer too much! It seems to me that - so far at least - the global 'analgesia' being administered hasn't been distributed to those of us who are paying for it.
For instance, it's all very well bailing out the banks and bankers, but not if if it is just for them then to flex their macho muscles and get tough with their customers, thereby restoring their profitability whilst the rest of us go to the wall - reposessions, receiverships, redundancies. (And I say that even as a shareholder in three banks!)
I accept that the only thing worse than the bail-out would have been not to bail out, but surely the purpose is to cushion the blow for us all, not just to save the banks.
Not only must they start to make credit available again to each other but also to businesses great and small, and to personal customers.
Equally, steps to calm the overall situation, such as interest rate cuts and the bringing forward of capital infrastructure projects - such as a new rail line or two, crossrail perhaps, new power stations - nuclear, conventional or renewable - and affordable housing with proper social infrastructure, and so forth (or even - dare I say it - ADDING to the 2012 project rather than pruning it!) - things with a lasting benefit and which we will mostly need anyway - seem very slow in coming forward. Let's get these going and generate some economic activity!
Let's have a 'New Deal' and quickly, before we stack up the cost of supporting the unfortunate and unnecessarily unemployed. Mrs Thatcher had North Sea Oil to pay for her dole queues. We don't. We need to be more creative, in every sense, if we are to ride out this pestilence!
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This is just like the failed lawsuit against William Hill for letting some fool gamble, and lose, on horses.
I'm just off to email BetFred, see if they will refund my losing Grand National bet. you see, I didn't realise that if the horse lost they get to keep my money. how unfair is that. ?
Listen up whining Hedgies, you placed your bet, you picked the wrong horse, too bad but thats the nature of Gambling. If you have a problem, I believe Gamblers Anonymous will help you out more than the German regulators.
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Re 161
Perhaps it is generous of Prosche to help the hedge funds. On the other hand it may be a cynical and calculated 'sop' to keep regulators from crying 'foul'.
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Others have asked this but can Preston explain why we shorting should continue to be legal? My broker wont let me do it and it does seem to be at the root of a lot of volatility in the market with serious consequenses for share prices,pension funds, and company stability.
The logic says that I shouldnt sell something I havent got. I appreciate futures trading has a place in commodities, but not shares
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Hi Robert,
I saw some rather odd figures on the BBC website today, the FTSE100 seems to have gone a little crazy, either that or the office are having an early xmas party.
http://i55.photobucket.com/albums/g135/pyoungson/bbctoday.jpg
I saved it and stored it at photobucket, its worth looking at for a giggle.
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Eureka! I've just been listening to the answer to all of our economic's woes-Neuro Economics. Check it out on Radio 4's pod cast of the week.
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Exquisite!
EU carmakers are seeking loans from a gullible EU ... wait for it ... to develop environmentally friendly cars.
But what about the news that Porsche does more in gambling on stock markets than in making cars? Ford may also dabble in this area. Perhaps the rest as well?
So ... is there some deeper problem here that has nothing to do with cars?
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Re 193
At our last pensions AGM (Nov 2007, Electricity Supply Pension Scheme, Magnox section) I asked specifically if the fund was exposed to any hedge funds or dodgy paper (CDS, SIV, CDO etc.) and was assured they were not by the Chairman of the Trustees.
Are you saying that they could have been lied to by their fund managers?
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€ 168
Dear Russell Brand,
You were rightly given lbw I guess because I also wrote something from here in Munich that was given offside,
The locals here insist that only well paid engineers have ever worked in the VW factory and that their pension funds are as safe as houses - a Freudian slip.
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Well done Porsche for beating the rocket scientists at their own game. The hedge funds have now been caught out and complaign about the apparent non-transparency of the German capital market. Funny only, that they thought the market was transparent enough when they decided to go short. They knew exactely what the rules were, and what the risk was when they decided to go short. Simply a case of bad loosers, now looking for a scapegoat.
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"Porsche... disclosed on Sunday that it had acquired financial contracts (cash-settled options) to buy more than 30% of VW.
If it exercises those options, it would have almost 75% of VW."
Considering Porsche probably could not afford to exercise the options, what was the announcement intended to achieve and did it meet regulatory requirements? Or was this no different to the rumours about British banks not long ago, a story which Robert saw fit to cover in great detail? Is this sort of thing OK for one group and not another? Is one type of instability better than another? Who decides? Who are we supposed to be cheering?
