Tuesday, June 30, 2009


The BBC reported today that the state-controlled bank, KfW, rejected Porsche's loan application. To follow the bouncing ball, Porsche's leaders decided last year to borrow billions to take control of VW. Why did they need to take over VW? Arrogance and greed, the usual culprits.

Last year the Porsche management was feeling pretty smug. Through an option strategy that would make a hedge fund proud, they caused a short squeeze in VW's stock. This means that investors, including a number of hedge funds, that bet that VW's stock price would fall, had to buy VW stock to stop losing money as the stock price rose 400% in one day!

Why did it go up in one day? Well Porsche management which owned 50% of VW disclosed it had effectively acquired options for 25% more of the stock. Therefore, the people who shorted the stock had to go in the open market to acquire the stock. There were numerous complaints but the management smugly said they had outsmarted the market.

Well now they are paying the price. Porsche has $9 billion of debt it borrowed to takeover VW that it can no longer service. The Porsche leaders thought once they owned the much larger VW, they could refinance the debt. In a storybook turnaround, Porsche had to borrow from VW to make its debt service payments.

Now, VW is looking to takeover Porsche by calling its loan which Porsche can't pay. Porsche asked the state-controlled bank to help. The bank refused. Porsche is hanging in the wind looking to Qatar for an immediate and large investment. A little color is added by Zerohedge.

One other thing, if you google the Porsche VW situation, you will find out that the two companies are led by cousins. I am sure that has nothing to do with the arrogance and greed. Couldn't they just stick to making cars?

Cheers, Mike

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