Guys, world premiere, 9PM EST tonight on CNBC. Probably more of interest to the finance guys on the board...

Thursday, 2/16/2012: 9:00 PM FAST BUCKS: HOW PORSCHE MADE BILLIONS (30 Minutes)
12:00 AM FAST BUCKS: HOW PORSCHE MADE BILLIONS (30 Minutes)



"Fast Bucks: How Porsche Made Billions":
Over two astonishing days in October 2008, one of the most amazing stories of the downturn emerged. Porsche, the luxury sports car manufacturer, was revealed as the force behind an audacious takeover bid for Volkswagen. The price of Volkswagen shares rocketed fivefold, and it briefly became the most valuable company on the planet. And hedge funds that had been betting on VW shares falling in the downturn found themselves staring at losses that ran into billions of pounds. "Fast Bucks: How Porsche Made Billions" investigates allegations that the iconic automaker manipulated the market in an all-out bid to acquire its rival.

 

Yeah, that sounds about as accurate as most journalism.

Gary

 

Gary - I think that description is accurate. In Dec '11 a group of hedge funds filed a EUR2bn damages suit against Porsche.

The teaser though misses the grand conclusion -- that in Porsche's greed, they became the minnow instead of the whale. (Too much debt related to the takeover attempt put Porsche on the edge of bankruptcy, and VW saved them... or is at least trying hard to).

 

Thanks. The DVR is set to record!

 

There you go. You made my case for me, Kona. The teaser says Porsche made billions on the run-up, and it implies they ripped off the people short-selling VW to do it.

Actually, I've been following that activity somewhat since it became public and I do know what the story is about. I just don't agree with the promo trailer and I seriously doubt they can accurately convey the complexities of the attempted deals in a story less than ninety minutes long -- if that -- always supposing anyone associated with the production understands them.

The truth is the investors short-selling VW lost track of the principle of inherent value and pictured VW going the way of American Motors. And they bet wrong. Now they're trying to get a court to give them do-overs. That also skips a couple of hours worth of complexities that have legal importance, but it's as accurate as that promo.

Gary

 

The market is to provide liquidity that allows money to flow to the most productive from the less productive (supposedly meaning profits). Short sellers do not create liquidity, but can amplify volatility in a stock that is to the detriment to normal investors. Short sellers bet that shares are going to decrease and often can effectively force values down, costing a company dearly when they are trying to raise equity. Most short sellers have no economic interest in the underlying stock other than to trying push the value down. Reading the shorters on message boards and the negative things they come up with is amazing. If you place a speculative bet you, shouldn't cry when you lose. I'm not sure what the function of short positions in equities are. So i'm not sad to hear when they get their teeth kicked in.

 

Short sellers made a bet and lost. The shorts took in the shorts on this one, so to speak.

 

A company has no obligation what so ever to support or consider the implications to short-sellers. A companies obligations are to its shareholders.

Short sellers, especially if they sell on margin or with OPM (other peoples money) especially don't deserve any consideration. Thats speculation and if it goes wrong, it goes wrong. Crying about it after the fact is rather childish and I'm assuming the court cases will prove that out.

Porsche's attempt to take over VW had and still has merit... there is a need to fold the niche cars into a larger fleet to meet every more restrictive environmental regulations. As you grow and sell more cars, you then need to have a diversitfied fleet or else you are banned from many places. So the option is, stay tiny boutique or grow. As it turned out, the economy consipired a bit against the plan and it backfired and now VW will end up owning Porsche, but in the end the big result is the same: Porsche will be included in the fleet that is all of VAG I expect, which is a good thing.

How this all effects the personal wealth of the inside players in the Porsche, Pieche and other VW insider families is totally irrelevant to me.

 

 

How ironic. As we all know how Porsche at the end 'lost' the game and is now owned by VW. You just cannot make this up.

 

Well said..

 

I finally got around to watching it today. First off, it was originally aired in 2009, so that explains the headline (Porsche making, not losing, money) and also explains why they ended the story without the best part -- the boomerang.

I disagree with a number of the points made above. I think there is nothing wrong with short selling and in fact it is a valuable market practice. For one, it allows investors to hedge their bets, which allows them to buy more stock (long) and thus greatly increased liquidity in the marketplace. Second, historically it has played a notable role in exposing frauds (e.g., Enron, Worldcom, and most recently Sino-Forest). Like betting long on stocks, it can be done legally/ethically or not, so I don't consider rumor mongering practices on bulletin boards to be relevant. That is criminal under state and federal law for both longs and shorts.

Most importantly, it's the companies earnings that set the price in the long-term. Sure short sellers can drive a stock price down in the short-term, but ultimately if the company grows and makes money, they are powerless to stock the market forces -- namely that new investors will buy the stock for its earnings power. And then the shorts will lose money. (Financial companies, which critically rely also on investor and customer confidence, are an exception to the rule). Which brings me to Porsche/VW...

Personally, I find it hard to believe that Porsche didn't know that they were manipulating the market when they secretly amassed a 74% stake in VW, with 25% owned by Lower-Saxony (which is public knowledge). Short interest in VW stock, like all stocks, is published regularly. Market manipulation is a crime.

Minok makes the point that the fiduciary obligation is to the shareholders. That's true. If I were a Porsche shareholder before this mess, thinking I were investing in an automaker, and find out that the company has secretly bet it's financial life on the price of a single stock (VW) in a volatile market, I'd say that's irresponsible and unreasonable. Porsche had been disclosing that ~80% of its earnings had been coming from "trading activities" so it seems that covered them on this point, but IMHO I think it's a stretch on their part.

This issue aside, I'm glad Porsche is hooking up with VW. On balance it seems to have improved the quality and Lambo and Bentley, so I don't see any reason why it won't do the same for our cars.

