Three brief items

1. More on Porsche, VW, etc.

A report in today's Wall Street Journal says that several hedge funds have taken a beating as a result of their speculation in VW shares, and the spike in VW's share price I discussed in yesterday's entry.

"Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital," the p. C1 story said.

There have been rumors of effects going beyond that list, and beyond the hedge fund world.

2. Ackman has a plan for Target

Pershing Square Capital Management, which owns nearly 10% of the giant retailer Target, said it has a plan for a transaction that will boost Target's value. It will present its plan today, Wednesday.

Bill Ackman is the principal of Pershing Square, a hedge fund that has been involved in some memorable corporate in-fighting over the years. To his credit, Ackman was arguing in a very public way, before it became a commonsensical observation, that credit ratings agencies and banks were co-operating to prop up bond insurers such as MBIA so that the banks wouldn't have to write down their exposure to such insurers.

Anyway, Pershing's latest statement on Target is as follows: "Pershing Square believes that the insights gained by sharing the potential transaction in a public forum will benefit Target and all of its stakeholders."

One clue to what he has in mind: Mr. Ackman recently expressed interest in a potential derivatives transaction that he said would let Target effectively retire more of its own shares. That provides a nice segway to my final item of the morning.

3. Canada wants to restrict bank share buybacks

The most important fnancial regulator in Canada at the federal level, the Superintendent of Financial Institutions, put out an advisory note Monday that banks shouldn't be buying back their own shares. That runs counter to the goal of strengthening their balance sheets.

Canada's banks are in general in better shape than those in the US or in Europe, where as one would expect the temptation to buyback/retire shares just isn't a big problem right now. Canada's financial institutions generally have a strong retailing base, and their mortgage-lending practices have remained conservative. So I'm a bit baffled by the SFI's concern.

Apparently, though, he thinks their practices may not be quite conservative enough. The SFI's note said: "The current environment calls for increased conservatism in capital management."

Porsche and VW

VW shares shot up on the Deutsche Börse over the last two days in what looks like a classic "short squeeze." I'll take this as an opportunity to go into full-pedantry mode and explain what a short squeeze is. Those of you who already know, or who neither know nor care to learn, are of course free to click yourselves elsewhere at this point!

The price of a share of equity in Europe's largest auto manufacturer increased by 147% Monday, and is up again, though somewhat less dramatically, today.

Here's a closely-related fact: as of last Thursday, 12.9% of VW's shares were on loan to short sellers.

A short squeeze in an uncomfortable event in the life of a short seller. Specifically, it is what happens when a substantial share of a company's stock is out on loan for purposes of a short play, and the stock's price unexpectedly starts to rise. The short sellers need to cover, and they all may decide they need to cover at the same time, because they now expect the stock price to continue rising and they have to cut their losses. So they head for the same exit door at the same time, shouting "buy, buy, buy!"

This of course makes the price of passage through that exit increasingly expensive.

That, then, is what is going on with VW. Over the weekend, Porsche unexpectedly disclosed that through the use of derivatives it has recently accumulated a 74.1% stake in VW, up from 34%. The state of lower Saxony owns 20.1% This means that there is a "free float" of only 5.8% of VW's capitalization. It also means, as a matter of arithmetical necessity, that some of those shares on loan must actually be the property of Porsche or Saxony, though the short sellers presumably obtained them through the services of a prime broker.

It didn't take long for short sellers to do the math and decide that the exit door was shockingly narrow.

VW is one of the shares on which the Teutonic DJIA, the Dax index, is built. So Dax has shot up along with VW. This morning the Financial Times quotes one analyst thus: "This is a special situation and I think it will go on as long as Deutsche Börse doesn't make a decision regarding these extreme movements in VW shares."

More BCE Excitement

Common shareholders of BCE Inc., the holding company of telecomm giant Bell Canada, have filed a class action lawsuit demanding the payment of a dividend they had expected this summer.

