Porsche Taps on VW's Brakes

In a gesture sure to be appreciated by some of its best customers, Porsche gave some relief to short sellers by offering to sell as much as 5 percent of its stake in fellow German automaker Volkswagen.

The news immediately let the air out of VW's ballooning stock price, which had surged 150 percent on Monday and 93 percent on Tuesday. VW shares fell 39 percent, to €564.18 ($704.70) in Frankfurt. They had peaked Tuesday at €1005 and closed at €918.

The volatility was triggered by Porsche's announcement Sunday that it had raised its stake in Volkswagen to 74.1 percent from 35 percent. Since the German state of Lower Saxony, where Volkswagen is based, owns 20 percent, that meant only about 5 percent of VW shares were on the market.

However, some investors, anticipating that Volkswagen would follow other big carmakers into a slump caused by recession and tight credit, had sold short about 13 percent of its shares. The realization that there were not enough shares available to cover those positions sent short sellers into a frenzy to cover their bets.

"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, told the Daily Telegraph in London.

Porsche said it would make available some of its shares " In order to avoid further market distortions," but denied short-sellers' grumblings about a lack of transparency in Porsche's strategy toward VW.

"Porsche SE denies all responsibility for these market distortions and for the resulting risks to which the short sellers have exposed themselves," the company said in its statement. "Porsche wishes to point out that the applicable capital markets law provisions have been complied with at all times. Porsche has not been active in the market during this share price movements. Allegations of price manipulation by Porsche are therefore without any foundation whatsoever."

Just to be safe, the company added: "Porsche remains committed to its goal of increasing its stake in Volkswagen to up to 75 percent and thus intends to continue to acquire Volkswagen ordinary shares, on and off the stock exchange, at prices which are economically justifiable."

by Mark Stein

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