Wednesday, October 29, 2008

Serves them right

Having followed the convoluted affairs of Volkswagen since 2004, we cannot help but indulge ourselves in a small smile, quickly suppressed, at the plight of hedge fund traders who are, according to The Daily Telegraph, taking a "bloodbath".

Based on the assumption that this German company would share the fate of the rest of the automotive industry, speculative "short sellers" have been holding short positions in anticipation of the share price plummeting as the demand for vehicles drops in the recession.

Instead, as news came though that Porsche - which has been attempting to take over the VW for some years – had secured a larger stake in the company than anyone had thought, shares rocketed, prompting "a huge scramble to cover short positions in Volkswagen, which had been the most shorted stock in Germany's benchmark DAX index."

One hedge fund said: "There have been some dark moments over the past few months but none blacker than this. We couldn't have dreamt a worse scenario." "The German stock exchange has become a joke," said Andy Brough, a fund manager at Schroders.

The point, of course, is that the VW saga goes way back, and we have a heady mix of high finance, politics, local German law and EU intervention – the combination of which means that normal market rules most certainly do not apply to this company. The moment politics and business mix to this extent, beware.

Unfortunately – for them – financial wizz-kids tend to be more than a little na├»ve when it comes to politics, a stance most often tempered by a certain arrogance, fostering a belief that they are somehow immune to the meddling of the dark forces.

Well, in this instance, they have been well and truly caught out. The Porsche takeover – which would had happened years ago but for the meddling of politicians – has been artificially held back but, behind the scenes manoeuvring at a political rather than business level, has enabled it to make the breakthrough. But, being "political" rather than financial, the clever, highly paid analysts and their trader pals missed the signs.

We do not claim any great prescience – but then we are not highly-paid analysts who do this sort of thing for a living. But anyone with at least moderately-tuned political antennae would have cautioned that you treat VW issues with the very greatest of care, tainted as they were by a complex political overlay. The "normal" assumptions simply do not apply.

Clearly, the expensive-suited traders did not take enough care. Shame!