The biggest short squeeze in history occurred with Volkswagen stock in 2008.
Understanding the Volkswagen Short Squeeze of 2008
The Volkswagen short squeeze of 2008 is widely recognized as the most significant in financial history due to its unprecedented scale and impact on the global markets. It demonstrated how unexpected corporate actions could trigger extreme volatility and massive losses for short-sellers.
Key Aspects of the Volkswagen Short Squeeze:
- Timing: The short squeeze unfolded dramatically in October 2008, a period when global financial markets were already in turmoil due to the burgeoning financial crisis.
- The Setup: Volkswagen's prospects appeared bleak to many investors, leading a significant number of hedge funds and institutional investors to short the stock. This meant they borrowed Volkswagen shares to sell them, betting that the price would fall, allowing them to buy them back cheaper later and profit from the difference. As a result, the short interest in Volkswagen stock was extraordinarily high.
- The Catalyst: The unexpected turn of events came when Porsche SE, which had been quietly accumulating Volkswagen shares and options for years, suddenly announced that it had increased its direct stake in Volkswagen to 42.6% and held options that would allow it to control 31.5% more. This effectively gave Porsche a controlling stake of nearly 75% in Volkswagen. This revelation meant that the available "free float" of Volkswagen shares on the market was far less than what short sellers had estimated.
- The Squeeze: With Porsche controlling such a large percentage, very few shares were left for short sellers to buy back and cover their positions. This created a massive supply-demand imbalance. Short sellers, desperate to close their positions to avoid even greater losses, frantically bid up the price of the remaining available shares.
- The Impact: Volkswagen's stock price skyrocketed. In just two days, from October 27 to October 28, 2008, Volkswagen briefly became the most valuable company in the world by market capitalization, surpassing ExxonMobil. Its share price surged from around €200 to over €1,000, reaching a peak of over €1,005 per share.
- Consequences: The squeeze led to immense losses for hedge funds and other short-sellers, with estimates ranging into the tens of billions of dollars. Some funds faced collapse due to their overextended short positions. The event underscored the significant risks associated with short selling, especially when a company's ownership structure is opaque or subject to sudden changes.
The Volkswagen short squeeze serves as a stark reminder of the potential for market manipulation and the rapid, unpredictable shifts that can occur in heavily shorted stocks when unexpected news or corporate actions emerge. It also highlights the intricate relationship between corporate control, share float, and market dynamics.
For more information on short squeezes and other market phenomena, you can explore resources like Investopedia.
