In 1931, Austro-Hungarian engineer Ferdinand Porsche started a German company in his own name. It offered car design consulting services, and was not a car manufacturer itself until it produced the Type 64 in 1939. But things got interesting for Porsche long before then.
In 1933, he was approached by none other than Adolf Hitler, who commissioned a car designed for the German masses. Porsche accepted, and the result was the iconic Beetle, manufactured under the Volkswagen (lit. “people’s car”) brand. Today, Porsche’s company is one of the world’s premier luxury car brands, while Volkswagen (VW) is itself the world’s third-largest auto maker after General Motors and Toyota.
Three years ago, 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. Of course, this isn’t quite what came to pass.
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.
To explain what happened next, I’m going to first tell you about a financial maneuver called shorting.
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At any given point, only a certain amount of a publicly traded company’s stock is floating freely in the market. The rest is held in various portfolios, funds, and investment vehicles. Now, everyone’s familiar with the basic idea behind the stock market: you buy stock when it costs little, and you sell it when it costs a lot, profiting on the difference.
But that assumes a company’s value is going to increase. What if, instead of betting a company will go up, you want to make money betting the company will go down? You can — by selling stock you don’t own.
Say you borrow a certain amount of stock from someone who already owns it. You pay a fixed fee for borrowing the stock, and you sign a contract saying you will return exactly the same amount of stock you took after some amount of time. So, you might borrow a thousand shares of Apple stock from me (I don’t actually own any, but play along), pay me $100 for the privilege, and sign an obligation to return my stock in 3 months. At the time, Apple stock is worth $10 per share.
After you borrow the stock, you immediately sell it. At $10 a share, you get $10,000. Two and a half months later, another rumor about Steve Jobs’ health sends AAPL crashing to only $6 per share for a few hours, so you buy a thousand shares, costing you $6,000. You give me back those shares. Because you successfully bet the company would go down in value, you earned $4,000 minus the borrowing fee. This is called short-selling or shorting the stock, and the downside is obvious: if your bet was wrong, you would have lost money buying back the shares that you have to return to your lender.
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Now things get kinky.
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.
Porsche anticipated exactly this situation and promptly bought up much of these borrowed VW shares that the funds were selling. Do you see where this is going? Analysts did. According to The Economist, Adam Jonas from Morgan Stanley warned clients not to play “billionaire’s poker” against Porsche. Porsche denied any foul play, saying it wasn’t doing anything unusual.
But then, last October 26th, they stepped forward and bared their portfolio: through a combination of stock and options, they owned 75% of Volkswagen, which is almost all the company’s circulating stock. (The remainder is tied up in funds that cannot easily release it.)
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 will 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.
And that, my friends, is called a short squeeze.
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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 28th, making Volkswagen for a brief time the world’s most valuable company by market cap.
On paper, Porsche made between €30-40 billion in the affair. Once all is said and done, the actual profit is 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.
I know I am starting a big debate here as i know i will offend a lot of people here.
But do you really think that Rock Music is alive anymore?
I myself hear all the contemporary music like JT,Jay-Z,Linking Park,Rihana etc but I confess that where I find peace is with Pink Floyd and Metallica.
I remember the times when i was in school then MTV and Music was something different as its today. I remember people listening to Eagles and AC/DC and thats what i grew with.
Nowdays what people call Rock Music is something produced out of thousands of Microprocessors across the world using different wave frequencies with the help of electricity.
Where is that acoustics of Dueling Guitars and that Music which used to trig millions for that insane Headbanging?
Rock music, is barely alive. Bands that once ruled the charts are gone. Guns n Roses, Metallica and Korn are no longer selling out arenas or compact disk racks.
What teenagers today define Rock is nothing which matches the music of 80's and 90's. Tell me where can you find know a song like "Comfortably Numb" or "Turn the page"?
There was a time when people used to go crazy as soon as Aerosmith touched the Stadium with 50000 fans just trying to catch a glimpse of the man with Long hair,Leather Pants, Sweat all over the body, Skinny Ass and insane passion with the best pitch to address all his lovers.
Well, here's a question: WHERE IS THE ORIGINALITY??? The only original new band I have heard is the Arctic Monkeys and they are from Britain! The problem with American music is that bands aren't willing to take chances! The last time that happened was when Nirvana, Pearl Jam and Soundgarden suddenly burst onto the scene and destroyed 80's rock in general. It was a move that had to be done for the sake of music. That's just what American bands do…they take something that was original and turn it into something stale.
The last good bands I heard producing a nice Rock Music were Coldplay and Radiohead.
Still they are not par excellence as there ancestors.
Since living in Bangalore gave me a chance to be at the Best Rock Pubs in India like Purple Haze and Stones I have a small hope left that at least some of the people still are aware whats called a True Rock Music and I hope the Fraternity will keep it alive and contribute to it.
The rebellious, loud and obnoxious rock music that so many love will be continue and live.
I hope the generations to come will still respect the Mettalica and Pink Floyd as we do and will pass on the legacy........
