Carl Icahn admits he made a recession bet that cost him $9 billion wrong

Carl Icahn has admitted he was wrong in making a huge bet that the market would crash after an ill-fated trade that caused his firm to lose nearly $9 billion over nearly six years.

According to a Financial Times analysis, leading activist investors lost about $1.8bn in 2017 on hedging positions, before losing a further $7bn between 2018 and the first quarter of this year as asset prices fell. must have done

“I’ve always told people that there’s nobody who can really pick and choose the market on a short-term or intermediate-term basis,” Icahn told the FT in an interview to discuss the analysis. “Perhaps I have made the mistake of not following my own advice in recent years.”

Icahn Enterprises began aggressively betting on market collapse following the 2008 financial crisis and became increasingly bold in subsequent years, implementing a complex strategy that included broad market indices, individual companies, commercial mortgages and shorting of debt securities.

Over time, Icahn’s notional risk, the underlying value of the securities he was betting against, exceeded $15 billion, regulatory filings show. “You never get the perfect defense, but if I kept to the parameters I always believed in . . . I would have been fine,” he said. “But I didn’t.”

Icahn Enterprises, the activist-owned listed vehicle that allows retail investors to add to their stakes, reported losses totaling $4.3bn in 2020 and 2021 as the pandemic battered markets after the Federal Reserve’s massive stimulus There was a rapid recovery from the recession.

Icahn said, “I clearly believed that the market was in big trouble.” “(But) the Fed 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 that Icahn Enterprises’ market value was inflated and its dividend was volatile. The company’s shares have declined by more than 30 percent since the report was published.

As Icahn’s small stakes drained billions of dollars from his investment firm, he pledged nearly $4 billion of his own money to his publicly listed vehicle, filings show. That injection helped keep the firm’s internally calculated investment portfolio value relatively stable.

Icahn exposed himself to another risk by taking out a margin loan that first appeared in early 2022. The Hindenburg report drew attention to Morgan Stanley’s margin loan, against which Icahn pledged 60 percent of his stake in Icahn Enterprises as collateral.

Hindenburg argued that this could expose his business if the sinking stock price triggered a margin call that would force Icahn to liquidate some of his holdings.

In a statement earlier this month that addressed Hindenburg’s allegations, Icahn Enterprises said that Icahn was in “full compliance” with respect to all personal loans and agreed to reduce its share price by $500 million. Announced stock buyback authorization. With regard to its market valuation, the company stated that “over time, (our) performance will speak for itself”.

Icahn told the FT that he had used margin loans to make additional investments and had billions of dollars in cash outside his public vehicle. He said, “Over the years I have made a lot of money out of money.” Referring to margin loans, he said, “I like to have a war chest and by doing so I got more war chest.”

Icahn Enterprises warned that a “prolonged decline” in its share price could raise the possibility of foreclosure or a forced sale of Icahn’s stake if it was subject to a “margin call”.

Earlier this month, Icahn Enterprises disclosed that federal prosecutors in New York had contacted the company seeking information on 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. Of the roughly $9 billion he lost on small bets over the roughly six-year period, the portfolio made almost $6 billion from his activist bets, leaving the vehicle with total investment losses of nearly $3bn.

Separately, Icahn Enterprises made a $3.5bn profit during this period by selling companies it controlled – including casinos and a railcar leasing business – that were held outside the investment portfolio.

The net asset value of Icahn Enterprises fell from $7.9bn in 2017 to $5.6bn this month. That’s a potential problem for Icahn, which has historically taken a hefty $8 annual dividend in stock rather than cash. It has more than doubled the number of shares outstanding over a roughly six-year period, causing its net asset value to drop from $33 per share to about $16.

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

As pressure mounts on his firm, Icahn has been forced to rein in his short bets, as some investors fear a regional banking crisis and debt ceiling standoff could result in a sharp market selloff.

Icahn said, “I still believe to some degree that this economy is not good and that there are going to be problems ahead.” “We are still defending, but not to the extent that we were.”