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🕑 Added 2025-01-29 03:30:02 +0000 UTCHyun-joo adjusted her glasses and spoke.
“I know, but many companies have suffered because of Big One.”
I had been spreading the word about this fact months before the Big One incident. However, very few believed me.
Except for Golden Gate, all IBs incurred losses, and hedge funds also faced significant setbacks. Thanks to this, we made over $10 billion.
“They’re aggressively trying to recover their losses, no matter what.”
Short selling is a trading technique where you sell stocks you don’t own and buy them back later to repay. We also short-sold Samsung Electronics during the L6 incident.
Short selling provides liquidity to the market, prevents overheating, and allows for hedging, among other positive functions.
Almost every country allows short selling, but the majority of individual investors are negative about it. Some even advocate for its abolition.
This is because there are many associated problems.
Short selling is an investment method used when one predicts that a stock price will fall.
Whether you short sell or not, stocks that are going to fall will drop. In this case, short selling helps rationally adjust the market.
The issue arises when stock prices fall excessively due to short selling, or when false information is spread to exaggerate a crisis and induce price drops.
Even this time, foreign brokerage firms are flooding the Korean market with negative reports.
Stock prices are often compared to a dog walking with its owner. Sometimes the dog will be ahead or behind, but ultimately, it moves with the owner. In this analogy, the owner represents the company’s actual value.
Even if short selling causes a stock price to drop excessively, it will eventually recover over time. However, during this process, individual investors with less capital and slower access to information suffer significant losses.
In fact, the biggest problem with short selling is the accessibility for individual investors.
In the U.S. and Japan, individual investors can short sell as long as they have a margin account. However, in Korea, the structure effectively makes it impossible for individual investors to engage in short selling.
Institutions and foreigners dominate individuals in terms of capital, information, and transaction fees, allowing them to utilize short selling. In contrast, individuals can only respond with buying and selling.
If OTK Company were not a foreign entity and did not have sufficient capital, we would have had to sit idly during the L6 incident as well.
“You’re seeing it; they’re flooding the market with short sales. The focus is primarily on Eunsung, and then on biotech and consumer goods.”
“Who are the leading forces?”
“Albert.”
I frowned.
“Those guys again?”
The formal name is Albert Management. They claim to be an activist fund and an investment management company, but in reality, they resemble a Vulture Fund. They target distressed companies for profit, akin to vultures tearing into carcasses, hence the name.
Their main activity involves acquiring failing businesses or distressed bonds at rock-bottom prices and reselling them at inflated prices. Up to this point, it falls within normal investment practices, so there’s nothing to criticize. However, they employ extraordinarily unconventional methods in this process.
A famous anecdote recounts how in 1996, they bought Peruvian government bonds and seized the private jet of an ex-president who had fled the country, netting five times their investment.
They also purchased Congolese bonds cheaply and reclaimed poverty aid funds the Congolese government received from the international community. During Argentina’s moratorium in 2002, they bought over $2 billion in government bonds for a pittance, then sued in U.S. courts, seizing an Argentine naval ship docked in a foreign port, employing every trick in the book to recover the principal and interest, achieving returns of up to 400%.
The international community condemned such speculative behavior, but Albert remained unfazed.
What’s the problem? It’s not illegal.
In fact, it was legal. It just seemed dirty.
“What is Albert’s asset size?”
“$40 billion.”
I was taken aback.
“When did it grow so much?”
“Since its establishment, the average annual return is 16%. Recently it’s been around 20%. At this rate, investors are bound to rush in with their money.”
Since they will do anything profitable, they have recently been meddling in corporate governance reforms.
Hyun-joo said while exhaling cigarette smoke, “It seems the Korean market has been looking decent lately. Its openness relative to the size of the financial market makes it easy to invest money, and even easier to pull it out.”
The Korean stock market has often been swayed by foreign capital. Even Samsung Electronics recently plummeted 5 percent in a single day due to a Merrill Lynch report expressing concerns about oversupply in the semiconductor sector.
Although it recovered within a few days, during that time, some faced losses while others saw profits.
“Has the target been set on Eunsung Motors this time?”
“Automobile stocks are sensitive to economic conditions. Especially now, faced with difficulties and even a recall situation, it makes sense for them to be a target. Something similar happened during the financial crisis. Can you think of anything regarding short-selling auto stocks?”
It immediately came to mind. “The Volkswagen short-selling incident?”
Ellie nodded, perhaps thinking the same thing. “It was an incredibly absurd event.”
Only Taek-gyu looked confused. “What’s that?”