I doubt Porsche will follow through.
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185:
I'm not sure if people are going to stop bashing hedgers, but you might get cheeky offers for the lambo (see my post #166 about cheap 911s). (Only joking).
But you make a very good point indeed about the British Condition of envy.
Actually, it's broader than that. It's a blame culture. In the past, we've blamed foreigners, immigrants, Europe, the French, single mothers, benefit claimants; the list goes on - and now, in the financial crisis, we're blaming bankers and traders. 'Anyone but ourselves', in fact.
If we didn't do this, we'd have to ask ourselves some tough questions. Why is the average consumer debt GBP 21,000 - did lenders force us to do this, or was it just greed? Why do we only save 40p in each GBP 100 that we earn? Did bankers force us to take out 125% mortgages at ludicrous LTVs? Why, as a country, have we lived on a debt bubble backed by absurdly overvalued property?
Of course, the blame culture lead comes from the very top. The credit crunch and the ensuing recession is the fault of Americans, "the global economy", OPEC - anyone, in fact, except the man who's been running our economy for the last 11 years; who claimed to have ended boom and bust; and who has taken perhaps GBP 200 billion out of our pension funds.
Is it too much to hope that we might grow out of the blame culture?
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We are just about to see the Hedge of all Hedges with the 50 point cut in USA interest rates.
They are just about to pull the plunger on the pin ball to 1% and as a result when they let the plunger go and spin that deflating spinning ball out of the channel we are going to see the mother of all deflation next year.
If you prime the economy up for borrowing when nobody wants to lend from people that are not able to lend, you have a lot of cash washing about.
The result being 1930 again.
Can anyone advise me of a place I can take my family that can live in peace and self sufficiently and where you also defend yourself and take life if you need to?
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156:
You are wrong on the EU wide rules.
In most continental countries employees have to be informed first about any major strategic changes, achievement of strategic objectives and shareholders only after that as some of the UK companies with European subsidiaries learnt in the hard way. This plainly contradict your assertion.
Having said that the VW case is a bit on the edge, I admit. However, if you look at share trading, where only a fraction of shares are traded (and because of block shareholding, a very large proportion of the European shares fall in this category), such events are pretty common, just get less limelight and less accentuated by such price movements.
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There is an alternative to borrowing to keep up. Its called spending to live.
Instead of pumping trillions into the system of tax payers money why not reduce taxation to provide more spending power (if thats what people want) or for others to save (if thats what they want)
If you legislate to ensure profits and dividends are limited to 10% above inflation /(interest) and then ensure that everyone in full time employment is able to BUY everything that appears in the CPI (reconstructed to ensure necessities instead of nice to have) and still have enough to either save or buy at 10% of their salaries.
Will you not find that growth can be maintained, welfare can be maintained, profits can still be made, borrowing would be limited and therefore, sustainable and the world would be a happy place
Very simplistic, I know and housing would need to be addressed, but surely chasing profit is now dead and embracing life must come to the top?
In conclusion, paying people enough to enable decisions to be made on saving or buying or both must be better than forcing people to borrow, stopping them from saving and allowing excessive profits
Or have I just turned into a socialist?
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Hedge funds are like small spoilt boys. If they can't win they want to take their ball home.
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Man in street again
''Borrowing shares from Porsche, selling them to Porsche, buying them back from Porsche and then returning them to Porsche. "
The most logical thing I've heard all day.
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Pigs (genuine investors) get fed.
Hogs (hedge fund types) get slaughtered.
Hopefully, the hog slaughter was widespread, enough to cripple many of the present players, and to discourage future hustlers from playing roulette with our lives and futures.
We'll know who they are soon enough. Just watch the real estate listings, featuring houses bought for $6 million on the market for $800,000, with no purchaser in sight.
'The wheels of History grind slowly, but grind they do.'
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189:
Good point and even more:
Actually there are more engineeers in German banks than finance people and accountants. It also tells you something.
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# 198
If you're broker won't let you short, then change your broker! Anyone can short shares. All you need to do is open a CFD ("Contracts For Differences") account, then seel whatever it is you want to short.
Alternatively, open an account with a spread betting firm. All the big bookmakers offer this type of service. Indeed, Paddy Power is offering to cover the first £300 of losses you make if you open an account at the moment.
