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The World From Berlin

VW Stock Price Anomaly 'Must Not Be Allowed'

Volkswagen stocks have gyrated wildly since Monday, taking the German DAX index for a once-in-a-lifetime ride. Commentators are now asking who's to blame -- and how such instability can be avoided in future.

Automotive companies around the world are temporarily shutting production, or else operating at huge losses. But on Tuesday, Germany's Volkswagen became the most valuable company on earth. A single share cost over €1,000 euros -- making VW by one measure bigger than General Motors, bigger than oil giant Exxon Mobil, bigger than all of Europe and America's other car makers combined.

The shares shot up after Porsche's surprise announcement Sunday that it had indirect control of 74.1 percent of VW. The federal state of Lower Saxony holds 20.2 percent of the company, meaning that suddenly a mere 5.7 percent of VW stock was left on the market. This caused a crisis for short sellers, speculators who bet on a decline in stock value. They scrambled to buy up the few remaining shares and cover their bets.

The stock value soared 146 percent on Monday, closing at €520, then doubled again Tuesday, briefly topping €1000. Germany's blue-chip stock index, the DAX, went along for the ride. VW's ballooning market capitalization -- which gave it a larger value than Exxon Mobil -- also gave it an astonishing 27 percent of the DAX's overall value. To minimize its effect on the rest of the market, stock exchange operator Deutsche Börse acted on Tuesday and lowered VW's index weight to 10 percent.

On Wednesday the stock plummeted by almost 50 percent when Porsche announced it would cancel some options. But hedge funds are still looking at enormous losses and have taken their complaints to the German regulator, BaFIN.

Porsche rejects all claims of wrongdoing or stealth. A spokesman said: "It's the funds themselves that are responsible, with their huge bets of a fall in VW shares which never happened."

Many commentators call the situation "absurd." Some blame the hedge funds and demand a ban on short selling, while others blame Porsche for using sneak tactics.

Regulators aside, the fact that a single company's stock can exert such an outsized influence on the DAX has posed some existential questions in Germany. Most commentators agree the Deutsche Börse needs to respond faster to this sort of wild situation.

The conservative daily Die Welt writes:

"Such perversions must not be allowed. The German stock market must change its index rules as soon as possible, so that one single price does not have such influence on the DAX. And laws governing takeovers must ensure more transparency. When it becomes impossible for companies like Porsche to gain clandestine access to such a large equity stake, investors won't have the rug pulled from under them in this fashion. Speed is necessary. Trust in the German financial center is at stake."

The center-right Frankfurter Allgemeine Zeitung writes:

"The German stock exchange would be well-advised to change its rules to protect its leading index from such absurd situations in future. At the moment, (the DAX) is leading investors astray. The weight of any single price should be limited to 10 percent, permanently. Right now there are only four deadlines (for determining index weights) per year. The next deadline will be in December. Between now and then, DAX weights will enjoy free play. On Tuesday, VW determined 30 percent of the DAX. Such weight for one security will hardly recommend the market to private investors and their portfolios. The DAX -- and with it the whole market -- should spare itself such a concentration of risk."

The Financial Times Deutschland writes:

"When the stock of a single company can hustle the index and its derivatives up and down as VW shares do at the moment ... it creates a systematic risk and endangers Germany's status as a center of investment."

"What's even more irresponsible is that the German stock exchange is obstinately barricading itself behind its own rules. The composition and weight of an important stock exchange should certainly be based on clear and transparent factors. But it would be wrong to stubbornly keep to a rule which (distorts the index) seemingly ad absurdum -- a rule which has already led US investment bank Goldman Sachs to recalculate the DAX without taking VW into account."

"One small but effective adjustment would be a more flexible formula for weighting the DAX. Under current rules the exchange can only cap the importance of absurdly over-weighted securities at 10 percent on four dates per year. In exceptional cases like Porsche, this should be an immediate option."

The left-leaning daily Die Tageszeitung writes:

"Unlike other speculation bubbles, driven by masses of small traders playing the stock market casino, the chaotic VW ride was caused by professional gamblers. Hedge funds -- more than any other group -- may have lost billions in the last few days by short selling VW. It's hard to muster sympathy."

"Support for more restrictive rules for hedge funds, a ban on speculative short selling and more transparency in the financial markets has now gained new relevance. Without such changes the stock market will remain a casino -- and a casino where not all rules apply to all players."

The center-left Süddeutsche Zeitung writes:

"Hedge funds were burned by betting on a drop in VW prices, and speculative investors are also often blamed when financial stocks nosedive. From this observation it's easy to conclude that hedge funds should be banned. That would be a mistake, and it would not address the real problem."

"How little a ban on short selling would achieve is demonstrated by the last few weeks. Bank stocks are protected from short selling in many countries, but have nevertheless fallen dramatically. A general ban on short sales to profit from falling stock values might have prevented the panicked buying that pushed VW up so high. But the problem lies elsewhere. Porsche used a secretive, sneaky strategy to limit the number of freely available VW stocks. News of their coup inevitably drove prices up. One can ask the DAX if a company like VW, with less than 6 percent of free-floating stock, should even be included on the exchange."

"Hedge funds themselves, by the way, will learn their lesson from investors. Investors will no longer believe managers' promises as frivolously as they once did."

-- Rachel Nolan, 3 p.m. CET