Carl Icahn admits error in bet on market crash

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Carl Icahn admitted he was wrong to bet the market would crash after the ill-fated trade cost his company nearly $9 billion over roughly six years.

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According to a Financial Times analysis, the prominent activist investor lost about $1.8 billion in 2017 in hedged positions that would have paid out if asset prices fell before losing another $7 billion between 2018 and the first quarter of this year.

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“I’ve always told people that no one can really pick the market in the short or medium term,” Icahn told the Financial Times in an interview discussing the analysis. “I may have been wrong not to heed my advice in recent years.”

Icahn Enterprises began betting aggressively on a market crash in the aftermath of the 2008 financial crisis and became more aggressive in subsequent years, deploying a complex strategy that included shorting broad market indices, individual companies, commercial mortgages and debt securities.

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Regulatory filings show that at times, Icahn’s theoretical exposure, and the underlying value of the securities he was betting on, exceeded US$15 billion. “You’re never going to get the perfect hedge,” he said, “but if I kept it to the standards I’ve always believed in… I’d be fine.” “But I didn’t.”

Icahn Enterprises, the activist’s listed auto majority that allows retail investors to join his bets, reported short losses totaling $4.3 billion in 2020 and 2021 as markets quickly rebounded from the pandemic recession after the massive US Federal Reserve. Stimulus.

“Obviously, I thought the market was in big trouble,” Icahn said. (But) the Fed has pumped trillions of dollars into the market to fight COVID and the old adage is true: ‘Don’t fight the Fed’.

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Weak position

The trades left Icahn in a vulnerable position and threatened to erode his standing as one of Wall Street’s most feared activist investors.

Earlier this month, Hindenburg Research, a short-selling firm, released a report saying it believes Icahn’s market capitalization is overvalued and its dividends unsustainable. The company’s shares have fallen by more than 30 percent since the report was published.

The filings showed that because Icahn’s short bets drained billions of dollars from his investment firm, he invested nearly $4 billion of his money in his publicly listed car. This injection helped keep the company’s internally calculated investment portfolio value relatively stable.

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Icahn exposed himself to other risks by taking out a margin loan first disclosed in early 2022. The Hindenburg Report drew attention to the margin loan from Morgan Stanley, against which Icahn pledged 60 percent of his stake in Icahn Enterprises as collateral.

Hindenburg argued that this could lead to the collapse of his business if the fall in the share price triggered a margin call that would force Icahn to liquidate some of his stake.

In a statement earlier this month addressing Hindenburg’s allegations, Icahn Enterprises said Icahn was “fully compliant” with respect to all personal loans and announced a $500 million share repurchase authorization in an effort to boost its share price. In terms of market valuation, the company said “Over time, our performance will speak for itself.”

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Icahn told the Financial Times he used the margin loan to make additional investments and had billions of dollars in cash out of his public car. “Over the years, I’ve made quite a bit of money with money,” he said. “I would love to have a war chest and this has given me more war chest,” he added, referring to the margin loan.

Icahn Enterprises warned that a “prolonged decline” in its share price “could increase the potential for foreclosure or forced sale” of an Icahn stake if it was “subject to a ‘margin call’.”

Federal Public Prosecution

Earlier this month, Icahn Enterprises revealed that New York federal prosecutors had approached the company to obtain information about its business, including corporate governance, valuations, and due diligence.

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Icahn’s bearish bets are the main reason his portfolio has lost money every year since 2014. Over the nearly six-year period in which he lost $9 billion on short bets, the portfolio made about $6 billion from his activist bets, leaving the car with Total investment loss of nearly 3 billion US dollars.

Separately, Icahn Enterprises gained $3.5 billion during the period by selling businesses it controls — including its casinos and rolling stock rental business — that were kept outside the investment portfolio.

Icahn Enterprises net asset value fell from $7.9 billion in 2017 to $5.6 billion this month. That poses a potential problem for Icahn, which has historically received a large share of its $8 annual dividend in stocks rather than cash. This caused the number of shares outstanding to more than double over the roughly six-year period, dropping NAV per share from $33 to approximately $16.

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Individual investors who took their cash dividends would have received more than $40 per share over the same period.

As pressure mounts on his company, Icahn has had to rein in his short bets just as some investors fear a regional banking crisis and debt-ceiling standoff could lead to a sharp sell-off in the market.

“I still think to some extent that this economy is not good and there will be problems in the future,” Icahn said. “We are still surrounded, but not as much as we were.”

© 2023 Financial Times Limited.