“It happened during the financial crisis.”
Many incidents in finance often go unnoticed by the general public. However, this was a significant event that received ample news coverage at the time. I learned about it later since I was young back then.
2008 was a tough time for automakers. Cars represent the second-largest asset after homes. With the uncertainty brought by the financial crisis, no one wanted to buy a new car, leading to a plunge in automobile sales.
Car stocks fell sharply and were expected to drop further. As a result, hedge funds targeted automobile stocks and engaged heavily in short selling.
Volkswagen was no exception. At that time, Volkswagen’s stock price had skyrocketed from 200 euros to 400 euros in a short period due to a management dispute with Porsche.
It was clear that the stock price was overvalued compared to its actual worth.
Hedge funds would certainly not miss such a good opportunity. They simultaneously unleashed short positions against Volkswagen stocks.
In about a month, they sold 12 percent of the total shares through short selling, amassing over 10 billion euros in capital used.
“What happened after that?”
“The Volkswagen stock had halved.”
“Then didn’t the hedge funds win?”
“Everyone thought so.”
Now, they just need to buy the plummeting stocks, repay the short positions, and walk away with huge profits.
But…
“Suddenly, there was a problem.”
“What kind of problem?”
Hyun-joo said, “Porsche Holdings announced that it acquired 42.6% of Volkswagen’s shares. They also stated they would increase their stake to 50% by the end of the year and up to 74.1% by next year using call options.”
Ellie added, “20.1% of Volkswagen shares are owned by Lower Saxony, where the headquarters is located. That’s not something that will be available on the market.”
They both know the percentages exactly. People in finance love to talk like this.
I continued explaining, “Think about it. If Porsche secures 74.1% of Volkswagen shares and adds the 20.1% owned by Lower Saxony, that’s 94.2%. That means only 5.8% is circulating on the market. But the hedge funds shorted 12%.”
Taek-gyu blinked.
“So what happens then?”
“What happens is that, even if they buy all the circulating shares, a situation arises where short covering becomes impossible.”
They need to buy Volkswagen stocks and cover their short positions before Porsche increases its stake further.
After Porsche’s announcement, as soon as the market opened, hedge funds rushed to buy Volkswagen shares.
“Another problem has come up.”
Due to a sudden surge in stock prices, Volkswagen was included in the DAX30 index, which consists of major German companies. This prompted institutional investors to start buying in before the price rose further, with index funds and program trading joining in as well.
While the demand to buy was high, available shares were scarce.
Volkswagen’s stock skyrocketed by 150% in just one day, surpassing 500 euros, and the following day exceeded 1,000 euros. (The German stock market has no upper or lower limits.)
In just two days, the stock price more than quadrupled.
Market capitalization also more than quadrupled, allowing Volkswagen to leap over the then-unchallenged leader ExxonMobil to become the world’s largest company by market cap.
“Thinking about it, it’s astonishing. They didn’t develop a new product, nor did sales increase.”
Everything remained the same, but due to speculative activities, the market cap had risen fourfold.
Ultimately, when Porsche withdrew its acquisition plans, the situation calmed, but during that time, Porsche excitedly sold off its Volkswagen shares.
While other automakers struggled with declining net profits, Porsche’s net profit in 2008 increased by 50% compared to the previous year. Surely, they couldn’t have made such profits just from selling cars?
On the other hand, hedge funds that took short positions suffered astronomical losses and retreated. Among them, the fifth richest person in Germany, Adolf Merkel, committed suicide by throwing himself in front of a train.
At the time, both the government and individuals were frustrated with hedge funds’ short selling, leading to a mostly positive reaction.
“When hedge funds decide to attack, it’s hard for the market to withstand it. Regardless of everything, Golden Gate has done similar things many times.”
South Korea ranks among the world’s leading manufacturing powerhouses. Just attending CES, you’d see a plethora of Korean products. The excessive reliance on large corporations and an export-driven economy has caused various side effects, but thanks to the efforts of major firms like Samsung Electronics and Hyundai Motors, the country earns a substantial current account surplus each year and approaches the threshold of advanced nations.
However, unlike the industrious capital that excels globally, the performance of financial capital is dismal.
Hyun-joo sighed and said:
“In short, we’re making money through industry and being drained by finance.”
While it’s natural to earn dividends or capital gains from investments, not being able to properly respond to such speculative behaviors is problematic.
Ellie added a comment.
“Speculative capital has caused controversies in the Korean market more than once.”
During the IMF crisis, many domestic companies were sold off cheaply to foreign capital.
