There was once a fine American sports car company called Stutz. It made beautiful – even legendary cars. The cars had a reputation for dependability, reliability and punishing speed....
Anyway Stutz was controlled by Alan Aloysius Ryan through family holdings. For reasons mostly to do with improved mass production by competitors the company found itself under pressure. Short sellers could smell blood. And they shorted the stock. And shorted some more.
Through this Alan Aloysius Ryan stood firm, buying stock when he could (possibly through options and hidden holding companies so the shorts could not see what he had done). He did this until he declared one day in 1920 that he owned 105 percent of the company and the shorts could settle with him on his terms.
His terms were a price so high that it would bankrupt broker dealers who had stood as intermediaries between the stock exchange and shorts.
Well to put it bluntly the financial market and regulators defended their own. The story is told here and here and here and here in the New York Times – and the amounts of money involved were monstrous for the time. Eventually the New York Stock Exchange –with the threat of criminal proceedings – arbitrarily determined a price to settle the short positions. The shorts even got an officially sanctioned “protective committee”.
That price was way below the top price that Ryan paid – but far more than intrinsic value. The shorts – well – except those that shorted right at the end – lost money. Ryan wound up paying too much for a motor car company which was slowly declining anyway. As he now owned 100 percent of Stutz his debts got intertwined with the car company and both he and the car company went bust. Some family members got a little out but only by suing other family members. The only winners were ordinary longs of Stutz who sold along the way – or even at the final settlement price.
For those not familiar, Porsche, the car company, undertook a similar strategy to corner the short-sellers of Volkswagen. So far, it has been successful in crushing the short-sellers—and unlike the Stutz case above, the investors and speculators don't have the stock exchange on their side, although the regulator is supposedly investigating. One of the public losers was David Einhorn, the up-and-coming value investor, who probably lost between 100% to 400% on his position (the position was supposedly tiny for his fund and he didn't disclose his actual loss.)
Porsche, in a manner foretold by Hampton, is facing a liquidity crunch. It borrowed a little more than $12 billion to undertake the strategy and, predictably, doesn't have the money. So it looks like it is trying to get some capital from a Qatari investment fund. The New York Times updates us:
Porsche built up net debt of €9 billion, or about $12.6 billion, as it acquired about 51 percent of VW outright and used so-called cash-settled options contracts to gain voting rights to at least 20 percent more.
Volkswagen’s market value, at €80 billion, is nearly ten times Porsche’s €8.2 billion, despite Porsche’s massive VW stake. Analysts say the market values Porsche that way because the company could not sell its VW stock without driving the price sharply lower.
Porsche’s options transactions are being investigated by the Germany market regulator BaFin. Many analysts suspect it faces substantial risks on those deals.
“Porsche is not a bankrupt company,” Frank Biller, an analyst at Landesbank Baden-Württemberg, said. “There’s plenty of value in it. But from the liquidity standpoint, it could face problems if it’s forced by its options position to purchase VW shares at high prices.”
Porsche last month supplemented its €10 billion of bank credit with the addition of €750 million of short-term financing from Bank of Tokyo Mitsubishi. It is talking with the German state-owned banking group KfW about obtaining another €1.75 billion.
Porsche isn't as badly off as Stutz and it should be able to finance its strategy. Whoever that finances Porsche is looking at a good return if the strategy can be completed. The big risk in my eyes is the regulator. The Stutz company seems to have essentially lost when the NYSE arbitrarily set the price in order to defend the intermediaries who financed the short-sellers (basically bankers and brokers.) It's not clear if the regulator will favour the hedge funds and banks who are thought to be the short-sellers on the opposite side of the trade.
I think Porsche will make it out alive but not without some big concessions.