THE DAY VOLKSWAGEN BECAME MORE VALUABLE THAN ALMOST EVERY COMPANY ON EARTH
Volkswagen was worth about $110 billion on Friday. Four days later, the market briefly valued it at more than $370 billion.
Nothing fundamental about the car company had changed that quickly.
No new factories had opened.
No revolutionary car had been unveiled.
No one had discovered that Volkswagen had secretly found an enormous oil field.
Instead, something much stranger happened:
There weren't enough Volkswagen shares available for investors who desperately needed to buy them.
IT STARTED WITH A BET THAT VOLKSWAGEN WOULD FALL
In October 2008, the global financial crisis was crushing financial markets.
Automakers were particularly vulnerable.
Investors expected car sales and profits to deteriorate, so some hedge funds and other traders took short positions in Volkswagen.
The idea was simple:
Borrow Volkswagen shares → sell them → wait for the price to fall → buy them back cheaper → return the shares → keep the difference.
It works when the stock falls.
But there is a dangerous part.
If the stock rises instead, short sellers eventually have to buy shares back to close their positions.
And that can create a vicious cycle.
Price rises → short sellers buy → price rises further → more short sellers panic → even more buying.
That's a short squeeze.
THEN PORSCHE REVEALED SOMETHING THE MARKET HADN'T FULLY PRICED IN
On October 26, 2008, Porsche announced that it had built a much larger economic position in Volkswagen than the market had realized.
Porsche directly held 42.6% of Volkswagen's ordinary shares.
But it also held cash-settled options representing another 31.5%.
Together, Porsche said this gave it economic control over 74.1% of Volkswagen.
There was another huge shareholder:
The German state of Lower Saxony.
It held roughly 20%.
That left only a very small portion of Volkswagen shares actually available to trade freely.
The market suddenly discovered that the supply of shares was much smaller than many short sellers had assumed.
THEN THE BUYING STARTED
On October 27, Volkswagen shares exploded upward.
The stock closed at €520, up roughly 147% that day after trading even higher intraday. Its market capitalization rose above €150 billion.
For investors who had shorted the stock, this was disastrous.
They needed Volkswagen shares to close their positions.
But there weren't many shares available.
So they competed with each other to buy them.
And when everyone needs to buy at the same time:
Demand explodes.
THEN VOLKSWAGEN DID SOMETHING ALMOST UNBELIEVABLE
The next day was even stranger.
On October 28, Volkswagen shares briefly crossed:
€1,000 per share.
At an intraday high of about €1,005, Volkswagen's ordinary shares implied a market capitalization of roughly €296 billion, or about $370 billion.
For a brief period, Volkswagen was the world's most valuable publicly listed company by market capitalization, overtaking ExxonMobil.
Think about that.
The world's financial system was in the middle of one of its worst crises in decades.
Automobile companies were facing collapsing demand.
And suddenly:
Volkswagen was worth more on the stock market than ExxonMobil.
BUT VOLKSWAGEN DIDN'T REALLY BECOME A $370 BILLION BUSINESS
This is the part people often miss.
Market capitalization is:
Share price × shares outstanding
If the price of one share suddenly multiplies, the theoretical value of every outstanding share rises with it.
But that doesn't mean someone actually paid $370 billion to buy the entire company.
Only a relatively small number of shares were changing hands at those extreme prices.
The market was effectively saying:
"The next available Volkswagen share costs this much."
That price was then applied mathematically to all outstanding shares.
So Volkswagen's quoted market value could explode even though the amount of actual money changing hands was far smaller.
THE FREE FLOAT WAS THE REAL PROBLEM
This is what made the squeeze so violent.
Porsche had 42.6%.
Lower Saxony had roughly 20%.
Porsche also had options representing another 31.5%.
The amount of Volkswagen stock genuinely available to ordinary market trading was therefore tiny.
Research into the episode has estimated that the effective free float was only around 5–6%.
Meanwhile, short positions represented a much larger amount of stock.
That created an almost impossible situation:
More shares had effectively been promised to short sellers than were easily available to buy.
SHORT SELLING SUDDENLY BECAME A TRAP
Imagine there are only 6 shares freely available.
But investors need to buy 10 shares to close their short positions.
What happens?
They have to compete for the available six.
As the price rises, other short sellers become even more desperate.
So they buy.
That pushes the price higher.
Which forces more short sellers to buy.
Which pushes the price even higher.
The market can become self-reinforcing.
Short selling → price rises → forced buying → more price rises → more forced buying
That was the Volkswagen squeeze.
SOME INVESTORS LOST BILLIONS
The consequences were enormous.
Academic research into the episode estimates that investors caught in Volkswagen short positions suffered losses of more than €20 billion.
The same research argues that the squeeze generated at least €6 billion in profit for Porsche and played an important role in Porsche's financial situation at the time.
One of the most dramatic casualties was German investor Adolf Merckle, whose investment group had taken a large short position in Volkswagen.
The Volkswagen trade became one of the factors contributing to the financial crisis surrounding his business empire.
THEN THE PRICE COLLAPSED AGAIN
The extraordinary valuation couldn't last.
After Volkswagen had briefly crossed €1,000, Porsche announced that it would make up to 5% of Volkswagen's stock available to help calm the market and increase liquidity.
The effect was immediate.
Volkswagen shares fell sharply.
The stock had reached an intraday valuation of roughly €296 billion.
Soon afterward, that valuation had fallen dramatically.
The company hadn't suddenly lost hundreds of billions in factories, cars or cash.
The price of the shares had changed.
THIS IS WHY MARKET CAP CAN BE MISLEADING
Market capitalization is extremely useful.
But during a liquidity crisis, it can also produce bizarre-looking numbers.
A company's market cap doesn't mean:
"Someone has this much cash available to buy the company."
It means:
"The current market price of the shares multiplied by the number of shares outstanding."
Normally, that provides a useful approximation of what investors collectively value the equity at.
But when the number of shares actually available for trading becomes extremely small, prices can become extraordinarily sensitive to buying pressure.
Volkswagen became the perfect example.
THE STRANGEST PART
Volkswagen didn't become the world's most valuable company because investors suddenly decided that its cars were worth more than ExxonMobil's oil business.
It happened because:
Porsche controlled a huge economic position.
↓
Lower Saxony controlled another large block.
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The remaining free float was tiny.
↓
Large numbers of investors were short.
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Porsche's disclosure shocked the market.
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Short sellers desperately needed shares.
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The available shares became extremely expensive.
↓
Volkswagen briefly became the world's most valuable listed company.
MAACAT PERSPECTIVE
The Volkswagen squeeze is one of the clearest demonstrations that price and underlying business value are not always moving for the same reason.
A company can become hundreds of billions of dollars more valuable on paper without suddenly producing hundreds of billions of dollars more in economic value.
Sometimes the story isn't:
"Investors discovered the company was worth more."
Sometimes it's:
"Investors suddenly discovered there weren't enough shares."
And when too many people need to buy something that too few people are willing or able to sell, the price can behave in ways that look completely irrational.
For a few hours in October 2008, that was Volkswagen.
The world's most valuable company — without becoming a fundamentally different company.