A well-known incident is the U.S. private equity fund Lone Star’s controversy with Korea Exchange Bank. Following that, the Canline Group similarly exploited HB Bank (the person who succeeded in this was RCK Brothers’ chairman, Ryu Cheol-gyun).
Tiger Fund embezzled 630 billion by competing for shares in SK Telecom, and subsequently, Sovereign attempted to seize management rights over the SK holding company, successfully embezzling another 900 billion (if this happens twice, shouldn’t we suspect the responsibility of the founder’s family and structural issues?).
Furthermore, Carl Icahn purchased shares in KT&G, interfering in management to embezzle 150 billion.
This is just the tip of the iceberg; listing all embezzlement cases would require several books.
In contrast, instances of Korean capital embezzling in foreign markets are extremely rare. One notable success story is OTK Company during Brexit, which embezzled in the UK and Japanese foreign exchange markets (although OTK Company is classified as U.S. capital).
“To speculative capital, Korea is an easy market,” said Taek-gyu, crossing his arms.
“It’s not like we’re a republic of embezzlement.”
Due to the big one, consumer sentiment has decreased, the economy has contracted, and export-heavy Korea has been hit hard. On top of this, hedge funds have poured out short sales, leading to stock market declines and rising exchange rates.
Fortunately, the company with the largest market capitalization, Samsung Electronics, has been holding its ground, but without it, the stock market’s decline would be even steeper. Even Samsung Electronics, considering the rising exchange rates, has effectively dropped by 20%.
Moreover, the culprit behind the crisis is the president, and with the change of government, neither the ruling nor opposition parties can respond effectively. Eunsung is also in disarray, facing issues with recalls and Chairman Han Min-goo’s retirement and management succession.
Knowing this, hedge funds are intentionally pulling such stunts.
The problem is that in the process, subcontractors and individual investors are suffering. As always, when those in high positions cause issues, it is the common people who bear the brunt.
By the time hedge funds withdraw after raking in huge profits, individual investors will have suffered significant losses, and component companies will likely have collapsed.
However, the government cannot directly regulate speculative capital either, due to issues like WTO or ISD (Investor-State Dispute Settlement).
In fact, in the case of Lone Star, they not only executed a “eating-and-running” scheme, but also claimed losses due to the Korean government’s delay in sale approval and filed a lawsuit for ISD. They intend to pocket compensation even after making profits.
These bastards…
In reality, the best way to deal with speculative capital is with more speculative capital. Just like Porsche issued false statements, not intending to protect anything, and blindsided the hedge funds.
After thinking for a moment, I said, "Is there a good way to screw these guys over?"
TL/n -
Elliott Management Corporation, a hedge fund founded by billionaire Paul Singer, and their operations as a "vulture fund."
Peruvian Bonds and the Seized Jet (1996) =>
Elliott Management bought distressed Peruvian government bonds for about $11 million. These bonds were heavily discounted as Peru faced economic turmoil. After Peru's government began recovering, Elliott demanded full repayment of the bonds' face value ($58 million), plus interest. When the government refused, Elliott sued in a U.S. court and won. They went as far as seizing a private jet owned by former Peruvian President Alberto Fujimori, forcing Peru to settle. Elliott reportedly made a 400% return.
Congolese Debt and Poverty Aid =>
Elliott also acquired distressed debt from the Republic of Congo at a massive discount. They then pursued repayment by targeting funds the Congolese government received as international aid to fight poverty. This sparked controversy, as critics accused Elliott of undermining aid efforts meant to help one of the world's poorest nations.
Argentina’s Debt and the Seized Naval Ship (2002) =>
During Argentina’s financial collapse in 2001–2002, the country defaulted on $100 billion of debt. Elliott Management bought Argentine bonds for pennies on the dollar and later sued the Argentine government in U.S. courts for full repayment. To enforce the court ruling, Elliott took dramatic measures, including seizing the Argentine naval training ship ARA Libertad in Ghana in 2012. This created a diplomatic standoff until the ship was released under a U.N. tribunal ruling. Elliott ultimately made up to a 400% return when Argentina settled the debt in 2016 for $2.4 billion.
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During the 1997 Asian Financial Crisis, South Korea faced a severe economic downturn and sought a bailout from the International Monetary Fund (IMF). As part of the bailout terms, South Korea had to open its markets to foreign investors, deregulate its financial sector, and sell off assets to raise capital. This created opportunities for foreign private equity firms to acquire struggling South Korean companies at bargain prices.
One of the most controversial cases involved the U.S. private equity fund Lone Star Funds and its purchase of Korea Exchange Bank (KEB).
