
How Porsche hacked the financial system and made a killing (2009) - mootothemax
http://radian.org/notebook/porsche/
======
eftpotrm
It's also worth noting, though, that the fall-out of this cost Porsche dearly:

 _In its efforts to acquire a majority holding in Volkswagen AG, Porsche built
up a large debt burden, aggravated by taxes due on very large paper profits
from Volkswagen AG options. By July 2009, Porsche was faced with debts
exceeding 10 billion euros. The supervisory board of Porsche finally agreed to
a number of arrangements whereby the Qatar Investment Authority would inject a
large amount of capital, and Porsche would be merged with Volkswagen Group. On
23 July 2009, Michael Macht was appointed CEO, to replace Wendelin Wiedeking,
who is expected to receive a compensation package of 50 million euros._

<http://en.wikipedia.org/wiki/Porsche#Corporate_restructuring>

~~~
Estragon
Everybody loses! A paragon of free-market efficiency!

~~~
jerf
Would you prefer a system where stupid decisions and bad risks are instead
_rewarded_?

Free markets are about giving feedback like that. They aren't magical ways of
making people never make bad decisions. And neither is your preferred
$ECONOMIC_SYSTEM, whatever it may. If it's claiming to be one, it's lying.

~~~
maxxxxx
The people who made the stupid decisions were rewarded pretty well. Weideking
still sits on a few hundred million euros. This seems to be the new "free
market".

~~~
sambe
Why is are these debates run only on terms of envy and retribution? The
_company_ made a bad decision, and they were absolutely not rewarded, they
lost big. Weideking was hugely influential, but his contract with the company
was already agreed at that point. You could say it was reward for his
negotiating skills and existing reputation. Misaligned incentives is the fault
of the company who, as we said, suffered for it. If the next guy to hire him
makes the same mistake, maybe they will lose too.

~~~
eftpotrm
The company authorised Weideking to take the ultimately unsuccessful strategy
of turning Porsche primarily into a stock trading fund investing in VW shares,
yes, and paid off his contract as agreed when it failed and brought the
company to its knees.

The problem is that oversight and accountability is too weak. As CEO he was
authorised to take actions which should've set alarm bells ringing with
others, without apparent limit, and his contract (much like many others; Fred
Goodwin would be a prime UK example) was poorly drafted so as to provide him
with limited personal accountability for failure. UBS 'rogue trader' Kweku
Adoboli is currently in custody awaiting trial for inflicting a serious loss
on his company; Wendling Weideking was paid off handsomely for far worse.
Boards need to take their role of executive oversight more seriously.

~~~
sambe
And like his contract, oversight and accountability is the responsibility of
the board/shareholders/owners. Not any of us. He didnt "get away with it". It
is nothing like rogue trading whatsoever, let alone "far worse". One is ill-
advised but sanctioned, one is unsanctioned (well, that's another argument)
and illegal.

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steve8918
Ummmmmmm, this is a terrible article. They failed to point out that Porsche
went heavily in debt in order to finance this "hack", and ended up getting
bailed out and bought by VW.

It's ridiculous to say that Porsche "hacked the financial system and made a
killing" when they essentially bankrupted themselves by doing so.

~~~
sek
The financial crisis killed this project for Porsche, but the background is
very difficult. In financial terms this didn't matter.

The funny thing in this whole Story was Ferdinand Piech, he has full control
over VW as head of the board and was against this buyout. He also owned half
of Porsche, so he was then owner of VW, but was also against it because
Wideking would have gotten more power.

Both companies are bound together since the war, this whole action was about
power between some industrial families.

They gained money in the bottom line, and some idiots with no insight made a
bet against them.

Before this action was the Share of Porsche Holding 32.2% and now it is
50.74%. Look at the market cap and say again this was a failure.

~~~
LearnYouALisp
For a moment there, I thought you said "Ferdinand Porsche"!

~~~
blumentopf
He's his grandson.

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aqrashik
I'm curious, what happens if you can't return stock that you've borrowed in
order to short it? either because of a situation like this or simply because
you went bankrupt due to bad debts.

Wouldn't this be a common scenario given the very nature of the risk?

