Germany's "Warren Buffet", Billionaire Adolf Merckle, Commits Suicide - Update to the Hedge Fund Drama about Porsche & VW stock options

On October 30th, I posted about my confusion about hedge funds and shared a link to an interesting article in the Economist: "Porche and VW - Squeezy money: How Porsche fleeced hedge funds and roiled the world's financial markets"

Well, I am still confused, and saddened. Much has unraveled since that post. Last month, it was Bernie Madoff and the non-existent funds of philanthropic organizations that must close operations, resulting in negative consequences for many.

German billionaire Adolf Merckle's recent suicide adds to the drama.


Mr. Merckle was known as Germany's "Warren Buffet". He was a well-respected man who was involved in the short squeeze on hedge funds, orchestrated by Porsche.

Here is the initial information, from the Wall Street Journal, via the Associated Press:

"BERLIN -- The family of Adolf Merckle said the German billionaire committed suicide after his business empire got into trouble because of the global financial crisis.

A brief family statement Tuesday did not give details on the circumstances of the 74-year-old investor's death. It said the problems his holdings suffered due to the financial crisis "broke" him and "he ended his life."

Mr. Merckle's business interests included drug maker Ratiopharm International GmbH and cement maker HeidelbergCement AG.

The newspaper Die Welt reported that Mr. Merckle was struck by a train near Ulm, Germany and died Monday night."

"Mr. Merckle has recently been in the news with reports that he lost money in transactions involving Volkswagen AG shares when the company's stock surged at the end of October."

—Dow Jones Newswires contributed to this story. Copyright © 2009 Associated Press

Mr. Merckle's money was involved in hedge funds involved in short selling- betting that VW's stock would go down, but lost money when it went up instead.

Update:

"The plight of his firms caused by the financial crisis, the uncertainties of recent weeks as well as the powerlessness of not being able to do anything, broke this passionate family businessman and he ended his life," a statement said.

Merckle, 74, headed the world's 94th biggest fortune, according to Forbes magazine, with a total net worth last March of $9.2 billion." - Wealth Bulletin

'Broken' Billionaire Merckle Killed Self, Family Says
(Bloomberg)

Here is an excerpt from my earlier post about hedge funds, short selling, VW, and Porsche:

"No matter how hard I try, I still don't quite understand hedge funds.

According to an article in today's Economist (10/20/08), "hedge funds sold shares in VW that they did not own." From what I can tell, companies such as Morgan Stanley and Goldman Sachs and the likes might have "exposure" to VW. There is no telling, right?!

I guess if things were transparent, the general public might have a better idea of what is going on, and perhaps have a better chance of making better data-driven financial decisions. Right now, people are third-guessing. What a game the world has been playing!

From the article:

"Adam Jonas of Morgan Stanley warned clients on October 8th of the danger of playing “billionaire’s poker” by betting against Porsche."

That sounds about right.
Yes.
Billionaire's Poker. "

RELATED

Billionaires' lustre dims as crisis grips -Reuters 12/30/08, Via Guardian

Merckle’s VEM Investment Unit Says Bank Claims Frozen (Update2) -Bloomberg 12/30/08
"Adolf Merckle, whose holdings span the cement, machinery and drug industries, was battered by wrong-way bets on Volkswagen AG, a drop in the value of his HeidelbergCement AG stock and increasing debt at his companies. The 74-year-old, whose estimated $9.2 billion fortune put him 94th on Forbes’ list of the world’s richest people, had previously threatened to seek insolvency for VEM if banks didn’t provide financing."

FACTBOX - German billionaire Merckle's business conglomerate - Thomson Financial News 1/6/09

"Porche and VW - Squeezy money: How Porsche fleeced hedge funds and roiled the world's financial markets" (This article is a must-read, along with the comments.)

"Porsche crashes into controversy in the ultimate 'short squeeze'"
""This is the culmination of long-held plans to take over VW. Porsche engineered the squeeze as one of the most brilliantly conceived wealth transfers ever: they've got the hedge funds positioned to pay for Porsche's acquisition of VW. The only thing they underestimated was the scale of the fallout," said an insider."

The Madoff Economy (New York Times Op-Ed, Paul Krugman, 12/19/08)

The Rise of the Machines & another look at the role of "quants" in the current financial downturn.

I came across an article on-line from the New York Times, written by Op-Ed Contributor Richard Dooling, "The Rise of the Machines",

Dooling mentions at the beginning of the article that Warren Buffett called derivatives "weapons of mass destruction". I guess time will tell. The article was published on October 11, 2008. Nearly two months later, things continue to combust.

"Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, “Open the bank vault doors, Hal." '

Richard Dooling is the author of "Rapture of the Geeks: When AI Outsmarts IQ"

I've assembled a few related articles that focus on the role of the quant and some additional information that might assist in our understanding of what has been unfolding during the current economic recession:


Quants Gone Wild - The Subprime Crisis (3/27/08; A.W. Bodine and C.J. Nagel)
"The “best & brightest” quantitative analysts on Wall Street became so technologically advanced that many of the principals running investment firms simply didn’t understand the arcane risk models their “quants” developed – and sadly neither did the quants. We recall the comment made during a recent presentation at Concordia College by Don Gogel, President and CEO of Clayton, Dubilier and Rice. He noted that this “toxic cocktail” was something that even the “mixologists themselves didn’t understand” let alone those trading in them. Bryant Urstadt writing in MIT’s Technology Review in December 2007 also notes, “The more quants learn, the farther away a unified theory of finance seems. Human behavior, as manifest in financial markets, simply resists quantification, at least for now.” We should here also do homage to the investing approach of the sage Warren Buffet—that he does not invest in anything he doesn’t understand. Investment houses should note this simple truth."

On Becoming a Quant (pdf) May 2008; Mark Joshi

Hiring the Next Generation of Quants, Finance Tech, 3/31/2006; Ivy Schmerken

""An MBA does not cut it because operating in today's markets requires more quantitative skills than a typical MBA can offer," contends Linda Kreitzman, director of the Masters in Financial Engineering (MFE) program at the Haas School of Business at the University of California at Berkeley. "Trading is getting more complex, especially in structured products," she adds, citing as examples fixed income, mortgage-backed securities and asset-backed securities, as well as credit and equity derivatives and volatility trading. ""

Here is an article, written by Tom Davenport, in the Discussion Leader, Havard Business Publishing, that offers a a few ideas for solutions:

10 Principles of the New Business Intelligence

"I've argued for a while that organizations need to increase their focus on decision-making. In particular, they need to think again about the relationship between information and decision-making."