The Acquisition (2003) =>
Lone Star acquired a controlling 51% stake in Korea Exchange Bank for approximately $1.2 billion when the bank was struggling with insolvency.
The deal was made possible because South Korea’s financial regulators, under pressure to stabilize the economy, encouraged foreign investment in distressed assets. However, many critics argued that the bank was undervalued during the sale and questioned the legitimacy of the valuation process.
Controversy Over Manipulation Allegations =>
Lone Star was accused of artificially driving down KEB’s value before purchasing it. South Korean prosecutors alleged that Lone Star colluded with bank executives and government officials to misrepresent KEB’s financial health, making it appear weaker than it actually was.
These accusations led to years of legal battles, regulatory scrutiny, and public backlash in South Korea.
The Sale (2012) =>
After years of ownership, Lone Star sold its stake in KEB to Hana Financial Group for $3.5 billion, reaping substantial profits (estimated at $4 billion, including dividends).
The sale reignited anger among South Koreans, as many believed Lone Star unfairly profited from the country's financial crisis.
Public and Political Backlash =>
The deal became a symbol of perceived exploitation by foreign capital during South Korea’s time of vulnerability. Critics accused Lone Star of acting as a “vulture fund,” profiting off the crisis while contributing little to the local economy.
Protests and lawsuits against Lone Star continued for years, with many South Koreans feeling the government had failed to protect national assets.
###
The incidents involving Tiger Fund and Sovereign Asset Management highlight controversial investment practices in South Korea's corporate world, particularly during and after the 1997 IMF crisis, when the country opened its markets to foreign investors. Here's a breakdown of the cases:
Tiger Fund and SK Telecom =>
Tiger Fund, a prominent U.S.-based hedge fund, is alleged to have exploited the South Korean financial market by aggressively acquiring shares in SK Telecom, South Korea's largest telecommunications company.
The fund reportedly manipulated the market by driving up share prices and then selling off its holdings for massive profits. This is often perceived as an example of speculative foreign investment that prioritised short-term gains over long-term contributions to the domestic economy.
Allegations of embezzlement, however, remain contentious and lack direct evidence. The primary criticism of Tiger Fund's actions revolves around their speculative nature and the destabilizing effects they had on South Korea's stock market.
Sovereign Asset Management and SK Group =>
The Takeover Attempt (2003) =>
Sovereign Asset Management, a Monaco-based investment fund, acquired a 14.99% stake in SK Corporation, the holding company of SK Group, South Korea’s third-largest conglomerate.
Sovereign claimed it was acting as an "activist investor," demanding better corporate governance and transparency from SK Group, especially after a scandal involving embezzlement by the group's chairman, Chey Tae-won.
The Allegations =>
Many in South Korea, including SK Group, saw Sovereign's actions as a hostile attempt to take over the conglomerate rather than a genuine push for reform. Sovereign was accused of aiming to seize management control and extract massive profits through corporate restructuring.
Sovereign sold its stake in SK Corporation in 2004, reportedly earning 900 billion KRW (approximately $760 million) in profits. Critics argued this was a classic case of "vulture investing," where the fund capitalized on corporate instability for financial gain.
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The WTO (World Trade Organization) resolves trade disputes between countries, focusing on issues like tariffs, subsidies, and trade barriers. Its rulings are binding on member states, ensuring fair global trade practices.
The ISDS (Investor-State Dispute Settlement) allows private investors to sue governments for violating investment agreements, such as unfair treatment or expropriation. It provides compensation for investors but is criticized for undermining state sovereignty and lacking transparency.
In short, the WTO governs trade between nations, while ISDS protects foreign investors from unfair treatment by states.
###
During the Volkswagen short squeeze in October 2008, Adolf Merckle, the fifth richest person in Germany at the time, suffered devastating financial losses that ultimately led to his tragic death.
Volkswagen Short Squeeze =>
Porsche secretly accumulated a controlling stake in Volkswagen (VW), leading to a shortage of VW shares available for short-sellers.
As hedge funds and investors scrambled to cover their positions, VW's stock price skyrocketed, briefly making it the most valuable company in the world.
Adolf Merckle's Losses =>
Merckle's investment firm had heavily shorted VW shares, betting the price would fall. Instead, the short squeeze caused massive losses.
These losses compounded financial troubles for his broader business empire, which was already struggling during the global financial crisis (subprime crisis).
On January 5, 2009, overwhelmed by financial pressures and the collapse of his fortune, Adolf Merckle tragically committed suicide by stepping in front of a train.
