Beyond the Amusement Value of Icahn v. Ackman
|Jan 30th, 2013 | Filed under: Alpha Hunters, Alpha Strategies, Today's Post | By: cfaille||
In a perfect world … no, check that: in a world even slightly better than this one, it would have been a teaching moment. The very public blow-up between renowned alpha hunters Carl Icahn and William Ackman that has given everyone something to “ooh” and “aah” about, could have given rise to explanations and even some enlightenment.
The oohing began even while the exchange was underway – that is the background noise you hear at several points in the CNBC exchange that aired live Friday afternoon, January 25.
Ackman is the principal of Pershing Square Capital Management. His biggest coup to date as a high-profile investor has been his very risky, and in time quite successful, investment on the short side of bond insurance company MBIA. He bragged about this a bit during the CNBC discussion.
Spitzer Recollected in Tranquility
The end-game in MBIA, you’ll remember, was bound up with the fall of a certain Governor of New York. Early in 2008, Eliot Spitzer became involved in an effort to support MBIA and its younger twin, Ambac Financial Group.
But on March 10th, the New York Times’ website ran a story that linked Spitzer to a prostitution ring. As that story developed, even while late-night talk show hosts were still chortling over their good luck, Wall Street traders were looking about for some way to short Spitzer. The way that presented itself was to short MBIA and Ambac, that is, by jumping on Ackman’s bandwagon.
On June 4, Moody’s announced that it was reviewing the credit profile of both of these firms and that it might mark MBIA in particular as low as a single A. On the same day, Ackman told his associates to liquidate their short position on MBIA, locking in their win.
Ackman, on CNBC last week, left the prostitution scandal out of it, but he did suggest that CNBC “call Eliot for the facts … I got to know him after that and have a nice relationship with him.”
Talking One’s Book
As the world by now knows, Ackman on Thursday, December 20, set out his case for a short sale on Herbalife.
This is not manipulation, BTW. It is talking one’s book: which is just as fair when the shorts do it as when the longs do it, especially when – on either side – the talker is open about the self-interested nature of the communication.
Herbalife (NYSE:HLF) sells certain health-oriented products, notably Formula 1, a powder that becomes a nutritional shake, thus competing with Ensure and Slim-Fast. But HLF also sells the opportunity to sell Formula 1, and the opportunity to sell that opportunity, and so forth. This is typical of so-called “multi-level marketing.”
MLM isn’t illegal. The crux of whether a particular MLM is a pyramid scheme, and thus is illegal, is this: is a particular participant paid primarily on the basis of the products he sells or primarily on the basis of the new participants he recruits?
Heat in the Darkness
At any rate: Ackman isn’t going to prevail or fail on the basis of whether his characterization of Herbalife as a pyramid is accurate. This is not some law school’s moot-court contest. He is going to win or lose on the basis of whether law enforcement authorities come to agree with him and act accordingly. If they do, and fairly soon, the price of HLF may well go to zero. If they don’t, then Herbalife may well last long enough to bury him.
It is the sort of question on which the financial media might well shed some light. In a world with lemonade seas and televised unicorn dances, one would expect to see learned discussions of this question on the cable channels, helping illuminate the nature of the short selling strategy. In this world, they might even perform the public service of cautioning potential consumers/entrepreneurs about the dangers of even the best MLM, the dangers of grasping at an opportunity that may put you at the bottom of a pyramid that has already saturated the actual market for its nutritional shakes.
In this world, though, the unicorns remain invisible, and the seas remain unpleasantly salted. Much of the press can discuss the hedge fund industry only if they can use headlines like “Billionaire Smackdown” or “Epic Showdown of Billionaires.”
In this world, too, news outfits of all sorts love to cover personal bitterness. They prefer spreading heat rather than light – they’ll spread both when that’s easy, but they’ll spread heat in the darkness whenever that is simpler. As, indeed, it most often is.
Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."