It's also worth noting, though, that the fall-out of this cost Porsche dearly:
In its efforts to acquire a majority holding in Volkswagen AG, Porsche built up a large debt burden, aggravated by taxes due on very large paper profits from Volkswagen AG options. By July 2009, Porsche was faced with debts exceeding 10 billion euros. The supervisory board of Porsche finally agreed to a number of arrangements whereby the Qatar Investment Authority would inject a large amount of capital, and Porsche would be merged with Volkswagen Group. On 23 July 2009, Michael Macht was appointed CEO, to replace Wendelin Wiedeking, who is expected to receive a compensation package of 50 million euros.
Would you prefer a system where stupid decisions and bad risks are instead rewarded?
Free markets are about giving feedback like that. They aren't magical ways of making people never make bad decisions. And neither is your preferred $ECONOMIC_SYSTEM, whatever it may. If it's claiming to be one, it's lying.
The system is that stupid decisions and bad risks are rewarded, so long as the chickens don't come home to roost too early.
The "best" bets are bets that are on average loss-making but over the short to medium term seem to make a profit (if they weren't on average loss-making, yields would probably be too low). What you do is look until you seem to have a reliable money maker, lever up and bet big. If it all pans out - as it usually does - you pocket a big chunk of the profit. If it fails (which it will once every few years or decades), you get the government to bail you out, or at worst the company goes bust.
Heads you win (most of the time), tails you don't lose much. It's a money-making (or rather, money-diverting) ratchet.
The feedback mechanisms don't work properly, particularly in finance. Humans don't live long enough and don't defer compensation long enough for the averages to work out properly. When a large proportion of the economy is devoted to this stuff (20+% in some countries), it's almost certainly highly inefficient, but the market won't fix it because the market can't fix it: again, the feedback mechanisms aren't strong enough.
The people who made the stupid decisions were rewarded pretty well. Weideking still sits on a few hundred million euros. This seems to be the new "free market".
Why is are these debates run only on terms of envy and retribution? The company made a bad decision, and they were absolutely not rewarded, they lost big. Weideking was hugely influential, but his contract with the company was already agreed at that point. You could say it was reward for his negotiating skills and existing reputation. Misaligned incentives is the fault of the company who, as we said, suffered for it. If the next guy to hire him makes the same mistake, maybe they will lose too.
The company authorised Weideking to take the ultimately unsuccessful strategy of turning Porsche primarily into a stock trading fund investing in VW shares, yes, and paid off his contract as agreed when it failed and brought the company to its knees.
The problem is that oversight and accountability is too weak. As CEO he was authorised to take actions which should've set alarm bells ringing with others, without apparent limit, and his contract (much like many others; Fred Goodwin would be a prime UK example) was poorly drafted so as to provide him with limited personal accountability for failure. UBS 'rogue trader' Kweku Adoboli is currently in custody awaiting trial for inflicting a serious loss on his company; Wendling Weideking was paid off handsomely for far worse. Boards need to take their role of executive oversight more seriously.
And like his contract, oversight and accountability is the responsibility of the board/shareholders/owners. Not any of us. He didnt "get away with it". It is nothing like rogue trading whatsoever, let alone "far worse". One is ill-advised but sanctioned, one is unsanctioned (well, that's another argument) and illegal.
This has nothing to do with envy and retribution. It's about an economic system that pretends to be a free market but is increasingly skewed to giving a certain class of people guaranteed rewards no matter how they perform. Not a healthy thing for an economy.
It is not a question of economic system. I don't even know what that means. His employer signed a contract saying if he messed up he still gets paid, AND failed to be sufficiently critical of his risk taking. As a result, they suffered. The only thing it has to do with the economic system is the existence of private contracts. I may disagree with their hiring policy, but it's none of my business. Would you feel any better if the golden parachute was simply paid on top of his salary?
Stupid decisions and bad risks are frequently what provide the greatest rewards in the current system, at least in the short term. The mountains of cash investment banks where minting off of tranches is what fucked up the economy in the first place.
capitalism and freedom both arise from an egalitarian cultural mindset.
when people believe in the notion of a hierarchy, that some people are better, more deserving, more noble, or more worthy than others, neither capitalism nor freedom can exist for long.
when people believe that all men are equals, that we all have hopes and fears, needs and wants, strengths and weaknesses, authoritarian institutions of all forms will crumble.
Capitalism (in the purist laissez faire sense) functions just fine when people believe that capital is controlled by those who are more deserving (or better at managing it), even if the people controlling the capital happen to be a monarchical dynasty whose inherited land happened to sit on an oil well.
