benhacker

Peter, Can you share the CUSIP of these bonds? Are they the '42 / '43's or something else like SSRAP? I can't figure out a way to trade the '42 / '43 maturity bonds, and nothing else I see (other than SSRAP for brief periods today / yesterday) is trading that low. On a side note, during the recession, Eddie did buy back some bonds, but not very much, especially given some of the long bonds got <35% of par. He kept buying stock at that time. Ben

Yes Zarley, you simply look at whatever stocks have the highest short rebate (aka "borrow"). Institutional traders can access the rebate / interest on lending thus it is implicity in the options pricing (usually), but most retail can't... so the "math" for retail strongly favors the options trade in these situations. As pointed out above, IBKR has now flattened this asymmetry in the market. Ben

Eric, http://www.interactivebrokers.com/en/p.php?f=shortableStocks&p=stockYield-default Haven't check the rate, and not able to right now. You have to not carry a margin balance, and you simply have to turn on the feature through account management. IB is simply bar none the best broker... no other brokers can even approach this level of capability at the retail level. Ben - long and strong on IBKR... I don't lend any SHLD but own a lot of debt of Sears.

What Hester said... IBKR does lending now for small accounts. Also, the bonds offer a wide range of ways to play this as well... true, not fully applicable to holdco, but sure provide some nice YTMs depending on what price you get. Ben

Ourkid, not to disagree with everything you said, but I just wanted to touch on this point that you made. It is true that it is sometimes hard to separate process and outcome after the fact, but I don't think the line of reasoning you are using is ever appropriate. The premium you are describing for pre-crisis financial assets, and IMO, even the 'quality' designator have been show to been way off base after the fact. Was the financial crisis an outlier that couldn't have been predicted? ... maybe. But I think good arguments could be made that much of the buying / selling going on pre-crisis was the opposite of margin of safety - it was only going to work out if the stars aligned. There is no way to defend the purchases by saying "well, that was the price for the assets". The other obvious choice for financial acquirers pre-crisis (and any time prices are too high) is to just say no. This is one of the many reasons that corporate managers should be paid good money (*if* they do a job well done), they need to have the skill and fortitude to walk away from bad deals even when institutional momentum pushes business toward doing something. There is a difference from buying BAC at 2x book in '06, vs. 1x poorly capitalized book in '08 vs. adequately (hopefully) capitalized 1/4 of book in '11. There is a margin of safety variation along those points... There are times when assets are cheap (even quality ones) and times when they are not. At least for me, my expectation for anyone who is an allocator of capital (whether a corporate manager or an investment advisor) is to know the difference between cheap and expensive, and change their buying based on that. If Canadian banks were trying to get into the US market, it may have been "easier" to buy "quality" assets at 2.5x book, but that doesn't make it right regardless of what was customary at the time. I for one think the managers should be held accountable for those decisions. I'm not an expert on the Canadian banks, so I don't mean to endorse everything said up thread about the banks, but I only meant to comment narrowly on the acceptance of ex-post analysis that absolves management of stupid acquisitions by gesturing to EMT. Ben Hacker Long BAC in various ways (small position)

Thought this was relevant to the discussion: http://financiallyfit.yahoo.com/finance/article-113691-11403-3-true-story-living-well-on-11000-a-year One of the things I love about this country is that their are so many ways to find happiness. Not everyone of them makes perfect sense to me, but there is a lot of opportunity. I like this guys' style, even if I wouldn't choose it myself. Ben

Wow... reminds me of this: --- from "When Genius Failed" (partial quoting) --- "We're down by half," Merriweather said. "You're finished," Mattone replied. "What are you talking about? We still have $2 Billion. We have half - we have Soros." "When you're down half, people figure you can go down all the way." ------------------------------------------ Not fully applicable given the difference in leverage, but in this environment, I doubt Paulsen stays in the game. He's filthy rich, I bet his job is no longer fun... Ben