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# 202
Unlikely in the extreme. If their managers lied to them it would probably result in regualtory censure and a seven figure fine. More importantly, it would be commercial suicide, as once it were known, all their clients would leave them. If you want an idea as to the damage it would cause, just check out what happened to the firms that Spitzer in the US prosecuted for breaching late trading and front running rules. At least one saw half its business walk out with in three months at a cost of USD billions in lost revenue.
If your Chair of Trustees said your scheme wasn't invested in the instruments you mentioned, then it very likely to be true. Keep in mind that the scheme also probably retains the service of an investment consulting firm, part of whose role is to research and monitor the fund managers your scheme employs.
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If a hedge fund borrows (say) 5 million VW shares from Barclays, sells them for £1 each, then the price rises 348% and has to buy them back but does not have the money and has to call in the receivers:
1) How does Barclays get the shares back
2) Who picks up the tab for paying over the
odds?
3) What happens if no shares are available to
buy?
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The sad thing is that the losses will be carried by individuals in the form of pension funds or individual investors. While individuals have a say in where their money is invested, if it is your pension fund that invested, then you loose out through no fault of your own really. After all, Govt. forces you to use pension funds to invest your savings, and you have little say in how they invest or who they invest with.
So while I want to jump with joy at the thought that some wide boys who foolishly fell for their own hubris and thought they could make a killing on the woes of a company, and lets face it, if Porsche was not bidding for VW, they could have forced the shares way, way down and hurt the ability of VW to borrow to finance the day to day operations and the brunt would be borne by the employees, I can't celebrate as the ones who engaged in this won't be hurting themselves as much as the people who invested with those funds.
There is one little point though, The shares of Morgan Stanley and Goldman dropped like a stone at the same time as the shorting was going on at VW. Were they the parties who were involved in some of this shorting?
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At last these people have got just what they deserved. It is just a pity that those who did the same to the banks weren't caught out the same way.
My feeling though is that those who sold bank shares short were attacking the banks. Attacking banks is really an attack on the countries economy. An attack on the countries economy could (in some cases) be classified as treason. Perhaps the penalties for treason will concentrate the minds of the short sellers before the carry out their next attack.
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207-PetersKitchen:
" ..The result being 1930 again.
Can anyone advise me of a place I can take my family that can live in peace and self sufficiently and where you also defend yourself and take life if you need to?"
Such places do exist - you just have to find them :0)
John Bray
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RP: "There will be some pathologists of the economic mess we're in who'll argue that Munterfering was spot on. But we can have that debate tomorrow or the next day."
Very much looking forward to that, Robert. So will it be on the menu tomorrow?
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#216: If a broke hedge fund leaves a bank severely out of pocket, the taxpayer may pick up the tab the same way as for any other large loss.
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#181 I fully agree that you would be insane to go long at those levels. Then again, you will also be insane if you have shorted and not buy to return the borrowed shares, at whatever the price is at that time.
The rush to buy to cover the short selling was what pushed the price through the roof (from what I can gather). The company itself is not actually valued at that ridiculous price.
This is a stark example of the difference between the real value of a company and its market-perceived valuation !!
The faulty analysis was not so much about the value of VW as about the quantity of *available* shares in the open market !! Massively shorting VW shares when they know that there is only 5% of the shares available in the open market is like betting all your money on the 00 in roulette !! You may get lucky. Then again, you may not !! And, if not, what happens ??
Since I am intensely against such gambling, I can only cheer when such gamblers get FUBARed !!
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# 216
The way stock borrowing/lending works is this. There will probably be three parties involved. The lender (let's assume it's a pension scheme) will lend to a prime broker (usually a subsidiary of an investment bank such as Morgan Stanley). MS itself will lend to its Hedge Fund clients. When one of those Hedge Funds borrows it has to put up collateral against the loan. That's typically 102% of the value of the stock borrowed, so USD 1,020,000 for every USD 1 million of stock. Equally, MS has to put up 102% of collateral for the stock it has borrowed from the pension fund.
Every day the value of the stock borrowed is marked-to-market. If, as in this case, the stock has increased in value, the Hedge Fund has to put up additional collateral to bring the vlaue back to 102% of the m-t-m value of the stock borrowed. And, again, MS has to do the same with the pension fund from which it has borrowed the stock.
