Carl Icahn has admitted he was wrong to bet on a market crash after ill-fated deals cost his firm nearly $9 billion over about six years.
According to an analysis by the Financial Times, the prominent activist investor lost around $1.8 billion in 2017 on hedging positions that would have paid off had asset prices plummeted, then lost money in 2018 through the first quarter of this year. Another $7 billion was lost.
“I tell people all the time that no one can really choose the short- or medium-term market,” Icahn said in an interview with the Financial Times discussing the analysis. “Maybe I’ve made a mistake in recent years not sticking to my advice.”
Icahn Enterprises began betting aggressively on a market crash after the 2008 financial crisis and became increasingly bold in subsequent years, deploying a complex strategy that included shorting broad market indexes, individual companies, commercial mortgages and debt securities .
At times, Icahn’s notional exposure, the underlying value of the securities he bet on, exceeded $15 billion, regulatory filings show. “You’re never going to get the perfect hedge, but if I keep the parameters I’ve always believed in . . . I’ll be fine,” he said. “but I do not have.”
Icahn Enterprises, the publicly traded company majority-owned by the activist, allowing retail investors to join his bets, reported that 2020 will be a year-long rally as markets rebound quickly from the pandemic slump after the Federal Reserve’s massive stimulus measures. The combined short losses for 2010 and 2021 are $4.3 billion.
“I obviously think the market is in big trouble,” Icahn said. “[But]the Fed pumped trillions of dollars into the market to fight the coronavirus, and the old saying is true: ‘Don’t fight the Fed’.”
The deals put Icahn in a vulnerable position and threaten to erode his standing as one of Wall Street’s most feared activist investors.
Earlier this month, short-seller Hindenburg Research released a report saying it believed Icahn Enterprises’ market capitalization was inflated and its dividend unsustainable. The company’s shares have fallen more than 30% since the report was released.
As Icahn’s short bets drained billions from his investment firms, he plowed nearly $4 billion of his own money into his public companies, filings show. This infusion helps keep the company’s internally calculated portfolio value relatively stable.
Icahn is exposing himself to another risk by taking out a margin loan that was first disclosed in early 2022. Hindenburg’s report drew attention to the Morgan Stanley margin loan, in which Icahn pledged his 60% stake in Icahn Enterprises as collateral.
Hindenburg argued that if the stock price crash triggers a margin call, forcing Icahn to liquidate some of his holdings, it could tear his business apart.
In a statement earlier this month addressing the Hindenburg charges, Icahn Enterprises said Icahn was in “full compliance” with all personal loans and announced a $500 million share repurchase authorization to boost its stock price. Regarding its market valuation, the company said that “over time, (our) performance will speak for itself”.
Icahn told the FT that he has used margin loans for additional investments and has billions of dollars in cash outside his public vehicles. “I’ve made a lot of money with my money over the years,” he said. “I like having a war fund, and doing this gives me more of my war fund,” he added, referring to the margin loan.
Icahn Enterprises warned that a “long-term decline” in its stock price “could increase the likelihood of a foreclosure or forced sale” of Icahn’s shares if Icahn “is subject to a ‘margin call.'”
Earlier this month, Icahn Enterprises revealed that federal prosecutors in New York had contacted the company seeking information about its business, including corporate governance, valuation and due diligence.
Icahn’s bearish bets are the main reason his portfolio has lost money every year since 2014. In the roughly six years in which he lost $9 billion on short bets, the portfolio made about $6 billion from his aggressive bets, bringing the vehicle’s total investment losses to nearly $3 billion.
Separately, Icahn Enterprises made $3.5 billion in gains outside its portfolio during the period from the sale of companies it controlled, including casinos and rail car leasing businesses.
Icahn Enterprises’ net worth fell to $5.6 billion this month from $7.9 billion in 2017. That presents a potential problem for Icahn, who has historically paid his hefty $8 per share annual dividend in the form of stock rather than cash. That caused the number of outstanding shares to more than double in about six years, reducing its net asset value per share from $33 to about $16.
Retail investors who received dividends in cash earned more than $40 per share during the same period.
With pressure mounting on the company, Icahn was forced to rein in short positions as some investors worried that a regional banking crisis and debt-ceiling standoff could lead to a sharp market sell-off.
“I still think, to some extent, that the economy is not doing well and that there will be problems going forward,” Icahn said. “We still hedge, but not as much as we used to.”