When people start to believe in others' needs and wants you get all the products of an egalitarian mindset allegedly incompatible with capitalism, like taxes and government borrowing.
capitalism "in the purist laissez faire sense" becomes meaningless - you can't have a market without some mechanism of enforcing private contracts and securing property.
believing in others' needs and wants only needs to oppressive governments IF those beliefs come from a place of condescension (i.e. that poor bastard is too dumb to take care of himself, we should try to run his life for him) rather than compassion and understanding (i.e. he doesn't save money because he sees no point in planning for a future he has little hope of enjoying, let's give him the support he needs to function better).
Capitalism without the presence of (a set of) freedoms is not really capitalism, no matter who calls it that.
Now mind, you don't need several of the freedoms people in the civilized world generally like to enjoy for capitalism to exist. Freedom of religion is largely irrelevant to capitalism (so far as the state religion doesn't become a dominate market force...). Basically all you need is some form of property rights, the right to enter and exit markets, and some subset of freedom of expression (basically the right to say "[Product] sucks.")
I don't know of a single jurisdiction that I would call a capitalism. Even the US has socialism mixed in. And for the record, I consider this to be a good thing.don't think I would want to live in a purely capitalist area. I
I've heard Hong Kong was or is a pure capitalist society, but I don't know enough about Hong Kong to evaluate that.
Just because you cannot construct a perfect circle in the real world does not mean that mathmeticians are guilty of a logical fallacy. I am suggesting that capitalism is something the world has never seen outside of approximations, and that anything more is likely impossible.
Unicorns don't exist either but that doesn't mean that you can go cry logical fallacy if somebody says a horse with a horn pasted to it's head isn't one.
Scotsmem of course do actually exist...
You don't seem to have read my comments for comprehension though, so it's not surprising that you're getting hung up here...
If (pure) capitalism has never existed then Marx/Engels would have never written Capitol nor come up with The Communist Manifesto. It was a direct response to what they saw as the failings of capitalism (as in the real thing happening in the world around them, not the concept of it).
To try and argue it is not "True Capitalism" is just BS, and lets you get out of justifying anything you say. "oh I only meant Pure Capitalism, so whatever you say doesn't apply to that" --- It is complete True Scotsman, regardless how much you don't like it.
Freedoms have very little to do with capitalism. It is about private ownership vs government ownership. The right/privilege of ownership doesn't have to apply to everyone either (and thus isn't really a 'freedom'), it can simply apply to a select few (non-government) and you are still practicing capitalism.
> You don't seem to have read my comments for comprehension though, so it's not surprising that you're getting hung up here...
Would you like me to also point out it's a rhetorical fallacy to attack the person making the argument rather than the the argument.
You seem to be under the delusion that I approve of capitalism. On the contrary, I think it is a steaming pile of shit. It's a damn good thing it doesn't seem to appear in a pure form.
As I said, not reading for comprehension. If you read my other comments my viewpoint should become adequately clear. When I say capitalism involves an assumption of rights I'm talking about rights that are only applied to the participant parties (like for example, slave owners). For example, without the right to enter and exit a market, what you have cannot be described as capitalism. Any economist will tell you that. These are rights that should never satisfy reasonable people, such as myself and clearly yourself.
It's not a true Scotsmen fallacy to have a tight definition. 'Capitalism' proper may very well be the thing of fairy tales, similar to Socialism proper. It's a philosophical concept, it need not be obtainable.
Having lived there for a couple of years, I'd say the problem in Singapore is a having a muzzled press. However, this is balanced by Singapore having relatively clean politicians.
Ummmmmmm, this is a terrible article. They failed to point out that Porsche went heavily in debt in order to finance this "hack", and ended up getting bailed out and bought by VW.
It's ridiculous to say that Porsche "hacked the financial system and made a killing" when they essentially bankrupted themselves by doing so.
The financial crisis killed this project for Porsche, but the background is very difficult. In financial terms this didn't matter.
The funny thing in this whole Story was Ferdinand Piech, he has full control over VW as head of the board and was against this buyout. He also owned half of Porsche, so he was then owner of VW, but was also against it because Wideking would have gotten more power.
Both companies are bound together since the war, this whole action was about power between some industrial families.
They gained money in the bottom line, and some idiots with no insight made a bet against them.
Before this action was the Share of Porsche Holding 32.2% and now it is 50.74%. Look at the market cap and say again this was a failure.
