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In early 2021, the financial world was captivated by an unprecedented event involving
GameStop, a video game retailer whose stock price experienced an explosive and unexpected surge. The catalyst for this meteoric rise was a short squeeze orchestrated by a collective of retail investors primarily communicating through the subreddit r/WallStreetBets. The stock, which had been heavily shorted by institutional investors betting on its decline, saw its price skyrocket from around $18 in early January to an intraday high of $483 on January 28, 2021. The dramatic rise was driven by retail investors buying up shares and call options, forcing short sellers to cover their positions by buying back shares at increasingly higher prices. This not only inflicted massive losses on hedge funds like Melvin Capital but also brought the concept of a short squeeze into mainstream awareness.
The Volkswagen Short Squeeze of 2008
Before GameStop, one of the most infamous short squeezes in history occurred in October 2008 involving Volkswagen (VW). The VW short squeeze was a dramatic event that saw the automaker briefly become the world’s most valuable company.
The Players Involved
The major players in this squeeze included:
Porsche SE: The sports car manufacturer that had been quietly accumulating VW shares.
Hedge Funds and Short Sellers: Investors who had heavily shorted VW stock, betting on its price decline.
Volkswagen AG: The target of the squeeze, with its stock caught in the crossfire.
The Setup
Leading up to the squeeze, Porsche, which already held a significant stake in VW, announced on October 26, 2008, that it had increased its holding to 42.6% directly and had secured options for another 31.5%. This meant Porsche effectively controlled 74.1% of VW shares, leaving a mere 5.8% of the stock in free float when accounting for shares owned by the state of Lower Saxony.
At the time, VW was one of the most shorted stocks on the German DAX index, with about 12.8% of its shares sold short. Short sellers, who were unaware of Porsche's full holdings, were betting that the global financial crisis would hit VW hard, thus driving its stock price down.
The Squeeze
When Porsche's announcement was made, it revealed that there were far fewer shares available for trading than the short sellers had anticipated. Short sellers scrambled to buy shares to cover their positions, driving up the stock price in a classic short squeeze. VW’s share price surged from about €210 to over €1,000 within two days, briefly making VW the most valuable company in the world by market capitalization.
Aftermath
The VW squeeze resulted in massive losses for short sellers, estimated in the tens of billions of euros. Many hedge funds faced significant financial distress, and some were forced to close. For Porsche, the squeeze temporarily increased its financial power, but it also led to regulatory scrutiny and complex legal battles in the years that followed.
The Silver Short Squeeze by the Hunt Brothers
In the late 1970s and early 1980s, another legendary short squeeze took place, this time in the silver market, orchestrated by the wealthy Hunt brothers—Nelson Bunker Hunt and William Herbert Hunt.
The Hunt Brothers' Strategy
The Hunt brothers, heirs to a Texas oil fortune, believed that paper currency was losing value due to inflation and that silver would be a safer store of wealth. Starting in the early 1970s, they began buying large quantities of silver. By early 1980, they controlled more than 200 million ounces of silver, which was equivalent to about half of the world's deliverable supply.
The Squeeze
The brothers used a combination of outright purchases and futures contracts to accumulate their silver holdings. Their aggressive buying pushed silver prices from around $6 per ounce in early 1979 to a record high of $49.45 per ounce in January 1980. This rise in silver prices was partly driven by a short squeeze as those who had sold silver short were forced to buy back silver at increasingly higher prices to cover their positions.
Financial Scale
The Hunt brothers reportedly used leveraged positions worth billions of dollars to finance their silver purchases. At the peak, their silver hoard was valued at over $10 billion.
Aftermath
The silver price surge attracted regulatory attention. On January 7, 1980, the COMEX (Commodity Exchange Inc.) and the CBOT (Chicago Board of Trade) introduced special margin requirements on silver futures, which dramatically increased the cost of holding silver positions. These new rules, combined with selling pressure and a lack of liquidity, caused silver prices to plummet.
On "Silver Thursday," March 27, 1980, the price of silver dropped to below $11 per ounce, triggering a financial crisis for the Hunt brothers. They faced margin calls they could not meet, leading to significant financial distress. The Hunts eventually declared bankruptcy, and their silver holdings were liquidated. This dramatic fall in silver prices also led to significant losses for many other investors and had wide-reaching impacts on the commodities market.
Summary of Short Squeezes
Short squeezes, whether in stocks like GameStop and Volkswagen or in commodities like silver, showcase the complex dynamics of financial markets. These events highlight the risks and rewards of speculative trading and the power that strategic buying and regulatory changes can wield. While the individual circumstances of each squeeze vary, the underlying mechanics involve the interplay of market participants, regulatory environments, and broader economic factors. The stories of these famous squeezes continue to be studied as cautionary tales and fascinating episodes in financial history.