An interesting summary of the VW short squeeze from Ivan Krstic @ Radian.org
On Jan 6 2009 Adolf Merckle, one of the world’s richest men, committed suicide by throwing himself under a train. Financial difficulties, and particularly great losses he suffered on Volkswagen stock, were cited as the key reason he ended his life.
Merckle's company, VEM, was caught in a so-called short squeeze after betting Volkswagen’s stock would fall. It was said that Merckle lost at least 500 million euros on the bets on VW stock, VEM lost “low three-digit million euros” on VW stock, the company said in November 2008.
In 2006 Volkswagen found itself fearing a foreign takeover. Porsche, the company, decided to step in and start buying VW stock ostensibly to protect the landmark brand, widely fueling market expectations that it would eventually buy Volkswagen outright. For three years, Porsche kept accumulating VW stock without telling anyone how much it owned. Every time it purchased more, the amount of free-floating VW stock would decrease, driving the stock price up slightly; your basic supply and demand at work. Eventually the share price became high enough that, to outside observers, it wouldn’t have made any sense for Porsche to buy Volkswagen. It would simply have cost too much.
When Volkswagen’s share price exceeded the point where it made sense for Porsche to buy the company, a number of hedge funds realized that Volkswagen shares have nowhere to go but down. With Porsche out of the picture, there was simply no reason for VW to keep going up, and the funds were willing to bet on it. So they shorted huge amounts of VW stock, borrowing it from existing owners and selling it into circulation, waiting for the price drop they considered inevitable. (con't)
Porsche anticipated exactly this situation and promptly bought up much of these borrowed VW shares that the funds were selling. On October 26 2008, they stepped forward and bared their portfolio: through a combination of stock and options, they owned 75% of Volkswagen, which was almost all the company’s circulating stock.
To put it mildly, the numbers scared the living hell out of the hedge funds: if they didn’t immediately buy back the Volkswagen stock they were shorting, there might not be any left to buy later, and it isn’t their stock — they have to return it to someone. If their only option is thus to buy the VW stock from Porsche, then the miracle of supply and demand would hit again, and Porsche can ask for whatever price it wants per VW share — twenty times their value, a hundred times their value — because there’s no other place to buy. They’re the only game in town.
Porsche’s ownership disclosure sent the hedge funds on such a flurry of purchases for any Volkswagen stock still in circulation that the VW share price jumped from below €200 to over €1000 at one point on October 28 2008.
On paper, Porsche made between €30-40 billion in the affair. Once all was said and done, the actual profit was closer to some €6-12 billion. To put those numbers in perspective, Porsche’s revenue for the whole year of 2006 was a bit over €7 billion.
Porsche’s move took three years of careful maneuvering. It was darkly brilliant, a wealth transfer ingeniously conceived like few we’ve ever seen. Betting the right way, Porsche roiled the financial markets and took the hedge funds for a fortune.
Betting the wrong way, Adolf Merckle took his life.
The laws in Germany did not require that positions be made known to the public. That is why the shorts got shafted, bigtime. I think the stock at one time was up over 10 times from the usual price.
With IOC, the positions are known, but with 25% of the stock short, this could be a problem for the shorts if the bids go up towards a 100. With it appearing as though the Japanese are ng into IOC, I would expect for the selldown price to be upwards of $1.25 or it may even surprise on the upside.