Volkswagen shares halve as funds lose billions

Volkswagen (VW) shares continued their rollercoaster ride today when they nearly halved in value after the German authorities took action to prevent the volatility in the carmaker’s stock from destabilising the German market.

VW briefly became the world’s most valuable company yesterday, worth £238 billion, following panic share buying by hedge fund chiefs.

The hedge funds were trying to cover potential losses after placing huge bets that Volkswagen shares would fall.

But Porsche, the sports car giant, had been secretly building a 74 per cent stake in its rival, the world’s third-largest carmaker. Porsche said this morning that it would take steps to smooth VW’s soaring share price by settling hedging transactions, equivalent to 5 per cent of the company’s stock, but the move has come too late for some of the world’s most aggressive hedge funds, which are facing losses that could amount to between €20 billion (£15.9 billion) and €30 billion.

Today the shares fell €416.9 to €528.09 in morning trade.

Hedge fund experts believe the losses could even bring down some smaller funds, which have been caught out by the sudden price move.

Two days of frantic trading have led to what is thought to be one of the heaviest losses on a single company’s shares taken by hedge funds.

“This is without question the biggest single loss on a single stock in the history of hedge funds. It’s a bloodbath,” Laurie Pinto, a broker at North Square Capital, said.

Other shareholders in VW rounded on Porsche, saying that it had manipulated VW shares in an irresponsible manner. Porsche vehemently rejected the accusation of share-price manipulation.

With Porsche already owning 42.6 per cent of VW and Lower Saxony 20 per cent, the revelation on Sunday night that it had acquired the rights to an additional 31.5 per cent left little more than 5 per cent of shares free to cover short positions that amounted to nearly 13 per cent of the company’s stock.

As soon as the markets opened on Monday, hedge funds and investment banks’ scrambled to cover their bets.

The demand for stock sent the shares soaring, increasing the losses on the short positions and forcing others that had hoped to hang on to become forced buyers as well.

Andy Brough, a leading fund manager at Schroders, said: “If I was German, I would be completely ashamed of my stock exchange today. Frankfurt has been shown up to be a complete Mickey Mouse exchange. A stock like this has become the biggest in the world in a recession.”

Mr Brough said that VW’s shares would inevitably fall back after the drama of the past few days. “Unless VW has discovered a car that doesn’t need any oil at all, and you can eat it, I can’t see it remaining the biggest company in the world for long.”

He pointed out that, on a crude analysis, VW would need to sell 62 million cars next year to justify the valuation it reached yesterday.

Traders thought they were on to a certainty by selling VW shares as car sales have been falling around the world because consumers have tightened their belts or are denied access to credit.

Last week, VW’s shares tumbled by a third in two days, and hedge funds bet heavily that the share price would continue to plunge.

“Last week when VW came down 50 per cent, some people thought it was going to crash,” said one market participant. “Some funds just said, ‘it’ll go all the way now it has broken through so let’s get in (with a short position).'”

But they had not counted on Porsche’s dramatic intervention. The maker of the iconic 911 had last year built up a 35 per cent stake in VW, but said at the time it had no plan to buy a majority of the maker of Golf hatchbacks. However, in March it received permission from its supervisory board to increase its stake above 50 per cent but had given no indication that it would do so.

Yesterday, the rush to buy propelled the shares to an intra-day high of €1,005.01, valuing the company at €296 billion or $370.4 billion, before closing slightly lower at €945.

That was more than Exxon Mobil, the world’s most expensive company, which was worth $343 billion at Monday’s close.

Shares in European and American banks swung wildly amid rumours that they could be facing huge losses after betting on VW falling.

Société Générale, the French group, was hit by the speculation as its shares tumbled in Paris for the second consecutive day to close down 12.27 per cent at €33.33. The fall came despite SocGen’s efforts to reassure markets that it had no skeletons in the cupboard – the third time this month that it has been forced to issue a statement in an attempt to calm fears over its health.

A Paris fund manager said: “All you would need would be to have shorted Volkswagen shares with too much leverage, and you would be facing colossal losses.”

SocGen has denied that it is facing VW-related loses.

In the US, Morgan Stanley and Goldman Sachs were also caught up in the latest wave of panic selling amid rumours that they could also be exposed to the VW short squeeze. Morgan Stanley denied the claims and sources at Goldman Sachs said that the group had no significant exposure.

Deutsche Bõrse, the German stock exchange, said last night that it would reduce VW’s weighting in the leading DAX index to 10 per cent after the carmaker’s share price surge gave it a value equivalent to 27 per cent of the market.

BaFin, the German financial regulator, said it was monitoring VW’s share price and was looking into trading patterns but had not opened a formal inquiry.

October 29, 2008


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