Feel pretty shitty that I was posting about why you shouldn't buy Apple during that moment. :( He will be missed. A legend. Ben

DCG, This only is true if you think current margins and returns on capital are normal and sustainable and do not require any "growth capex / investment" to maintain. Do you believe that? We all agree on earnings, Apple seems cheap. Their products have been great. Is it really so obvious that the decline curve on their current revenues and margins isn't amazingly negative without continuous massive investment and successful innovation? I can imagine scenarios where it works out, but I wouldn't think the current P/E really gives you much comfort... you have to build a P&L 3-5 years out and have some reasonable confidence what it will look like and that it will be the same or higher than now. I don't have that conviction and I think the biggest issue value investors get into is looking at what a company has done and assuming it is ordained that that level of profit may be possible again or even normal. I think you have to carefully examine that opinion here. No position at all, but I'd certainly not be long if forced. Ben - My 1 cent... cause that's all it's worth.

Plan / Enoch, I see your point. $5B is a high price to pay, but maybe it was the right price. I think it says more about the value of Buffett's franchise than BAC's. I think BAC is cheap enough, buyers at this price will view it as a positive, but I'm questioning the logic of BAC management here. Ben

So I get the excitement here for the longs. It's nice to have Buffett validate your thesis, and it's great to see the huge rally. But I am sitting here as someone who owns a tiny piece of the Class A warrants, and I'm scratching my head as to the amazing high price BAC just paid for a little bit of confidence. 700m 10 year warrants @ 60% of tangible book -- what do you guys think the market price of those are (today)? Maybe $6-7B. Preferred is probably good for face value. It really seems to me that BAC just handed Buffett $6-7B (ok, maybe $5B since BAC preferred are paying way more than 6% these days). Does this seem like a rational thing for management to do? I understand that the market was just crapping on them, and confidence is important, but damn, I'm scratching my head a bit more worried about BAC than I was. Glad I own orders of magnitude more Berkshire than I do BAC... Ben

This isn't my area of focus generally, but I read the Drunkenmiller piece and was confused. I wasn't confused because I disagreed with what he said, but I was confused by what he didn't talk about. He basically said . Well that's all well and good, and he admitted that he is long treasuries. But when people talk about this, I think they are confused. Even if the US defaults on it's debt, US debt is still the safety trade, and Drunkenmiller knows this... and articulates it well. I agree 100%. What I don't think was genuine, was what about every other asset? Oh just "a few days with missed interest payments" --- how will commercial paper market behave? Money market funds? Stable Value funds? What is the impact to letters of credit, to the stock market? To the forex markets? Does every financial model in the world need to change how they calculate the risk free rate for their derivative models? Count me as agreeing with drunkenmiller that a US default will be *good* for the price of treasuries, but *bad* for virtually everything else.... at least in the short term and likely longer. Ben

Thanks everyone. I appreciate everyone's point of view to sanity check my own. Ben G, just wanted to know that I don't recall ever reading any of your posts (as I said, I use RSS For the board, so I don't see the authors) and I certainly did not mean to call you out as an offender specifically, just that your post was indicative of something that had been bothering me. Point taken from others as well about having thick skin about these pretty small things, and just skipping over the 'offending' posts. Understand we all have different desires here, and I don't mean to impose my own order or anything. As always, I appreciate Sanj's little creation here even if I pick at it from time to time. Thanks guys, Ben - thought I should note, long LVLT (very small position)... so it is not for my lack of interest that I raised this issue.

