theSun | MONDAY NOVEMBER 3 2008
speak up!
Volkswagen and the
casino economy
ONE singular incident
in Germany’s stock
market last week
reinforces the belief that
increasingly, Europe
– like the United States
– has become a casino
economy. Wealth is
being created on both
sides of the Atlantic,
not through higher
economic output but MakingSens
through massive bets
in stock markets in by Tan Siok Choo
the guise of financial
engineering.
For a brief moment last
Tuesday, Volkswagen (VW)
became the most valuable
company in the world. Panic
buying by hedge funds to cover
their short selling of VW caused
the German car maker’s price to
skyrocket to €1,005 (RM4,543) a
share.
At this price, VW was valued
at €296 billion (RM1.3 trillion),
slightly higher than US oil giant
Exxon’s market capitalisation of
US$359 billion (RM1.3 trillion) and
more than that of all American and
European car makers combined.
VW ended last Tuesday at €945
(RM4,272) a share. The following
day, it tumbled by more than 45%
to close at €517 (RM2,337). Despite
the fall, Wednesday’s price was
more than double the previous
Friday’s close of €210 (RM949).
By any yardstick, this price
performance over four trading days required to disclose their holdings
was a remarkable roller coaster.
Short selling involves investors
– pessimistic about a company’s
outlook – selling shares that they
do not own in the expectation
of buying the shares before the
delivery date at a lower price and
pocketing the profit from the price
differential.
VW’s share price fiasco
spotlights three major issues. First,
it underscores the destructive
potential of financial engineering
activity. Financial engineering via
share options and short selling
helped boost the German auto
giant’s share price sky high,
a development
divorced from actual
reality.
Tuesday’s panic
buying in VW shares
was prompted by
iconic sports car
maker Porsche
announcing it had
acquired 31.5% of VW
through cash-settled
options; that is the
option would be
settled through cash
rather than cash.
Combined with
an existing stake of 42.6%, this
brought Porsche’s shareholding in
the German car maker to 74.1%.
And with Germany’s Lower
Saxony state accounting for
another 20.2% of equity, this left
VW with a free float of 5.7%. News
of a minuscule free float coupled
with knowledge that about nearly
13% of VW had been shorted meant
there was a scarcity of shares
available for trading; a realisation
that prompted short sellers to bid
up the German car maker’s share
price to stratospheric levels.
News reports suggest the
magnitude of losses by fund
managers who had short-sold VW
shares is estimated to be as high as
€30 billion (RM135.6 billion).
Additionally, share options have
another hidden, and potentially
lethal, potential. In countries like
Germany, investors aren’t legally
of share options. This enables an
investor to mount a takeover of a
company by stealth.
Second, VW’s hyperventilating
share price also calls into question
the utility of stock markets
in determining a company’s
valuation. That VW’s share price
last week was determined solely
by speculative activity rather than
corporate profits and earnings
outlook undermines the claim that
a listing status provides a superior
means of pricing a company’s
shares.
Third, frenzied buying of VW
shares last week calls into question
letters
letters@thesundaily.com
Why we should
switch to fibre optics
the appropriate role of stock
markets in an economy.
As John Horvath notes in an
article titled Casino Economy,
nowadays stock markets have
become nothing more than
glamorised betting shops that
are increasingly divorced
from economic realities. Well-
established companies have been
led to ruin, not because their
products or services were bad, but
because of speculative movements
of their share prices.
Doug Henwood, editor of
Left Business Observer, notes the
marginal role of stock markets in
financing corporate activity. Since
1952, corporations have funded
95% of their cost of expansions
internally, primarily through
retained earnings. And because
companies are increasingly
controlled by stockholders and
managers, the bulk of corporate
profits tend to be spent on
dividends.
In his indictment on stock
markets, Henwood wrote
“throughout the late 1980s and
early 1990s, the stock market
rewarded firms announcing
write-offs and mass firings – a
bulimic strategy of management
– since the cost cutting was seen
as contributing rather quickly to
profits. Firms and economies can’t
get richer by starving themselves,
but stockmarket investors can get
richer when companies they own
go hungry – at least in the short
term,” he says.
Wall Street has been described
by a cynic as a street with a
river at one end and a graveyard
at the other. Unfortunately, as
VW’s experience shows, the
phenomenon of Wall Street has
been replicated across the Atlantic
and further afield.
Opinions expressed in this article
are the personal views of the writer
and should not be attributed to any
organisation she is connected with.
She can be contacted at schoo@
noordinsopiee.com
IT’S FRUSTRATING for
computer users to deal with slow
broadband connections during
peak hours. This happens on
weekdays, weekends and even
public holidays.
While fibre-optic
systems are revolutionising
telecommunications worldwide
we are still stuck with the
conventional copper wire.
Granted the main
disadvantage of fibre optics is
that the cables are expensive to
install and are more fragile than
wire and difficult to splice, the
advantages outweigh everything
else.
Switching to fibre optics has
its advantages.
The cables have a much
greater bandwidth which means
more data can be carried with
buffering reduced considerably.
The cables are lighter than
metal ones, are less susceptible
to interference and take up less
space in the ground.
Data can be transmitted
digitally (the natural form for
computer data) rather than
analogically.
Optical cables are cheaper
than copper wires.
Because optical fibres are
thinner than copper wires,
more fibres can be bundled
into a given-diameter of cable
compared to copper wire.
This allows more phone lines
to go over the same cable or
more channels to come through
One small step ...
I WENT to the Seksualiti
Merdeka event at The Annexe in
August and left with a sense of
warmth and encouragement.
It was inspiring to know
that there still are humane
Malaysians: those fighting
for basic rights, those who do
not demonise or criminalise
others with a different sexual
orientation, those who still have
compassion towards individuals
different from themselves, and
those who have the courage to
be what they really are. There
was a sense of liberation, a
sense that there might be a bit
of development and love in this
19
it. The loss of signal in optical
fibre is less than in copper wire.
Unlike electrical signals in
copper wires, light signals from
one fibre do not interfere with
those of other fibres in the same
cable.
This means clearer phone
conversations or TV reception.
Because signals in optical
fibres degrade less, lower-power
transmitters can be used instead
of the high-voltage electrical
transmitters needed for copper
wires. This saves both provider
and user money.
Because of these advantages,
you see fibre optics in many
industries, most notably
telecommunications and
computer networks. For
example, if you telephone
someone in Europe from the
United States (or vice versa)
and the signal is bounced off a
communications satellite, you
often hear an echo on the line.
But with transatlantic fibre-
optic cables, you have a direct
connection with no echoes.
Fibre optics is a particularly
popular technology for local area
networks. Telephone companies
elsewhere are steadily replacing
traditional phone lines with
fibre-optic cables.
In the future, almost all
communications will employ
fibre optics.
Noel F. D’Oliveiro
Ipoh
beloved little country after all.
Thank you for publishing
“Me, my body, my mind” (Oct
30). It meant progress to me.
Ah Kit
Via email
THANKS for covering Seksualiti
Merdeka so fairly. The nation
needs to learn to value people for
their contributions and abilities
objectively and leave people’s
private lives alone... sexism is
equally serious as racism.
SM Phang
Via email