Volkswagen Stock Surges: Investigation Likely

One Oct 28, 2008, Bloomberg reported that "Germany's financial-markets regulator are looking into trading of Volkswagen AG shares after Porsche SE's plan to raise its stake in the automaker triggered a fourfold increase in two days."

BaFin, the federal institution that supervises Germans banks, financial services institutions and insurance companies, "is monitoring Volkswagen and hasn't started a formal probe, said spokeswoman Anja Engelland. The gains follow Porsche's Oct. 26 announcement that it plans to increase the stake in Volkswagen to 75 percent. The move forced short-sellers to cover their bets on a decline in the stock."

"Volkswagen, Europe's biggest carmaker, is the most shorted stock in Germany's benchmark DAX Index. The so-called short squeeze today pushed the value of Wolfsburg, Germany-based Volkswagen's common shares as high as 296 billion euros ($370 billion), more than Exxon Mobil Corp.'s $343 billion at yesterday's close in New York, according to data compiled by Bloomberg."

Short selling is the practice of selling shares that you don't own, usually at the current market price, and then buying them back at a future date, at a lower price, to make a profit. Windfall profits can be made if the stock price plummets. But if the stock price rises, the short seller starts losing money. And in this case, it appears that Porshe's additional stake in Vokswagen caused the stock price to quadruple, making it hard for the short selling to "cover" the position and close the contract.

"The regulator needs to investigate," said Piers Hillier, head of European equities at WestLB Mellon Asset Management U.K. Ltd. in London. "The bigger question has to be why they have not done so already. If ever there was an example of market manipulation, this is it. Porsche's stake-building process is at best obscure."

This is only the tip of the iceberg. You can be assured that there will formal inquiries into this matter. It seems that the U.S financial system is the only one that needs to be monitored.

Stay tuned! You'll be hearing a lot about this in the future.