I'm curious, what happens if you can't return stock that you've borrowed in order to short it? either because of a situation like this or simply because you went bankrupt due to bad debts.
Wouldn't this be a common scenario given the very nature of the risk?
> I'm curious, what happens if you can't return stock that you've borrowed in order to short it?
It's similar to what happens when you can't pay your mortgage. If you are shorting you'll have to put up some margin( cash or cash equivalents representing some percentage of the dollar amount you shorted.)
if the short starts to move against you, you'll get a margin call and be required to put up more collateral.
Eventually if you can't pay you go bankrupt and your counterparty get's what they can in bankruptcy court.
Not surprisingly this is called counterparty risk and has become a big area of focus for risk managers recently.
If you're an individual retail investor, your broker won't let you leverage up that high and will likely require assets/cash as collateral against the margin account.
You pay money. A lot of it. And/or declare bankruptcy.
The "person" you borrowed the stock from may well lose out, but we're talking about huge institutional investors that lend stock thousands or millions of times a year, or even day, and the fees more than make up for the few losses they incur.
This is not fundamentally different than any other loan.
The attempt of Porsche to take over VW has gone into history as one of the best examples of financial over-confidence. Porsche was doing really good and decided to bite of more than they could chew, nearly went bust as a result and ended up being bought by the party they originally sought to acquire.
Wiedeking left with a 50 million golden parachute so I don't think he's complaining.
I'm not sure it's about being brilliant, it's about betting the house. G. Sorros bet his house and won, Porsche bet their house and lost. It's all about trying, failing and trying something else if it fails.
Very simple. Porsche financed their stock buying with loans, but then credit essentially disappeared for everybody in 2009 and so they couldn't keep it up. 0x12 posted some good links earlier.
Same sort of reason why Ford did better than GM or Chrysler in America - Ford had secured lines of credit back in 2006 in either a fit of brilliance or luck, so when credit dried up in 2009 they could still borrow. The others couldn't get loans and had to take drastic action.
For those interested in this kind of story, and manipulation of markets in general, one of the best books I've read on the subject, published in 1923: Reminiscences of a Stock Operator
Pretty ridiculous to kill yourself over losing a round of really expensive poker. Especially considering Merckle could probably command a higher monthly budget for the rest of his live than I can. And my life is pretty nice no death wishes here. He should have probably have the news sink in a little to gain some perspective on it.
I couldn't pass your comment without saying my opinion. Recently, I read a book about Steve Jobs. The book said that before Apple, Steve had "no money", and that was his main motive to start a company. What I am trying to say is, Steve had a place to live, and money so he can eat and drink, and money for transport and all those basic expenses. Here in my country, no money means really having no money. Recently I passed thru terrible times, without having money to even buy myself some food. It has gotten to the extend that I had to borrow shoes from friends for job interviews , and I had to walk from one edge of the city to another by foot just to get to those interviews. What I am trying to say, "no money" has different meaning to everyone. Even if Merckle could afford life thousand times better than mine or yours, it probably was very hard for him to face that failure of his. Btw, I will be having a job interview in one of construction companies this week, and one interview at US embassy. Hope this will work out for me :)
<br> I tried several web startups here, and it didn't work out well, since internet is highly regulated here, and most people think that internet=IM. My parents haven't even seen a homepage of google. My mom thinks that internet is some company that magically gives you information about anything. For now, starting a web startup is mission impossible here. You can check out www.verihasap.com, or www.tolkunfm.com to see what kind of startups I'am talking about.
Don't give up hope buddy: have you tried making a few iphone or android apps? Your english is perfect so i assume you could make apps for the english speaking market, it really could change your life.
Hi, thank you for advice! The problem with android apps and any other kind of online business is that we don't have proper banking system here. So it's very hard to receive money. We tried to establish a local system similar to paypall here, but couldn't convince the govt in legitimacy of the service. Business people here are considered those, who go to nearby countries, buy some stuff, come back and sell it for a greater price, benefiting from the difference. Anything more complex than that is considered dangerous/meaningless. Words like stock and investment are associated with fraud and lottery. So working for one international company here might be the right choice for now.
This guy assumed responsibility at least. The Wall Street guys in 2008 demanded retention bonuses instead. I don't propose suicide but I would like to see CEOs being a bit more shocked when their actions turn out to be a total disaster. I think it would be better for the country.
Suicide and mental deceases that cause it aren't very rational. Plus he might have had many personal/personality problems and the whole loss thing was just something that was the last drop.