Black-letter law is that no one can claim a right to a dividend. If an investor wants regular payments as a matter of right, the instrument he wants isn't a stock, it's a bond. Dividend policy is a matter within the business judgment, i.e. the nearly-unlimited discretion, of the board of directors.

The real point of the lawsuit, it would seem, is to derail the underlying deal. What the owners of equity do get, instead of a guarantee of payments, is a right to have a say in the major corporate decisions. That right is the basis for the existence of this blog, after all. I'm not entirely clear on how, in the plaintiffs' view, they've been deprived of that right here, but it seems that "pay us the dividends" is more a measure of damages in their eyes than the alleged legal injury.

The privatization of BCE will be (if the teachers'-pension folk behind it manage to pull it off) the largest leveraged buy-out ever. The deal was signed more than a year ago, though the closing has had to be delayed because the prevailing buisness climate has hardly been conducive to such wheeling-dealing.

A bond rating agency has estimated that if the deal does go through this December as now scheduled, BCE's consolidated debt will be C$42 billion, which is more than twice last year's revenue.

The deal has already generated some fascinating litigation. If you follow that link, you'll get to my earlier discussion of a challenge to this same transaction by bondholders.

So it may yet generate more.

Chuck Grassley v. Linda Thomsen

Senator Chuck Grassley now alleges that he has information (from an "anonymous but specific" informant) that Linda Thomsen, the director of enforcement at the Securities and Exchange Commission, has given information to the general counsel of JP Morgan Chase, concerning the state of various SEC investigations into Bear Stearns.

You'll remember that JPM took over what was left of Bear in a shotgun wedding arranged by the federal government in March.

Apparently it was while that transaction was pending that the executives at JP Morgan became (understandably!) very interested in the regulatory/compliance questions concerning this particular pig in a poke. The general counsel of JP Morgan Chase spoke to Ms Thomsen about the matter.

Ms Thomsen (again, according to Sen. Grassley's source, not according to me!) made representations about these investigations without talking to the staff doing the investigation.

Such conduct, worries Grassley, "would reinforce the appearance that Enforcement decisions, and disclosures of information about them, are sometimes based not on the merits, but rather on access to senior officials by influential representatives of power brokers on Wall Street."

Grassley put all of this in a letter he wrote to SEC chairman Christopher Cox dated October 21 -- Tuesday.

If the charges are right, if these phone conversations did take place, what harm might have been done by Ms Thomsen's indiscretion?

Grassley's answer is that if Morgan received "inside information" in that way,m it might have been able to put together a low-ball bid to Bear and the US government.

What this seems to mean is that there may have been other potential bidders for Bear out there who were scared off by the possibility of enforcement action. But JPMorgan wasn't scared off. Presumably, its general counsel had heard something re-assuring from Ms Thomsen.

Intriguing theory. We'll have to see how this plays out.

A book about AIG

For those who have an interest in entrepreneurship, or the history of the insurance industry, or just the recent business/regulatory history of the United States, I'd like to recommend a book, FALLEN GIANT: The Amazing Story of Hank Greenberg and the History of AIG (2006).

The book is the work of Ron Shelp "with Al Ehrbar." As usual that formulation means that Shelp is the insider guy, but Ehrbar is a professional writer who helped Shelp put this into shape for publication.

Shelp was a trouble-shooter and righthand man for Greenberg in the 1970s and 1980s. The book isn't a corporate PR department style puff piece, though. I don't think a puff piece would include this anecdote, about the kitchen for the company headquarter's dining room.

"At one point [circa 1981] there was an equal opportunity suit threatened by an Irish waitress against AIG because the dining room had exclusively Chinese waiters. To make matters worse, allegedly the Chinese weren't all legal immigrants. So a group of Irish waitresses were hired. They all quit within a relatively short time span because the Chinese made their lives absolutely miserable. I don't know what they did back in the kitchen, but it worked. Today, there are still all Chinese waiters but a few Chinese waitresses as well."

Balancing the Chinese with the Irish? It sounds like the recipe for a transcontinental railroad, not a personnel policy for a major corporation in the 1980s.

