Carl Icahn admits the bearish bet that cost $9 billion was a mistake

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

The prominent activist investor lost about $1.8 billion in 2017 on hedging positions that would pay off if asset prices collapsed before losing another $7 billion between 2018 and 2018, according to an analysis by the Financial Times. the first quarter of this year.

“I’ve always told people that there is no one who can really choose the market in the short or medium term”, Icahn he told the FT in an interview discussing the analysis. “Maybe I’ve made the mistake of not adhering to my own advice over the past few years.”

Icahn Enterprises began aggressively betting on a market crash in the aftermath of the 2008 financial crisis and grew increasingly bold in the years since, implementing a complex strategy that involved shorting broad market indexes, individual companies , commercial mortgages and debt securities.

At times, Icahn’s notional exposure, the underlying value of the securities he was betting on, exceeded $15 billion, regulatory filings show. “You never get the perfect hedge, but if I’ve held to the parameters I’ve always believed in. . . I would have been fine,” he said. “But I didn’t.”

Icahn Enterprisesthe activist’s majority-owned publicly traded vehicle that lets retail investors join his bets, posted a total of $4.3 billion in short-term losses in 2020 and 2021 as markets quickly recovered since the pandemic crisis following the huge stimulus from the Federal Reserve.

“Obviously I thought the market was in big trouble,” Icahn said. “[But] the Fed has injected trillions of dollars into the market to fight Covid and the old saying is true: “don’t fight the Fed”.

The trades have left Icahn in a vulnerable position and threaten to undermine his status as one of the most feared activist investors on Wall Street.

Earlier this month, short seller Hindenburg Research released a report saying it believed the market value of Icahn Enterprises was inflated and its dividend was unsustainable. The company’s shares are down more than 30%. since the publication of the report.

While Icahn’s short bets have drained billions of dollars from his investment firm, he has invested nearly $4 billion of his own money in his publicly traded vehicle, the documents show. This injection helped to keep the value of the investment portfolio calculated internally by the company relatively stable.

Icahn took another risk by taking out a margin loan that was first disclosed in early 2022. Hindenburg’s report drew attention to Morgan Stanley’s margin loan, against which Icahn pledged 60% of its stake in Icahn Enterprises as collateral.

Hindenburg said that could lead to the unraveling of his business if the falling stock price triggered a margin call that would force Icahn to liquidate part of his stake.

In a statement earlier this month addressing Hindenburg’s allegations, Icahn Enterprises said Icahn was in “full compliance” with regards to all personal loans and announced a $500 million share repurchase authorization. dollars in an attempt to raise the price of its shares. Regarding its market valuation, the company said that “over time, [our] the performance will speak for itself”.

Icahn told the FT that he has used the margin loan to make further investments and has billions of dollars in cash outside his public vehicle. “I’ve made a lot of money out of money over the years,” he said. “I like having a war chest and doing so has given me more of a war chest,” he added, referring to the margin loan.

Icahn Enterprises warned that “a sustained decline” in its stock price “could increase the likelihood of foreclosure or forced sale” of Icahn’s stake if it were “subject to a ‘margin call.'”

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

Icahn’s bearish bets are the main reason his investment portfolio has lost money every year since 2014. In the roughly six-year period that he lost $9 billion on short bets, the portfolio made about $6 billion on short bets. its activist bets, leaving the vehicle with an overall investment loss of nearly $3 billion.

Separately, Icahn Enterprises generated $3.5 billion in earnings during the period by selling companies it controlled, including casinos and a railroad car leasing business, that were held outside its 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, who has historically taken the big $8-per-share annual dividend in stock rather than cash. That caused the number of shares outstanding to more than double in the roughly six-year period, dropping its net asset value per share from $33 to about $16.

Retail investors who took their dividends in cash would receive more than $40 per share during the same period.

As pressure on his firm mounts, Icahn has been forced to curb his short bets even as some investors fear a regional banking crisis and debt ceiling deadlock could result in a sharp sell-off in the market.

“I still believe to some extent that this economy is not good and that there will be problems in the future,” Icahn said. “We’re still covered, but not to the extent we were.”