Herein lies the problem with the VW/Porsche issue. Our Hedge Fund would have sold the stock it borrowed to settle a short sale. It is now faced with a collateral call for about USD 3.5 million (ie to cover the 348% increase in VW's share price and the value of the stock it borrowed). It may or may not have sufficient assets of suitable quality to provide as collateral (what is acceptable depends on the particular arrangement with the prime broker - MS in our example).
Let's assume they don't have adequate collateral, then the Hedge Fund either has to buy the VW shares back in the market and return what it owes (at a loss of USD 3.4 million to it probably), or MS will liquidate the collateral of the Hedge Fund that it holds, and buy back the shares itself. In that case, MS would lose about USD 2.5 million and the Hedge Fund USD 1 million. Remember, again, that MS would itself have a collateral call of USD 3.5 million from the pension fund as a result of the price rise. The pension fund will liquidate MS's collateral if MS doesn't cough up the money, though it's likely that MS will be able to make good the collateral (usually in cash or government bonds) from its own resources.
Re what happens if there are no shares to buy, that's a very good point in this case, as Porsche's options contracts have reduced the available stock in VW to about 5% of issued shares, and there is apparently 11% of stock out on loan/shorted.
In many stock lending arrangements (and all the ones I've run), the lender (our pension scheme) will appoint a lending agent, often its custodian bank, to run the prgram for it. Part of the agreement is that the lender is indemnified against losses caused by borrower default. So, if stock doesn't get returned, the lending agent (custodian bank) is on the hook for the value of the stock not returned. Remember again that the lender has collateral and, in normal circumstances, this will exceed the value of stock not returned. In the current VW case, though, it is quite possible that collateral will be way less than the value of the stock not returned. That should be covered by the lending agent (custodian bank) indemnity. The pension fund gets back the current (inflated) value of the VW stock in cash, and the lending agent suffers the loss, which they may or may not be able to recover from their Hedge Fund client. Clearly, if this event bankrupts the Hedge Fund, then the lending agent ends up with the loss, net of any collateral it held of the Hedge Fund's.
Hope that explains everything!
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# 217
Interesting point about MS and GS. They are the two biggest players in prime brokerage globally, so it's very possible they have Hedge Fund clients who have been caught up in this event, and MS/GS may well be on the hook to the lenders from whom they have borrowed stock on behalf of their Hedge Fund clients in the event of borrower default. I have no idea if this is the position, though it seems very strange otherwise that their share prices have fallen when all other banks are up strongly over recent days.
I'll be very suprised if these trades stand. The more I read about this, the more Porsche's behaviour looks like market abuse. BaFin is already investigating trades in VW for market manipulation, and I reckon all the trades from Monday and Tuesday will get cancelled before the end of the week.
I know everyone here is finding the Hedge Funds' possible losses alomost orgasmic. The most humourous aspect of it, though, is that the biggest Hedge Fund involved is Porsche itself. It makes more money from financial, rather than automotive, engineering. Strange but true. Making cars, even prestige ones, just isn't very profitable.
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The comments here are fascinating. Thanks especially to JayPee28bpr for his clear explanations.
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Don't think I have seen so many comments being referred or removed... for whatever reasons?
Must have struck some chords somewhere?
Personally, can't help feeling a bit cheerful even if my pension does get a hit, might be worth it?
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Yeeeesssssss! The best bit of news for some time - the wheeler-dealers have lost some money, aw what a shame! Yet they cry foul we hear! Try telling that to someone who has seen their pension pot (built up over 40+ years of saving) shrink by 30% in as many days. Isn't it finally time that we broke the link between pension schemes and the stock market?
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This is really great. Next car I am buying is Porsche that is for sure...at least one with the remote control.
Some time ago a friend of mine told me the story that happened on shareholder session when some complained about only 8-10% return and what they plan to do about it. I think that was CEO or similar who said..well if you want quick money go to other kind of business like drugs or similar...this is industry type of business.
So much about that hedge funds BS and financial engineering. Is it something going to change?...well we will see. I think it really depends who is the next USA president.
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Aaaah got in late on this post so have not had time to read all of the 227 previous, sorry guys,gals however who cares who loses what my question is who did the hedge funds borrow their shares from it would seem that there are very few available to borrow or buy. Thus how many did Porsche lend out or did they and the Lower Saxony burghers lend them out several times. Shorting is a game for suckers or is that leeches take the losses folks and go home with tails between legs and don't ask for intervention, when you win you crow when you lose then we real investors have no sympathy
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To all of the Hedgie Bashers out there, there are probably a couple of things to note in all of this:
1) Hedge fund losses mean more of their investors (which includes pension funds and Universties, fyi...) will pull what's left of their investment out, forcing HFs to sell more of their other assets, which then leads to more pain in the markets for retail investors, pension funds and the traditional shareholders you all talk about. This is already one of the big factors driving prices down right now.