Just one more anecdote, then I'll leave you to discover the rest of this book for yourself. Some time in the early 1970s, AIG hired Tommy Corcoran as a lobbyist.

In 1975, Hugh Carey became Governor of New York, and a fellow named Matt Nimitz ran Carey's transition operation. Matt's office while he was doing this was in NYC, not Albany.

Anyway, Corcoran called Nimitz and said, "I am calling on behalf of AIG and we are very interested in talking to you and the Governor-elect about who the next State Insurance Commissioner will be."

Nimitz replied that he was busy.

Corcoran: "No problem, take this telephone number down and call me when you are free. It is a pay phone in Times Square and I will stay here until I hear from you!"

Corcoran was an old man -- and something of a legend within the Democratic Party. He had been part of the brains trust of FDR, and later of LBJ as well. A Carey appointee wasn't going to leave him waiting at a phone booth in Times Square. [Of course, this wouldn't work today, everybody has a cell and everybody knows that everybody has a cell.]

Nimitz made time for him. Later, Nimitz told Shelp, "I actually doubt now that he really was at a Times Square phone booth," but the ploy got Corcoran into Nimitz' office, and "in fact we chose an excellent insurance commissioner whom Hank and others felt comfortable with."

Shake-up at Deutsche Borse

Kurt Viermetz has resigned as chairman of the board of Deutsche Boerse AG, effective December 8.

Deutsche Borse owns the Frankfurt stock exchange, Clearstream (a settlement operation), Eurex (the dominant force in European equity derivatives), and Eurex Clearing.

Viermetz has been its chairman for just three years, and although it isn't clear just what happened behind the scenes leading to his departure, the folks who put him there seem to have lost faith in him.

The hedge funds Atticus Capital and TCI were instrumental in Viermetz' rise to the chairmanship three years ago. The best guess at this point is that they expected him to initiate a buyback of the company's equity by this point. He has resisted doing so, and now he's out.

Atticus reacted quickly to the news: "Atticus is pleased by Mr. Viermetz's decision to resign from the supervisory board of Deutsche Boerse AG, which we believe is in the best interests of the company and its shareholders," it said in a statement this weekend. "We wish to recognize and thank Mr. Viermetz for his years of service on the supervisory board."

To those of us who don't happen to own DB stock, the issue of whether the company is to initiate a buyback may seem a rather trivial one. An operational issue is also under discussion there, though: whether the company should spin off some of its units.

From the point of view of the stock or derivatives investing publics, is it better to deal through an exchange that is separate from the clearing/settlement operation, or with a single integrated company that performs both functions? Should we be hoping that whatever shake-up underway at DB results in a break-up?

A 'beer war' after all?

InBev, the Brussels based company that has entered into an agreement to buy Anheuser-Busch, faces a rebellion at last -- coming from a perhaps-unexpected quarter, from Grupo Modelo and allies.

InBev and AB agreed on the terms of their combination in July. Shareholders of the target company are to get a sizeable premium over the price of their stock before the bid, and Budweiser (not Stella Artois) will be the flagship brand of the combined company.

The key fact for understanding the new development is this: AB owns half of the equity in a Mexican beer company, Grupo Modelo, best known for Corona.

GM has initiated an arbitration action against AB, claiming that the latter was obligated under a 1993 agreement to consult it before concluding a deal with InBev. The arbitration action has instigated rumors that what GM really wants is a chance to buy back that 50% share of its equity. But a spokeswoman for the Mexican company denied this to a reporter for Reuters Friday.

InBev has a statement out expressing confidence "that the claims made by Modelo [and related parties] are entirely without merit."

Anyway, if Grupo isn't seeking the opportunity to buy back AB's interest: what does it want? To throw a monkey wrench in the works of the still-unclosed deal entirely? To get a greenmail pay-out for the shareholders who own the other half of its equity? What?

The price of Grupo shares was flat Friday on the Mexican stock exchange. The price of AB shares rose slightly.