 

Fortunately the whole point of market to exist is to be manipulated. Some fat cats are simply annoyed now that they were outsmarted so they start this PR. It all means nothing

 

I think most of us consider this off-topic except for its implications for our future supply of new cars and parts for current ones, but it is interesting, so for a moment more: this situation reminds me of the problems we must deal with in scaling. That is, with the difficulty predicting very small events or very large events from manageable desktop sizes of experiment. In the one direction, quantum physics and the behavior of semiconductors. In the other, aerodynamics and the behavior of air flowing over full-size objects.

I agree with most of what you say, Kona. Selling short is no different then long in terms of 'morality' but it does have the taint about it that we are betting against a company when we do that, and that in turn makes us into the hecklers cheering for the home team to fail. Mind you, I realize we're neither the home nor the away team when we buy negligible fractions of a company's worth. But when a legion of short sellers gather together to oppose a positive action of the company on the basis that they bet against them, damn it, and "How dare you do something effective!" When they do that, their own manipulation of our legal controls on stock trading may or may not come into play, but it has to be accepted that their moral position is bankrupt. They bet that VW could not pull out of a perceived bad direction, and now they want to block the moves in the good direction. That is not a morally tenable position. How it stands up to legal debate remains to be seen. If they prevail, will we see a countersuit against the short sellers by the long sellers? "Hey, we bet they would do well and you're interfering in that!"

As for Porsche manipulating the market, I certainly agree they had to know that disclosing their goal of buying the company would have raised the price they paid for each subsequent share of VW stock. But we do not recognize a moral obligation for a wealthy bidder -- or even one merely recognized as having good taste -- to disclose his interest in an item at auction. In the case of stock, it is not strictly the same, because fractional interests are being auctioned -- normally -- and the auction comes under special rules of law. Nevertheless, the moral position of the short sellers is again a poor one. They bet against VW succeeding (or at least prospering, to be meticulous) and they complain now that they did not know competent people already owned a majority share and planned to take a hand in the company's future. "We were betting against the current management, not the owners, who we thought were motiveless amoral and disinterested speculators like ourselves!"

That is the moral crux of their claim, no? Here was Porsche owning most of the company already and planning to take complete control, the competent bastards. "I never would have bet against VW if I'd known somebody competent and wealthy planned to guide their future!"

Basically, the problem we have distinguishing the moral position from the legal one is that market perceptions have moved the price of futures since the days of tulip speculation in the Netherlands. We recognize that situation as irremediable, if in fact it calls for remedy, and we cling by our fingernails to the small bit of control we can exercise through legal control of the auction itself. Thus the laws that short sellers are trying to invoke in this case. But the market in fractional interests shares the ground with buyers of controlling interest and that's where the blood is spilled.

If the market knew that someone else, some large player of good reputation, also was interested in VW shares, that would change the perception and raise the price. Certainly. And as tulip juggling, it might or might not be reprehensible to keep your interest anonymous. But if we knew they already had committed themselves, had already joined their future well-being to that of VW, and planned to achieve control... Well, that would have changed our perceptions enormously. Thus, by not admitting their interest, large players of good reputation are manipulating us. Or so we assert if we lose money. In fact, a buyer after control could be pure as a saint in caring only about future ownership and still cause the painful result to pessimists.

Our complaint certainly would be accurate in the notional market for stripey red tulips, which yield nothing but blooms if left to grow and have no intrinsic value beyond the perceptions of the market. But these are not tulip bulbs we're buying and selling with international corporate shares. Achieving useful and productive control of a corporation almost compels purchase in some fashion not subject to tulip fantasies.

Shares are in essence reins on the corporation, control of the corporation's future, but not until aggregated in their millions. Porsche's underlying purpose was to merge the future of two important corporations, in a situation created by other types of laws that have made such mergers essential. (A long seller could assert at this point that such mergers would have been foreseen by those betting on intrinsic value rather than market perceptions, but that's neither here nor there, except as our sympathies may be swayed.) Moreover, the underlying purpose of our regulation of markets in corporate shares is to encourage the movement of capital for just such purposes: to respond to the marketplace in products and create better businesses in the long run. In terms of our goal in writing laws regulating capital, we want to encourage such actions as a famous technical powerhouse uniting with a mass market producer like VW. We want to encourage such moves while keeping to a tolerable level the speculation based on market perceptions.

That is the conflict between our legal treatment of the short sellers and our moral response to their outrage. If I remember correctly, this outrage blossomed () when it came to light that Porsche already was the owner of VW and they made some moves to exercise control based on that ownership.The only basis on which short sellers can assert they are losing money is that Porsche and VW together will be a stronger company than VW without Porsche ownership.

That's why we lack sympathy for the short sellers in this case. They are saying unequivocally "Hey, the home team just scored. That's not fair, damn it!" But the basic problem is one of scale. Buying and selling fractional interests in companies looks very like speculating in tulip bulbs, but lessons learned in that art (and laws written to moderate it) scale very poorly to buying and selling controlling interest in companies. What hurts the tulip bulb speculator may be essential to next year's crop.

Maybe we need a Reynolds' Number for stock transactions?

Incidentally, I'm glossing over something I suspect most of us know, and certainly everyone with a serious interest in the case. Both manufacturing companies are legal entities separate from the companies that deal in financial holdings. The reins of ownership and control are pretty intricately woven and I don't even care to look into it, let alone try to discuss that tapestry.

Gary, who is at the CD stage of life and emotionally distant from this wrangle

 

Tulips Gary... Really? Most people stick with company ABC and widgets. Tulips were more of an example of the first "bubble." Excellent post for a rocket surgeon! I enjoyed reading that one. Now get back to explaining oil consumption .
http://www.damninteresting.com/the-d...ubble-of-1637/