~~~
chollida1
> I'm curious, what happens if you can't return stock that you've borrowed in
> order to short it?

It's similar to what happens when you can't pay your mortgage. If you are
shorting you'll have to put up some margin( cash or cash equivalents
representing some percentage of the dollar amount you shorted.)

if the short starts to move against you, you'll get a margin call and be
required to put up more collateral.

Eventually if you can't pay you go bankrupt and your counterparty get's what
they can in bankruptcy court.

Not surprisingly this is called counterparty risk and has become a big area of
focus for risk managers recently.

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0x12
[http://www.businessweek.com/globalbiz/content/jul2009/gb2009...](http://www.businessweek.com/globalbiz/content/jul2009/gb20090720_048461.htm)

[http://www.zigwheels.com/news-features/news/volkswagen-
acqui...](http://www.zigwheels.com/news-features/news/volkswagen-acquires-
porsche-holding-salzburg/7627/1)

~~~
nicpottier
Thanks for linking those, makes you realize that those brilliant financial
guys at Porsche maybe aren't ALWAYS brilliant.

Pretty crazy swing there, remind me never to buy stock in either.

~~~
nraynaud
I'm not sure it's about being brilliant, it's about betting the house. G.
Sorros bet his house and won, Porsche bet their house and lost. It's all about
trying, failing and trying something else if it fails.

~~~
tomkarlo
That only works if you don't fail so badly that you can't try again.

~~~
nraynaud
those guys can _always_ try again ...

~~~
tomkarlo
Not when it costs you your independence as a company.

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anoother
Judging by the other comments here, it seems that shortly after this was
written, the financials went horribly awry for Porsche...

Anyone care to explain, preferably in a similarly understandable style as this
article?

~~~
pkteison
Very simple. Porsche financed their stock buying with loans, but then credit
essentially disappeared for everybody in 2009 and so they couldn't keep it up.
0x12 posted some good links earlier.

Same sort of reason why Ford did better than GM or Chrysler in America - Ford
had secured lines of credit back in 2006 in either a fit of brilliance or
luck, so when credit dried up in 2009 they could still borrow. The others
couldn't get loans and had to take drastic action.

------
andjones
For those interested in this kind of story, and manipulation of markets in
general, one of the best books I've read on the subject, published in 1923:
Reminiscences of a Stock Operator

[http://www.amazon.com/Reminiscences-Stock-Operator-Edwin-
Lef...](http://www.amazon.com/Reminiscences-Stock-Operator-Edwin-
Lefevre/dp/0471059706)

~~~
atakan_gurkan
It is also available on the Internet Archive:
<http://www.archive.org/details/ReminiscencesOfAStockOperator>

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nasmorn
Pretty ridiculous to kill yourself over losing a round of really expensive
poker. Especially considering Merckle could probably command a higher monthly
budget for the rest of his live than I can. And my life is pretty nice no
death wishes here. He should have probably have the news sink in a little to
gain some perspective on it.

~~~
dimitar
Suicide and mental deceases that cause it aren't very rational. Plus he might
have had many personal/personality problems and the whole loss thing was just
something that was the last drop.

~~~
MarkPNeyer
people commit suicide in order to protect themselves from the pain they go
through on a daily basis.

that seems perfectly rational to me.

~~~
tintin
There have been a lot of interviews with people who committed suicide (and
failed). Most of them said they did not plan it and it was a last minute
decision.

That sounds not very rational to me.

~~~
ubercore
Don't want to argue the logic of suicide too much, but isn't that a self-
selecting audience of people that didn't plan well, and hence "failed"? There
are plenty of people that take their own life that spend quite a lot of time
thinking about it, and planning.

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T_S_
Nice example about how lack of information leads to volatility in markets. If
you are looking for prescriptions to fix our financial markets, increasing
transparency of trading would do wonders to eliminate speculation and refocus
investors on value.

~~~
ArchD
I'm not sure what precisely you mean by "transparency of trading". One of the
common goals of trading is minimize the revelation of information about your
intentions that other traders can exploit against you. Trading is like warfare
--being transparent is not a strength.

