Notes on the Volkswagen Scandal

GERMAN COMPANY VOLKSWAGEN HAS BECOME IN VERY SHORT TIME THE BIGGEST COMPANY IN THE WORLD (MAKING THE AMERICAN OIL GIANT EXXON-MOBIL SECOND IN THE LIST). IT HAPPENED AFTER 500% GROWTH OF VW ORDINARIES. ON FRIDAY OCTOBER 24 MARKET PRICE OF VW ORDINARY SHARE WAS EUR 211, BUT AT THE END OF THE TUESDAY OCTOBER 28 TRADING SESSION IT REACHED EUR 1005. THIS SKYROCKETING GROWTH OF VW SHARES WAS NOT CAUSED BY FINANCIAL INDICATORS OF THE CAR PRODUCING CONCERN. IT WAS CAUSED BY SPECULATIVE STOCK-EXCHANGE EVENTS TRIGGERED BY DECLARATION OF PORSCHE OWNERS MADE PUBLIC ON SATURDAY. PORSCHE DECLARED INTENTION TO RAISE THEIR SHARE IN VOLKSWAGEN NOT TO 50% AS IT WAS PREVIOUSLY PLANNED BUT TO 75%. THE INVESTORS WERE MOSTLY SHOCKED BY NEWS THAT PORSCHE, WHOSE BLOCK OF SHARES OF VOLKSWAGEN WAS 42,6%, HAD ALREADY BOUGHT OPTIONS ON 31,5% OF VW ORDINARY

SHARES. THIS "BOMB" HAS BLOWN UP THE FRANKFURT STOCK-EXCHANGE AND CAUSED PANIC AMONG THE SPECULATORS. ACCORDING TO THE LAW, 20% OF VOLKSWAGEN SHARES BELONG TO THE N. SACSONIA STATE WHICH HOSTS THE HEADQUARTERS OF VOLKSWAGEN.

SUMMING UP THIS 20% SHARE WITH THE BLOCK OF SHARES AND OPTIONS IN THE PORTFOLIO OF PORSCHE LEADS TO CONCLUSION THAT ONLY AROUND 6% OF VOTING SHARES OF VW REMAINED IN FREE CIRCULATION. ARTIFICIAL SHORTAGE OF THESE SECURITIES (USUALLY CHARACTERISED AS HIGH LIQUIDITY SECURITIES) HAS CAUSED IMMENSE DEMAND ON THEM.

ONE MORE DRAMATIC FACTOR, A NUMBER OF SPECULATORS WHO FORECASTED CHEAPENING OF VOLKSWAGEN SHARES HAD OPENED SHORT POSITIONS. SO AFTER THE DECLARATION BY PORSCHE NOT ONLY THE PRICE OF VW ORDINARIES JUMPED BUT ALSO THESE SPECULATORS HAD TO BUY THE SHARES AT ANY PRICE.

AS A RESULT, ON MONDAY THE PRICE OF VOLKSWAGEN SHARES TRIPLED AND THEN BROKE THROUGH EUR 1000 LEVEL. IT HAS LEAD TO distortion of the German stock exchange index DAX based on capitalisation of 30 biggest German companies. On OCTOBER 27 DAX GREW BY 0,9% WHILE SHARES OF 28 COMPANIES WENT SIGNIFICANTLY DOWN. WITHOUT COUNTING THE "VW EFFECT", THE DAX SHOULD CLOSE WITH MINUS 9%. ON OCTOBER 28 DAX HAS GROWN EVEN MORE, NAMELY BY 11,3% AND REACHED 4823,45 LEVEL DESPITE THE FACT THAT MAJORITY OF STOCKS FINISHED THE SESSION IN MINUS.

THIS DISTORTION OF THE MAJOR INDEX HAS HIT INTERESTS OF THE MAJORITY OF PARTICIPANTS OF THE FINANCIAL MARKET. THEY DEMANDED THAT THE COMPANY DEUTSCHE BOERSE, WHICH IS THE OWNER OF THE FRANKFURT STOCK-EXCHANGE, SHOULD EXCLUDE VOLKSWAGEN ORDINARIES FROM DAX OR TO STOP TRADING THEM. THE COMPANY REFUSED TO INTERVENE AND THE ABSURD GROWTH OF VW SHARES WENT ON UP TO EUR1005. BROKERS AND EXPERTS HAVE ACCUSED THE MANAGEMENT OF THE STOCK-EXCHANGE IN IRRESPONSIBILITY. THEY CLAIMED "EVENTS AROUND VW SHARES DISCREDIT THE FINANCIAL MARKET AS CENTRAL ELEMENT OF HIGHLY  DEVELOPED MARKET ECONOMY ". WAVE OF INDIGNATION ROSE IN THE WHOLE EUROPE.

THIS PRESSURE PROVED EFFECTIVE. ON WEDNESDAY DEUTSCHE BOERSE CUT THE SHARE OF VOLKSWAGEN ORDINARIES IN DAX TO 10%. LATER ON VW ORDINARY SHARES WERE TRANSFORMED INTO PREFERRED SHARES. PREFERRED SHARES ARE NOT REPRESENTED IN DAX.

http://www.telegraph.co.uk/finance/newsbysector/transport/3277894/Volkswagen-shares-plunge-after-Porsche-offers-to-sell-shares.html Questions for students (10 points total in 45 minutes): 1. WHY DID THE DECLARATION BY PORSCHE RESULT IN SKYROCKETING GROWTH OF VW ORDINARY SHARES? (1 POINT) 2. DRAW A PIE-TYPE CHART OF THE OWNERSHIP STRUCTURE OF VW ORDINARY SHARES BEFORE THE SATURDAY DECLARATION BY PORSCHE. (1 POINT) 3. EXPLAIN THE PHRASE «PORSCHE HAD BOUGHT OPTIONS ON 31,5% OF VW ORDINARY SHARES» ? (1 POINT) 4. DRAW A SIMPLEST CHART AND MAKE CALCULATIONS DEMONSTRATING THE SITUATION OF A SPECULATOR WHO PREVIOUSLY OPENED SHORT POSITION ON VW ORDINARY SHARES AND THEN GOT TO KNOW THE DECLARATION BY PORSCHE . WHAT IS THE ROLE OF THE SIZE OF DEPOSIT OF THIS SPECULATOR? (3 POINTS)

5. WHAT IS CAPITALISATION? (1 POINT) 6. WHY DISTORTION OF THE DAX HAS HAPPENED? (1 POINT) 7. EXPLAIN THE MEANING OF “ DEUTSCHE BOERSE HAD CUT THE SHARE OF VOLKSWAGEN ORDINARIES IN DAX TO 10%” (1 POINT)..

8. LIST THE DIFFERENCES BETWEEN PREFERRED SHARES AND ORDINARY SHARES (1 POINT).

Vendelin Videking – the face of Porsche