2) The vast majority of people working in the HF industry are support staff, who don't earn huge bonuses and who will end up, just like everyone else, with no means to care for their families or cover their mortgages on their single homes. Don't shed a tear for the HF Managers, but spare a thought for everybody else, who were just trying to make a decent living...
Incidentally I am not one of them, but I just find it a bit sad that so many people here are so keen to crow at the misfortune of others. Pettiness is never a virtue.
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One of the old robber barons in the US warned of selling short: "He who sells what isn't his'n, buys it back or goes to prison."
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Robert,
Franz Müntefering has never been Deputy Chancellor of Germany.
During the time of the "red/green" government from 1998 - 2005, Secretary of State for Foreign Affairs Joschka Fischer has been Deputy Chancellor of Germany.
Franz Müntefering was the party leader of the Social Democrats back then, and therefore it was his job to criticise hedge fonds.
I wonder if the UK as a country would be in a better shape today if the UK people/politicians had shown the same distate for hedge funds like we Germans have?
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Shorting should be banned,it creates a potentially unstable market .
I have no sympathy for the shorters of VW shares or anyone else who gets burned. Tough luck. Porsche,what were they to do ? They said they were looking to increase their stake in VW but did not anticipate it going to 75%. Do they then announce to world that in fact they will take it to 75% if they can. The hedge funds and every other opportunist would have been in there hiking up the price.
You can not have it both ways.
Paracites to a man!!
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#223
Thanks for that!
Just one thing, if the 1 million had gone up 384%, wouldn't it be more than 3.5 million?
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#92 "It also raises the question should the stock exchange operate as a gambling casino where people bet, by the hour, on which way shares in certain company's will fluctuate. Perhaps at this moment in time it would be useful to remind everyone working there that this institution was originally set up to help businesses to raise capital for future long term expansion based on sound business experience and expertise."
I agree with your sentiments entirely, but I'm not sure that investment has ever been more than a minor bi-product of stock exchanges. In his book "The Great Crash of 1929", the celebrated Harvard economist JK Galbraith put it this way: "Wall Street, in these matters, is like a lovely and accomplished woman who must wear black cotton stockings, heavy woollen underwear, and parade her knowledge as a cook because, unhappily, her supreme accomplishment is as a harlot."
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Surely this is good news that the hedge funds made huge losses selling something they never owned in the first place
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# 234
I think the stock went up by 348%, not 384%, didn't it? No big deal erither way.
Basically, if the stock is up about 350%, then there will be a collateral call for USD 3.5 million (ie 350% of one million). Total collateral will need to be 102% of USD 4.5 million (ie the original investment of USD 1 million that has gone up by 350% to about USD 4.5 million. The borrower would have to deposit 102% of USD 1 million with the lender at the time of borrowing the stock originally.
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#235
"Just one thing, if the 1 million had gone up 384%, wouldn't it be more than 3.5 million?"
Loose language causes problems here. If we're talking of an "increase by/of x%", then you add x% to the original amount. This means that we now have (100+x)% of the original amount.
Eg increasing by 100% means you have (100+100)%, ie 200% =200/100 or double what you had to start with.
So an increase of 200% gives you 300% etc :-)
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Interesting side-note:
VW had an 8 year program, that allowed the ordinary VW worker to buy 50 VW stocks each year, at a fixed price of 50 euros.
Who ever took part, had in the end invested 20.000 Euro in 400 VW shares.
Employees of the middle executive level where allowed to get 500 stocks each year, the top-level could buy up to 5000 of this stocks.
Most of the VW workers sold most of there VW shares last year, as the rate went over 200 euros.
But around 10 % of the workers kept all their shares.
So, there are VW workers, who held Tuesday around noon a VW share worth around 350.000 Euro, based on an investment of
20.000.
In the middle office and engineer level, there people with 3,5 million Euros out of 200.000.
And the top executives made 35 million out of 2.
Not bad to work at VW, these days.
There is only one thing better: If you have bought Porsche shares the day there famous CEO Wendelin Wiedeking took over in 1992.
