What Was The Volkswagen Short Squeeze of 2008?

This was, and still is considered, the biggest short squeeze in history! In late 2008, amidst the global financial crisis: Porsche took a swing in the world of financial maneuvers. After a series of clever, intense moves, this all set the path moving for Volkswagen to briefly become the most valuable company in the entire world. The specifics about this story are truly insane. Let’s take a look at the details that led to the alrighty Volkswagen short squeeze of 2008!

CLICK TO WATCH THE IMMERSIVE VIDEO VERSION OF THIS STORY

So… What is a Short Squeeze?

In short form (not a pun) – A short squeeze is when a stock aggressively increases in price causing short sellers to have to cut losses and exit their positions, inadvertently further driving up the price per share of said stock. Basically: it’s a big game of fast-paced price movements, occasional hedge fund “chicken”and a whole lot of potential. Being on the right side of a short squeeze is a very thrilling position. And you know, being on the wrong side… is a rather un-thrilling position. (Special shoutout to Citadel Capitol)

What Was The Biggest Short Squeeze Ever In History?

In 2008, the world markets saw the absolute largest short squeeze in history. This was the Volkswagen Short Squeeze of 2008. This is a tale of two German giants. A story of Porsche & Volkswagen. Let’s immerse ourselves and begin our story…

What Caused The Volkswagen Short Squeeze of 2008?

It was the midst of the worst financial crisis since the Great Depression, you’ve heard about it. At this time, Volkswagen was increasingly being viewed as a potential bankruptcy candidate. Or another way of looking at it: Volkswagen was viewed as a very sexy short candidate. Even before the crisis, Volkswagen was quite thoroughly in debt. They were already struggling financially, and in the midst of the crisis, of course, demand for new cars plummeted.

BUT WAIT.. A TWIST!

Despite its messy financials, Volkswagen had reported several quarters of better than expected earnings. This left its share price at a steady and surprising €300. So with this situation, it made Volkswagen an EVEN MORE attractive short candidate as the financial crisis unfolded. Like a ticking time bomb, soon-to make a lot of short sellers rich. Or so they thought.

The Automotive Industry In 2008

For reference, in 2008, the whole auto sector was considered to be a pretty sexy short trade. Up until 2008, General Motors had been the largest automaker in the world for literally over 70 years. I mean, damn. That’s a long run. But by December of 2008, GM had to be bailed out by the US government. And by 2009, GM had OFFICIALLY entered bankruptcy. Chrysler filed for bankruptcy right around then too.

So I mean, come on.. In late 2008, a short bet on stupid little Volkswagen seemed like a no brainer. But in fact, it was a… some brainer.. (sorry)

Please Welcome.. Porsche!

Before the madness that was 2008: Porsche had been a huge shareholder in Volkswagen. Then, come October of 2008: They took their already thick stake to 30%

But WAIT.. THEN, they took that stake all the way to 44% – WITH options to buy 30% more. So indirectly, Porsche all of a sudden had the ability to be in control of 74% of Volkswagen.

Side Note About Luxury Cars In The Great Financial Crisis

As you can imagine, a company like Porsche was hit even harder during the financial crisis. I mean, who the heck is buying a Porsche in the midst of a recession?

Well, maybe I do know who… (Shout out to Reddit.com/r/WallStreetBets)

Another important note: Porsche was making it clear at this time that they were NOT attempting to take over Volkswagen.

Short Interest In Volkswagen: The Volkswagen Short Squeeze of 2008

As we got later into 2008, the short interest in Volkswagen had been healthily rising, you could say. But even by October of 2008, the short interest seemed not-too excessive. It stood at just 12.8% of outstanding shares being short.

BUT, here’s the thing…

The market failed to appreciate the true availability of tradeable shares to cover these short positions . It was substantially lower than nearly everyone understood. With this, index funds made up around 5% of Volkswagen share ownership due to VW’s big ol’ weighting in the DAX index. So all these index funds were required to hold Volkswagen in proportion to its weight in the DAX, of course.

The Short Squeeze Twist

SO, let’s take a look at all this juicy information.

We know now, heading into October of 2008:

Around 55% of VW shares were unavailable in the market for any actual purposes.

With that, when Porsche increased its stake, it meant that the true available float went down from 45% of outstanding shares to around just 1% of outstanding shares.

Now all of a sudden, the seemingly little short interest of 12.8% turned into an immediate, MASSIVE supply and demand imbalance. Millions of shares needed to be bought immediately even though there were no shares available to be sold.

The Urgency of The Short Squeeze Situation

To make sure short sellers understood the urgency of the sitch, Porsche dropped a statement to address the short position. They said that they had… “decided to make this announcement after it became clear that there are by far more short positions in the market than expected.” “The disclosure should give so called short sellers – meaning financial institutions which have betted or are still betting on a falling share price in Volkswagen – the opportunity to settle their relevant positions without rush and without facing major risks.” So… Problem solved, right? Wrong! The statement pretty much had the opposite of a disarming effect. And well… do you really think their goal was to calm everyone down?

It triggered a mass panic for exits by anyone who was short shares of Volkswagen.

But Wait, There’s More! To top it off, Porsche dropped this bombshell on a Sunday, when the markets were closed.

So you know, the message was erupting at a time when short sellers would have no ability to cover their positions until the market reopened the following day. Clever move by Porsche, eh? That coined the classic headline: Porsche: The Hedge Fund That Also Makes Cars

The Biggest Short Squeeze In History

Following the announcement by Porsche, that panic caused a short squeeze in Volkswagen shares. This massive short squeeze led the world to see the deeply troubled automaker briefly become the most valuable company in the world.

Supply and demand got wild. Porsche shined light on the panic in a very engineered way. And so, it caused the price of Volkswagen to go hyperbolic as short sellers needed to get the hell out of their positions, further driving the price of the stock up. This, of course, caused even more insane losses to short sellers that held out further, attempting to stay strong.

Porsche Won In The Volkswagen Short Squeeze of 2008

So in the middle of the worst financial crisis since the great depression, Volkswagen share price broke €1,005 (that’s equal to $1,258, for my american folks.)

Porsche won. Short Sellers lost. Bigtime.

As a result of these skillful financial moves, Porsche netted itself more than $10 billion in profit in a matter of just a few short weeks… (Pun intended on that one)

Porsche pretty desperately needed money at this time, so this move was more valuable than you know! On the flip side of this action, the hedge funds who had been playing the Volkswagen short game saw losses that exceeded $30 billion.

Apparently at this point, hedge fund managers were “literally in tears on the phone” as they described “a nuclear bomb going off in our faces.”

Volkswagen Short Squeeze of 2008 | TLDR;

Shorting a stock or a sector because it’s the “obvious” thing to do can and has historically made men and women cry on the phone and also lose fat stacks of money.

Also remember: shorting a stock has a capped profit but a roof-less potential for losses. So be careful playing the short game in the market, suckers.

Farewell To All

Well, thank you so much for reading about the Volkswagen short squeeze of 2008. There’s been a lot of $GME and $AMC short squeeze talk up in the investing world, so I figured I’d give you a relevant tale from the past.

Hopefully you enjoyed it and maybe even got some value out of it.

Be sure to watch the video form of this story! And stay tuned for more immersive economic tales to come! See you next time.