how Porsche really makes money...

[Jad]

http://radian.org/notebook/porsche

Very interesting article on why Porsche bought VW and why it was a good investment....

[mrondeau]

Wow!! Brilliantly planned and executed. Talk about high stakes gambling. A very well written article that explains "shorting" better than anything I've ever read. Thanks for posting that link Jad.

[SDGT3]

Fascinating article and a great read. There seems to be something missing, however. IIRC, by German law, once Porsche held appx. 31.XX% of VW shares, it had X amount of time to make full disclosure if they were to buy controlling interest. I believe that happened in 2008 and the article states this was a 3 year move. How then did Porsche have 75% of VW stock? My question is did they buy the floating shares with shell or third party companies? It seems they would have had to do that to conceal their true intentions from the hedge funds/companies.

[ttweed]

How then did Porsche have 75% of VW stock? My question is did they buy the floating shares with shell or third party companies? It seems they would have had to do that to conceal their true intentions from the hedge funds/companies.

They didn't actually HAVE 75% of VW stock, they merely "controlled" that much. They owned a 42.6% stake by buying shares outright over the last 3 years but controlled another 31.5% through an opaque derivative called "cash-settlement call options." Because the options were to be settled for cash, and not stock, they were not "transparent" to other investors, and did not need to be disclosed to anyone under European law.

Rather than acquiring the shares directly – which would have to have been disclosed – Porsche acquired cash settled call options from a group of investment banks. Under German rules, neither the banks–-which all held 4.99% or less–-nor Porsche were under any obligation to declare the stake. But owning the options gave Porsche effective control over them, making the shares unavailable in the float to cover the short sales by the hedge funds. Since Lower Saxony owns 20%, there was only 5% of shares left available in the float to cover naked short sales estimated at 15% of outstanding shares, so a classic "short squeeze" developed as the hedge funds tried to cover their positions, resulting in VW shares climbing briefly over 1000 Euro/ea., for a short time making VW the most highly capitalized company in the world--greater even than Exxon.

Porsche then benevolently made 5% of their shares available to the squeezed hedge funds to cover their short sales, making a tidy profit from the increase in price, and could still settle their options for cash, making an estimated 12 BILLION Euros! They can now wait to buy a majority of VW shares at their leisure, when the price drops far enough again to make it affordable.

Porsche has made more through their currency hedging and this VW stock manipulation in the last 5 years than they ever made by building and selling cars.

TT

[Dan Chambers]

I don't really understand the investment world so I'm a little vague on the term "hacking" in the title:

"How Porsche hacked the financial system and made a killing"

I always thought "hacking" was a negitive term related to "breaking-in" or improperly accessing something: ie: hacking into a computer, etc.

From the article, it sounds like Porsche did everything according to the rules. If so, why the term "hacking?" Is this a "financial-world" term for an improper manuever of some sort? I'm curious.....

DC

[ttweed]

I always thought "hacking" was a negitive term related to "breaking-in" or improperly accessing something: ie: hacking into a computer, etc.

Dan-
Hacking in the computer world has always meant "finding and exploiting a vulnerability in a system." This can pertain to activity in a number of different categories, ranging from white-hat (“ethical hacking”), to grey-hat (with ambiguous motives) and black-hat hacking (or "cracking") for nefarious purposes. A computer expert who is trying to improve the security of a system can be deemed as a "hacker" when he tries to find vulnerabilities which might be exploited and secure them, but since his motives are ethical, he would be in the "white-hat" camp. Someone trying to exploit vulnerability for purposes of theft would be on the other end of the spectrum. Since they violated no security laws, I don't think Porsche was a "black-hat" in this case, but they could definitely be in the "grey" area, since there has since been a reaction to close the loophole they exploited by making disclosure of such options mandatory, and at least one person committed suicide over their tactic, after being brought to ruin.

TT

[Dan Chambers]

Dan-
Hacking in the computer world has always meant "finding and exploiting a vulnerability in a system." This can pertain to activity in a number of different categories, ranging from white-hat (“ethical hacking”), to grey-hat (with ambiguous motives) and black-hat hacking (or "cracking") for nefarious purposes. A computer expert who is trying to improve the security of a system can be deemed as a "hacker" when he tries to find vulnerabilities which might be exploited and secure them, but since his motives are ethical, he would be in the "white-hat" camp. Someone trying to exploit vulnerability for purposes of theft would be on the other end of the spectrum. Since they violated no security laws, I don't think Porsche was a "black-hat" in this case, but they could definitely be in the "grey" area, since there has since been a reaction to close the loophole they exploited by making disclosure of such options mandatory, and at least one person committed suicide over their tactic, after being brought to ruin.
TT

Thanks, Tom. Very interesting and informative stuff. Black Hat, White Hat, etc. Who's says you can't teach an old dog new tricks? I learn something new every day.

DC

[pdy]

since there has since been a reaction to close the loophole they exploited

TT

Sheez. In the old days, Porsche used to draw attention for finding and exploiting loopholes in racing rules.

[ttweed]

Sheez. In the old days, Porsche used to draw attention for finding and exploiting loopholes in racing rules.

Ya, Paul, that was back in the days they were a sports car company and not a holding company.

TT

[Bob Gagnon]

Sheez. In the old days, Porsche used to draw attention for finding and exploiting loopholes in racing rules.

Ya, Paul, that was back in the days they were a sports car company and not a holding company.

TT

Sad but true, and I miss those days past...