Posche was nearly broken then, deep in the red. The whole company had a worth of 300 million euro then.
Last year it's worth was 25 billion euro, and in the near future will own 75 % of VW as well, at whatever price.
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I'm sooooooh happy that these hedge funds have got shafted. I agree with the Germans - short selling should be abolished. It distorts and destabilises markets, affects jobs, companies and encourages scurrilous, ill-founded City rumours that undermine investor confidence. Good reputations are difficult to establish and are easily destroyed - and HFs are destructive.
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At least with the hedge funds losing this money it is mainly the rich guys losing other rich guy's money, i wont lose any sleep, I'm just crying about my own pension fund pot, which hasnt any hedge funds in it
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My first posting – so here goes.
In the 1980’s I was newly graduated and therefore lacked any experience of unpredictable volatility and bear market conditions. One GOLDEN RULE that was instilled within me (as a wet behind the ears 23 year old) was NEVER to be uncovered. Yes, I did deal in Traded Options (now known as CFDs) where the total risk position was ALWAYS covered. This meant that if something was to happen, like a takeover, it was always going to be possible to buy back the underlying shares at a known price – A STOP LOSS. And YES, I did experience the market crash of 1987. In the UK market, I remember that first takeover to happen was for Britoil. Is it any wonder that some cash-rich companies are going to go out on a spending spree?
I am sorry, but those individuals (and their SUPERIORS) who became “naked bears” have not got a leg to stand on. Incompetence, gross negligence and foolishness does not begin to describe the manner that these people have risked (and lost) either their own money or the savings belonging to others – like you and me. Yet again, this underlines the URGENT need for ALL financial service companies to correctly control and monitor their risk positions. If not then... (well, I will leave that to your own imagination)
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All we need now is the BoE and EuroBank to RAISE interest rates and the rest of the Hedgies will be gone,hopefully forever.
Bank rate could go up because banks have decoupled from the Bank rate,a relly brave PM would introduce emergency legislation th control bank loan margins;ei;morgates no more that 2% above and small business 5% above.We've paid the piper now let's call the tune.
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hmm .. I am just a simple engineer, albeit one with a good education. For as long as I can remember, I have depised those who make their living off the backs of others, but who add no real value to the financial well being of our country. I am required to conduct my professional endeavours with integrity. If I fail to do that, then in the event of consequential death, injury, or any other imaginable loss to another person, I can be jailed and sued. Those in the financial 'services' industry expect to fly to their vacation destinations in complete safety, and will sue me for sure if that doesn't happen! But do they assume the same moral responsibilty in their endevours, or merely line their own pockets with large bonuses but negligible personal risk? With my modest un-bonused salary, I do charitable work in more disadvantaged parts of world. Places I'd rather be than here right now. There is a lot of quiet satisfaction to had from giving rather than taking. I don't understand the insatiable greed that has given rise to the current crisis ... I don't own a Porche, nor do I have need of one. There are better things in life .. achievement through hard work .. and people!
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What irony? Their greed and selfishness to enrich themselves at the cost of joe blog has paid rich dividents.
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Does this mean it's cool to buy a Porsche again?
hehe
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I did post a response here. But I just want to say thanks to everyone else who did too. There are a lot of good people here in our small country. They're not all in the right place to influence our future for the good of all, but at least we seem to be unanimous in our thinking. I wish more people cared enough to make a real difference in the future! True or false, this nation once had a reputation for exemplary conduct and good sense - or is that merely a delusion?
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I seem to recall that some months ago Porsche had announced that it would be buying VW, and that everything was in place. So what were the Hedge Funds contemplated coming so late to the party? Did they expect people to renege on their agreements to accommodate the Hedge Funds?
I agree with many others, justice has been done, and may it be done more and more
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i am from germany.
Porsche and VW - an endless story.
The founder of Porsche - Ferdinand Porsche - was the responsible engineer of the VW Beetle - before WWII - and had the exclusive rights for all engineering work on VW-Cars. He was a typical German Engineer. Some of his Engineering Jobs are the WWII Tanks "Tiger" and "Panther".
The Volkswagen-Factory was build by Hitler to build Porsche´s Volkswagen. After the war the Owner of the Volkswagen Factory were first The British Military Government - then German government. The 20 % of German Government today is from that time.
