Did Porsche blitzkrieg the hedge funds?

Volkswagen short-sellers took a bath this week. Traders are blaming the German government for foul play

By Andrew Leonard
Published October 30, 2008 4:26PM (EDT)

Did you know that Ferdinand Porsche designed the VW Beetle? I suppose it is possible that I knew this once, and forgot it, but a quick review of this week's titillating developments involving Porsche and Volkswagen have brought back to the fore the paradox that a man whose name is intimately associated with high-end sports car luxury created, at the behest of Adolph Hitler, the ultimate people's car. (At least until the debut of the Tata Nano.)

On Sunday, Porsche revealed that it had sneakily purchased 71 percent of Volkswagen, sending shares in VW soaring high and wreaking a great swathe of destruction upon hedge funds who had been betting that VW's stock price was doomed to fall. If you crave a heavy dose of hedge fund schadenfreude, the Daily Telegraph has the goods. (Thanks to reader Eric Fern for passing on the link.)

"I have had hedge fund managers literally in tears on the phone," said one London-based analyst yesterday. Others likened the Porsche disclosure to a "nuclear bomb going off in our faces", describing the resulting losses as "a bloodbath".

Exactly how much of a bloodbath has occurred is in dispute. Estimates of losses range from $4 billion to $20 billion. But what doesn't appear to be in question is that German regulations which did not require Porsche to declare publicly how much of the company it was potentially purchasing contributed to the havoc. But could it really have been on purpose?

Across the world, traders raged at what they saw as a thinly disguised sting operation by Porsche and the German financial establishment. In almost any other country, Porsche would have been forced to declare its hand, rather than secretly building up share options through third parties. The hedge funds are demanding an investigation.

Christian Strenger, a board member of Germany's biggest fund manager DWS, said the German government needed to address the "untransparent" regulations, while Mike Warburton, an analyst at the City firm Sanford Bernstein, described the situation as "arguably an embarrassment for all European capital markets".

Much as I am infatuated with the idea of the German government using the People's Car Company to perpetrate a blitzkrieg on hedge fund "locusts" (a popular German insult for hedge funds), I find this difficult to believe. I also have to think about the Telegraph's conclusion, which is that we all lose when hedge funds lose.

Hedge funds will have to sell shares in other companies to make up for their losses on VW, which is likely to drive down those shares and contribute to the continuing turmoil on the stock market, further damaging the value of pension funds.

So let's get this straight: When hedge funds "win" -- wealthy investors get even wealthier, and hedge fund managers pocket huge bonuses. But when hedge funds "lose" -- we all lose. Wunderbar!

Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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