I concur with this. I've had a lot of history of serious depression, and when people say "just don't commit suicide, duh" it shows a misunderstanding of the motives. There's always something going wrong in one's life, but I would say it's only the tip of the iceberg when someone commits suicide.
There have been a lot of interviews with people who committed suicide (and failed). Most of them said they did not plan it and it was a last minute decision.
Don't want to argue the logic of suicide too much, but isn't that a self-selecting audience of people that didn't plan well, and hence "failed"? There are plenty of people that take their own life that spend quite a lot of time thinking about it, and planning.
Merckle was quite depressed at the time of his death. I don't think his death had anything to do with want for money, he lived quite modestly and didn't exactly lose everything.
Nice example about how lack of information leads to volatility in markets. If you are looking for prescriptions to fix our financial markets, increasing transparency of trading would do wonders to eliminate speculation and refocus investors on value.
I'm not sure what precisely you mean by "transparency of trading". One of the common goals of trading is minimize the revelation of information about your intentions that other traders can exploit against you. Trading is like warfare--being transparent is not a strength.
Additionally, you can't just make one law that tells people to "be transparent." The enacted laws have to be specific in order to be meaningful. Because they are specific, people will find ways around them and continue playing the game.
Trading of securities is a regulated market. The rules about what information is available to the market are a combination of tradition and regulation. But they are man-made and arbitrary. I argue that the current fashions in regulation starve the markets of information and contribute to crises.
I'll give you just one example. Large traders attempt to conceal their identity. This leads to a lot of gamesmanship, as you point out. If this information were released with every order placed then I would argue a lot of volume would dry up and volatility would decrease.
If you spend all your time building something no one wants, the world overall is poorer than if you build something amazing and people pay high prices for it.
Right -- all that money goes to pay people's salaries and materials, but the opportunity cost of building something useful is what is lost. That's the answer to the broken window fallacy, Keynesian ditch-filling (at least as a long-term solution; it is possible it makes sense to smooth out demand, but real public works projects are still better even then), etc.
So malinvestment is a good point but money does not disappear. For malinvestment to happen someone has to make good investment... Therefore the money does not disappear it goes to the person with better investments... Let me put it this way money transfers ( what i meant by it hides in someones pocket)
Coming back to your house... When you commissioned the house you paid for materials, salaries etc... therefore transfer of money.... Next when u bought the land u invested in a certain property for a certain value, the value was destroyed (due to whatever reason tsunami etc) so you lost money but the person who sold it to you gained (aka transfer of money)
Now if you talk about which building is worth building thats a whole new debate... Sorry I didn't explain it before... I was just talking about how banks usually have pretty good ways to make money... They invest in competitors cause no matter who wins... They get the interest...
This was hilarious, I was working for a company that supplied software to hedge funds at the the time. I was laughing my ass off that the hedge fund guys got taken so badly by a bunch of car makers. Looks like German financial engineering is as highly regarded as German automotive engineering.
I doubt they are merely "a bunch of car makers", I assume Porsche, with lots of money, hires lots of smart financial experts to do deals like this. You can throw money at a problem and be a money expert.
I am very surprised this was legal. Aren't there disclosure requirements? Certainly in the US if you acquire a stake of more than 5 or 10% you have to declare it.
"How Porsche hacked the financial system and MADE A KILLING"
"Betting the wrong way, Adolf Merckle TOOK HIS LIFE."
I'm all for dark humor, but isn't it a little sketchy to joke about suicide in your headline? (I'm guessing the headline was intentional, but who knows).
I think the line for me would probably be between reality and fictional circumstances. In this circumstance, a real person actually took their life, which (at least to me) is not really a joking matter. On the other hand, if there were some joke about a fictional character involving suicide, I probably would not be (greatly) disturbed. I understand that not everybody would have this reaction, but I have known people who tried to commit suicide so it is a bit different for me I guess.
In its efforts to acquire a majority holding in Volkswagen AG, Porsche built up a large debt burden, aggravated by taxes due on very large paper profits from Volkswagen AG options. By July 2009, Porsche was faced with debts exceeding 10 billion euros. The supervisory board of Porsche finally agreed to a number of arrangements whereby the Qatar Investment Authority would inject a large amount of capital, and Porsche would be merged with Volkswagen Group. On 23 July 2009, Michael Macht was appointed CEO, to replace Wendelin Wiedeking, who is expected to receive a compensation package of 50 million euros.
http://en.wikipedia.org/wiki/Porsche#Corporate_restructuring