After WWII Porsche got a Licence-fee for each VW Beetle and the exclusive distributon rights for all VW´s in Austria and East Europe - till now. In this contract, Porsche lost the exclusive right for all engineering work on VW-Cars.
After that time Porsche and Volkswagen worked closely together. For example the Porsche Cayenne, the VW Touareg and the Audi Q7 are the same cars.
After the death of Ferdinand Porsche his family went into the Porsche AG and fighted their family wars - till they were thrown out by Deutsche Bank & Co - because the Porsche Company was "red". One of these Guys from the Porsche Family - Ferdinand Piech - went to Audi - invented the Quattro Drive - got CEO of Audi and then CEO of Volkswagen. Today he is chairman of the supervisory board of Volkswagen. He is a famous engineer. People say he is drinking gasoline.
Since that time Porsche is managed by some clever guys, who made Porsche the best earning automotive company in the world.
Porsche is an engineering company. They made the development of the engine of harley davidson, the German "Leopard" Tanks, ...
And as Porsche are exporting most of their cars - the Chief Financial Officer has to deal a lot with currency options. I think, he has shown, that he is a professional option dealer.
Some years ago the Porsche Guys realized that they would come into big troubles. They depend on Volkswagen - because Volkswagen build main parts of Porsche Cars. They feared a volkswagen-takeover and need lower unit costs - not to forget the CO2-Discussion.
And so they decided to buy the majority of Volkswagen - Grandpa´s work.
They bought options and published their decision. Since that time the Volkswagen-Share is flying - and Porsche earns billions.
This story can be read everywhere - Wikipedia, ...
It seems the Hedge-Fonds have no Recherque department. There is nothing secret.
Maybe the Porsche Guys earn money with the takeover of Volkswagen (Audi, Volkswagen, Skoda, Seat, Lamborghini, Bugatti, Bentley, MAN-Trucks, MAN-Engines, Scania-Trucks).
Then - maybe - it´s time to buy Daimler-Benz shares. They are cheaper than ever.
But Porsche will never be a hedge fund. their business is automotive engineering - and they have a lot to do.
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One reason (OK, small) why I was first attracted to the Financial Services sector (back in 1985) was the long established image of integrity and good conduct. By the late 1990’s, things were changing, a new generation were beginning to have a stronger influence within the industry as the (very respected and highly experienced) pre-1970 generation were coming up for retirement . Front offices were becoming aggressive and more complex (and dangerous if in the wrong hands) financial instruments were being created. It became evident to me when I had to go and look for alternative work after the Sept 2001 fallout. It seemed then that I did not fit (poor me) into this up and coming generation. Even the Benelux region wanted a piece of the action and buy into (in their view) the “Anglo-Saxon” way – sorry KBC of Belgium! Let’s hope the wheel has turned where the fundamental principles of investment and conservative risk management comes to the fore.
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Re Jnthn1 .. nice of you to be so open and honest ... thank you so much .. i think you are right .. please don't alter your beliefs
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Im stunned by the comments. The term hedge funds is a misnomer, a redundant term that is used in relation to offshore funds trading absolute return strategies in boutiques, usually a star trader with a few support people. What you have to realise is that in current terms a lot of institutions have absolute return strategies, a considerable amount of pension funds either engage in so called 'hedge fund' activity either directly in the markets by having their own funds/products or indirectly by investing in other funds. 50% of what you would term 'hedge fund' investment is institutional money, so performance affects us all in this space. Also bear in mind, pensions etc. have performed in line with markets i.e. badly 30+% down, absolute return strategies on average are down 19%. So lets try and give these guys a break, they are trying to make us all better off.
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I did not know whether to laugh or cry when I read in the business section about hedge fund managers complaining about being "stung" by unfair practices when short selling VW shares.
You would assume that anyone prepared to risk billions in these trades would have taken the trouble to analyse the previous trading activity and noticed the difference between shares bought and held (by Porsche) and those bought and sold again and also now how German business law works regarding non-disclosure of shares held within other companies.
Their protests of foul play ring hollow. It is like a Rugby team from London agreeing to play American Football in New York and during the game complaining that their opponents have an unfair advantage because they are throwing the ball forward and wearing protective padding! Before you play the game make sure you know the rules you should be playing by.
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"VW defies the economic slowdown" - so it isn't "yet another car maker" !!
#250 The same here and I left in disgust. Hence my rants about "funny money" and "barrow boys" !!
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