

How Porsche fleeced hedge funds and roiled the world’s financial markets - dangoldin
http://www.economist.com/finance/displaystory.cfm?story_id=12523898

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iigs
_“They may struggle to sell 911s to hedge-fund managers for years and years to
come,” says one investor._

Because they'll all be eating Top Ramen for the next 20 years.

I think it's interesting how many different types of failures of transparency
we've seen in the financial markets over the last few years; it seems like the
system is so complex that very few people, if anyone, can understand it.
Lawmakers are going to be expected to "do something" about the financial
system. I'm loathe to think of the typical elected person, often so because of
their people skills or personality, debating an issue of this type.

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elai
I get a feeling that it's complex on purpose and the whole finance world could
be simplified greatly. Kind of like many telecom provider's marketing
strategies.

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nazgulnarsil
I used to think this too. but it turns out that maturity transformation (one
of the financial worlds main businesses) actually is pretty complex.

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dmv
_"They may struggle to sell 911s to hedge-fund managers for years and years to
come," says one investor._

Or now a 911 is even more required, to claim that _you_ did not get fleeced by
them. Appearance is far more important than fact, right?

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apstuff
What's the difference between a hedge-fund manager and a pigeon?

Only the pigeon can put down a deposit on a Porsche 911.

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lincolnq
Excellent hack. I don't get a good perspective on why the hedge funds didn't
see it coming, though.

~~~
Dilpil
Plenty did. This is one of those articles that pretends hedge funds are one
big unit, but, in reality, you can find hedge funds on every side of every
trade. I would be surprised if no hedge funds made money from this.

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tocomment
"Hedge funds quickly did the maths, concluding that they could be caught in an
“infinite squeeze” in which they were forced to buy shares at any price."

I don't get it. How can you force someone to buy a share at any price? If it's
possible why don't more people do this?

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GeZe
By shorting the stock.

<http://en.wikipedia.org/wiki/Short_selling>

Basically, the hedge funds thought the stock would go down, so they "borrowed"
or "rented" the stock from someone else and immediately sold it. The idea is
by the time they have to return the stock the price will have fell.

Ie, if the stock is currently worth $100, and they borrow 1 share and
immediately sell it, they have $100 and owe 1 share. Later, on the date they
have to return 1 share, they go and buy 1 share and give it back. If the share
price then is $80 they made $20 on the transaction. If the stock went up to
$120 then they lost $20.

So, they shorted the stock, because they thought it would go down, but then
the amount of stock available to be bought plunged right as they had to return
the stock. So, there was a huge demand for the stock right as the supply was
drying up. As such, the price went very high, but they were forced to buy it
anyways to due to the previous agreement (that they had to give the stock
back).

~~~
Anon84
That always sounds strange to me... why would you lend you stock so somebody
else can make money out of it?

~~~
byrneseyeview
You have to pay to borrow. If you're a small shareholder, your shares are
available for your broker to lend if you borrow money against them; a large
institution is usually able to negotiate rates at which it will lend its
shares.

~~~
Anon84
Humm... as a sort of hedging against the stock going down?

~~~
byrneseyeview
It's not really a hedge. A hedge would be something with an inverse
correlation -- so when the stock went down, your borrowing income would go up.
In general, the opposite is the case: if the stock goes down, but the
borrowing cost is the same in percentage terms, your borrowing income goes
down. The exception is if the stock goes down and demand for shorting goes up
so fast that the interest rate on borrowed stock goes up. Even then, it will
almost certainly be a small cushion (losing 49% instead of 50%) not a hedge.

That said, it's still income you wouldn't otherwise have.

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gamble
I'd say that they were clever, but a similar short squeeze attempt on the
United Copper Company in 1907 set off a panic that might have destroyed the US
banking system if JP Morgan hadn't stepped in to prop it up. Playing games
like that in a time like this isn't what I'd call 'responsible'.

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gaika
This sort of stock market manipulation is illegal in US. Nothing to be proud
of. Germany already started criminal investigation. Hope that people directly
responsible for it will go to jail.

~~~
eru
As far as I know no (German) laws were broken.

~~~
gaika
[http://www.ft.com/cms/s/0/0a0edf02-a621-11dd-9d26-000077b076...](http://www.ft.com/cms/s/0/0a0edf02-a621-11dd-9d26-000077b07658.html)

~~~
sokoloff
I doubt anyone will do jail time for this, if even any laws were broken. And
if Porsche settles for the maximum 1 million Euro fine, that's not even
1/1000th of the profits they made on the backs of the shorts. It's not like
their aspiration to takeover VW was any kind of a secret in either the auto or
finance worlds.

Frankly, I have no sympathy for market speculators who got reamed here by
shorting VW. I do have some sympathy for people who were short the DAX index
as a broad-based hedging strategy and got trapped by the leap in the DAX. Then
again, "the market can remain irrational longer than you can remain solvent"
is a true today as it was 75 years ago.

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gills
Hey, Porsche figured out how the US Government has allowed the banks to drain
our 401ks during the last year!

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mellow
Does anyone know if Porsche are well connected politically? I'm starting to
suspect that the markets are being manipulated (well, opportunities are being
taken at the very least) and given that governments are moving against private
business (nationalising banks etc), this is a worry. Are Porsche privy to
insider information they have used to their benefit? Before you scoff,
consider that all European countries intercept communications within their
borders. It's generally accepted that they do this for financial leverage, not
to fight terrorism.