Additionally, you can't just make one law that tells people to "be
transparent." The enacted laws have to be specific in order to be meaningful.
Because they are specific, people will find ways around them and continue
playing the game.

~~~
T_S_
Trading of securities is a regulated market. The rules about what information
is available to the market are a combination of tradition and regulation. But
they are man-made and arbitrary. I argue that the current fashions in
regulation starve the markets of information and contribute to crises.

I'll give you just one example. Large traders attempt to conceal their
identity. This leads to a lot of gamesmanship, as you point out. If this
information were released with every order placed then I would argue a lot of
volume would dry up and volatility would decrease.

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faizanaziz
So if the hedge fund managers lost money and Porsche lost money, so where did
the money go?

To play this game both borrowed money, so both parties paid interests... So i
guess the banks made money... Fits in with this article
[http://money.cnn.com/2009/04/13/news/goldman.earnings.report...](http://money.cnn.com/2009/04/13/news/goldman.earnings.report.fortune/index.htm)

~~~
dustingetz
everyone lost money in 2009 =(

~~~
faizanaziz
Money does not disappear... It just hides in some peoples pockets :)

~~~
rdl
Money absolutely disappears due to malinvestment.

If you spend all your time building something no one wants, the world overall
is poorer than if you build something amazing and people pay high prices for
it.

~~~
felipemnoa
Makes sense, build a house nobody buys and wealth is destroyed once you
demolish the house or it falls into disrepair.

~~~
rdl
Right -- all that money goes to pay people's salaries and materials, but the
opportunity cost of building something useful is what is lost. That's the
answer to the broken window fallacy, Keynesian ditch-filling (at least as a
long-term solution; it is possible it makes sense to smooth out demand, but
real public works projects are still better even then), etc.

~~~
faizanaziz
So malinvestment is a good point but money does not disappear. For
malinvestment to happen someone has to make good investment... Therefore the
money does not disappear it goes to the person with better investments... Let
me put it this way money transfers ( what i meant by it hides in someones
pocket)

Coming back to your house... When you commissioned the house you paid for
materials, salaries etc... therefore transfer of money.... Next when u bought
the land u invested in a certain property for a certain value, the value was
destroyed (due to whatever reason tsunami etc) so you lost money but the
person who sold it to you gained (aka transfer of money)

Now if you talk about which building is worth building thats a whole new
debate... Sorry I didn't explain it before... I was just talking about how
banks usually have pretty good ways to make money... They invest in
competitors cause no matter who wins... They get the interest...

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fleitz
This was hilarious, I was working for a company that supplied software to
hedge funds at the the time. I was laughing my ass off that the hedge fund
guys got taken so badly by a bunch of car makers. Looks like German financial
engineering is as highly regarded as German automotive engineering.

~~~
rmc
I doubt they are merely _"a bunch of car makers"_ , I assume Porsche, with
lots of money, hires lots of smart financial experts to do deals like this.
You can throw money at a problem and be a money expert.

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mathattack
I am very surprised this was legal. Aren't there disclosure requirements?
Certainly in the US if you acquire a stake of more than 5 or 10% you have to
declare it.

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dennisgorelik
For hobbyist investor it's tempting to short some stocks which seem to be
priced outrageously high.

In the past I've heard the term "Short Squeeze", but did not really pay
attention.

This article demonstrates one of the risks of shorting.

~~~
0x12
Small time investors advice for when you consider shorting stocks: don't.

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gavanwoolery
Am I the only one who noticed this:

"How Porsche hacked the financial system and _MADE A KILLING_ "

"Betting the wrong way, Adolf Merckle _TOOK HIS LIFE_."

I'm all for dark humor, but isn't it a little sketchy to joke about suicide in
your headline? (I'm guessing the headline was intentional, but who knows).

~~~
waqf
You're all for dark humor? Forgive me, but if you don't even like _wordplay_
on a "dark" topic, what kind of dark humor is it that you find acceptable?

~~~
gavanwoolery
I think the line for me would probably be between reality and fictional
circumstances. In this circumstance, a real person actually took their life,
which (at least to me) is not really a joking matter. On the other hand, if
there were some joke about a fictional character involving suicide, I probably
would not be (greatly) disturbed. I understand that not everybody would have
this reaction, but I have known people who tried to commit suicide so it is a
bit different for me I guess.

