Molly Neal in the WSJ:
Heard on the Street - WSJ.com: Inverse relationships rarely get as extreme as Volkswagen's soaring share price and the plummeting reputation of Germany's financial-market authorities. The retort from the authorities and Porsche that nobody has broken any rules during the past week's maneuverings won't wash.... Porsche has built up its stake in VW using options it doesn't have to declare publicly.... A sudden decision to publicly declare a much larger stake than expected, sending VW's stock sky-rocketing, has distorted Germany's stock market -- VW is a component of the benchmark DAX 30 index -- in the middle of the world's severest financial crisis since the 1920s.
The repercussions may be more significant. Any major losses suffered by hedge funds which have scrambled to cover short positions in VW at ever more exorbitant prices could end up enfeebling counterparty banks, already hard hit by the credit crunch. Sniggering over the irony of hedge funds' calls for more, rather than less, regulation would then prove short lived. It's hard to square this with the orderly functioning of Germany's financial markets for which Deutsche Borse and Bafin, the watchdog, are responsible. Deutsche Borse's reweighting of the DAX index to limit VW's contribution to 10% is too little too late.
Porsche's move to sell back up to 5% of VW in an attempt to improve the stock's liquidity is a tacit admission it is partly, if indirectly, to blame for the short squeeze. VW's shares nearly halved in value Wednesday to 550 euros but are still trading at more than double Friday's closing price. Bafin remains missing in action.... The... challenge of protecting investors' interests through timely and judicious oversight of the stock market remains.
Porsche investors and Volkswagen investors have done absolutely fine. It's the short hedge funds--and the banks that provided the leverage underpinning their option positions--who are in trouble.
I have a hard time thinking about this: after all, as long as there is a free float for Volkswagen shares--as long as there are enough individuals long VW--why don't they show up today, willing to lend their shares out? Couldn't the government of Lower Saxony lend out its shares (for a healthy consideration) and so keep the short squeeze from punishing hedge funds "too much"? And how do we figure out what "too much" is?