Carl Icahn makes $9bn mistake on bearish bet

Carl Icahn admitted that he made a mistake by betting on the crash of the stock market. The bet cost his group $9bn in six years.

According to an analysis, the activist investor who is well known for his hedging strategies lost $1.8bn on hedge positions that would have paid off if asset values had fallen. He then lost another $7bn from 2018 until the first quarter of 2019.

In an interview, Icahn stated that no one can truly pick the market over the short or intermediate term. “Maybe I’ve made the mistake of failing to follow my own advice over the past few years.”

Icahn Enterprises began aggressively betting against a market crash in the wake of the 2008 Financial Crisis and became more bold in the years that followed, using a complex strategy which involved shorting indices for the broad market, individual companies, mortgages, and debt securities.

Icahn has had a notional exposure of over $15bn at times. “You’ll never find the perfect hedge but I will keep the parameters that I have always believed in. . . “I would have been fine,” said he. “But I didn’t.”

Icahn Enterprises is the listed vehicle that is majority owned by the activist and allows retail investors to participate in his bets. The company reported $4.3bn of short losses between 2020 and 2021, as the markets recovered quickly from the pandemic recession following the Federal Reserve’s massive stimulus.

Icahn stated, “I clearly believed that the market would be in trouble.” “[But] The Fed injected trillions into the market to combat Covid, and the old saying: ‘don’t fight the Fed’ is true.”

Icahn is now in a very vulnerable position, and his reputation as one of Wall Street’s most feared activists could be at risk.

Hindenburg Research, a short seller, released a report earlier this month stating that it believed Icahn Enterprises’ market value was inflated and the dividend was unsustainable. Since the report was released , shares of the company are down more than 30%.

Icahn poured nearly $4 billion of his own cash into his publicly traded vehicle as his short bets drain billions from his investment firm, according to filings. This injection kept the value of the group’s investment portfolio, as calculated internally, relatively stable.

Icahn took on another risk when he obtained a margin credit that was disclosed for the first time in early 2022. Hindenburg’s report brought to light the Morgan Stanley margin loan, for which Icahn pledged 60% of his stake in Icahn Enterprises.

Hindenburg said that a plunge in the stock price could cause his business to collapse if it triggers a margin request, which would force Icahn liquidate a portion of his stake.

Icahn Enterprises, in a statement released earlier this month in response to Hindenburg’s allegations, said that Icahn had “full compliance” in regards to personal loans. They also announced an authorization to buy back $500mn worth of stock in order to boost its share price. In relation to the company’s market valuation, it said that, “over time, our performance will speak for themselves”.

Icahn claimed that he used the margin loan for additional investments, and had billions in cash outside his public vehicle. He said, “I have made a lot of money over the years with money.” “I like to keep a war-chest and this gave me even more money for my war-chest,” he said, referring the margin loan.

Icahn Enterprises warned that a “prolonged decline” in the stock price of its company “could increase” the likelihood of “foreclosure or forced sale” if Icahn was “subject to margin call”.

Icahn Enterprises announced earlier this month that federal prosecutors from New York had contacted them to get information about their business, such as corporate governance, valuations, and due diligence.

Icahn’s bearish bets have been the primary reason for his portfolio losing money every year since 2014. During the six-year period in which he lost $9bn, the portfolio earned about $6bn through his activist bets. This left the vehicle with a total investment loss of almost $3bn.

Icahn Enterprises also generated $3.5bn in gains by selling businesses it owned, including casinos and railcar leasing companies that were outside of the investment portfolio.

Icahn Enterprises’ net asset value fell from $7.9bn to $5.6bn last month. This could be a problem for Icahn who traditionally has taken his large annual dividend of $8 per share in stock instead of cash. The number of shares outstanding has more than doubled over the last six years, lowering the net asset value (per share) from $33 down to $16.

Retail investors who received their dividends as cash during the same time period would have earned more than $40 per share.

Icahn, under increasing pressure from his group, has had to reduce his short bets. Meanwhile, some investors are worried that the regional banking crisis or the standoff over debt ceiling could lead to a sharp sell-off of stocks.

Icahn stated, “I believe this economy will not be good in the future and that there will be many problems.” “We still hedge, but not as much as we used to.”