Honestly, I had taken some time away from the board as it had digressed in my opinion, and I needed some time away, but coming back this posting regarding LVLT has really lit me up again, and is over the top in my opinion. I view this board via RSS feed so I don't see authors, and I honestly feel like half the threads end up having completely irrelevant and "pumping" like posts linking every topic back to LVLT.... I don't know if it's 1 or 10 different posters, but it seems wacky and really unproductive. Am I the only one who finds this strange and completely inappropriate on this board? I'm honestly asking because I feel like maybe I'm out to lunch and this is totally normal... There is a level of discourse on certain names that exceeds acceptable limits (there is only so much you can say about a given company... we never even talked about FFH during the dark days as much as LVLT now). I think LVLT is well out into the cult space on this board. Or maybe I'm just coming from a different perspective. I've been posting on this board (and predecessors) for I think 7 years... that does not give me special privileges or more weight to my opinions, but while there have been flare ups here before, I don't think I've ever seen behavior around a specific stock that I thought was so wholly inappropriate, so I hope this statement comes across in that light. For those who continue to push LVLT into every thread on this board, please stop. If you want to advocate for LVLT as an investment thesis with great data, or talk about trends in telco, you can do it under several threads with those topics. Knowing that Howard Marks has a 0.37% position in LVLT seems... like irrelevant info to me. Apologize if this isn't taken the right way... I am trying to highlight what I think should be a basic expectation of these kinds of message boards, but maybe I need to change now that the forum has grown. Ben

Yeah Josh, I'd also argue that if you look at any company, many balance sheet items are estimates - discount rates chosen, loss rate estimates, recovery rates, etc can all drive a range of value around the "real" final number. There is a very very large difference on the continuum of FRAUD -- AGGRESSIVE -- MODERATE -- CONSERVATIVE -- OVERLY CONSERVATIVE. Just like some banks tweaked their account to show delinquencies later, or pull some profits into the current period during the crisis (I defended this here on this board for WFC at the time), there is a big range between being conservative, and being fraudulent. Others have also noted that FFH never used to put a note in the annual about how they were strongly reserved until around '07 and '08 (can't remember) because, well, they weren't. Just my 2 cents. Ben

One other thing to note guys about the 'under reserved' claims (and I agree with TWA and Al said above) is that while many claims may have been wild, and the harassment and media alignment was certainly borderline / illegal, we should note that FFH combined ratio has been in the sh1tter for the last several years due to exactly the business issues the shorts were complaining about (wrt to reserving). They made up a bunch of other crap too that didn't come to pass, but the reserving was real IMO. Just take a gander at ORH's loss reserve development table for their 2009 annual report. It shows that between 2005-2009, the reserve additions just for business prior to 1999 was over $700m. Take a look at NB's books (FFH '09 annual has this reserve table) for the '99 and prior bucket compared to the later years. Crum is a similar looking story, although I don't have the right loss triangle in front of me right now. People keep bitching about the combined ratio, but as FFH has pointed out, if you look at it on a '02-'09 basis, their reserve redundancy has only been moving in the right direction... the reason FFH has still been showing crap results is due partly to the craptastic business they acquired back in the day. Now I haven't run all the numbers, but we didn't see $4B of under reserving (which Gwynn quickly revised to $2B), but it was more than $1B for sure. And that is intuitively obvious because FFH's investments results would have made a non-reserve adding companies' stock do much better than what we have experienced (not complaining) via book value growth over the last few years. To be clear, Hempton had some things right. FFH bought some serious garbage, and honestly, they probably knew it along with the shorts. What FFH viewed as trying to 'earn their way out' the shorts called out as accounting fraud for failure to reserve add upfront, and the shorts saw a company that was in trouble, with illiquid stock, and a fresh listing in a land with more media coverage and hot money, and went to take advantage... they have failed, and crossed many ethical lines in the process, but let's not make the mistake that their words were 100% fabricated lest we lie to ourselves. To say that the analysis was wrong 100%, or that they should apologize for saying reserves were understated... well that is just naive. FFH reserves were understated... period. But that doesn't give the shorts a pass. What is interesting is that this confusion about early business ('00 and earlier) doing badly while later business (after FFH got religion from their near death) is showing continuous reserve releases is creating a compelling investment opportunity that people don't respect. As the bad business runs off, you see the loss development each year turn to a redundancy on average... this will hopefully coincide with a harder market, but we all know that now that I just said that the market will be soft for another 2 years. :) Just trying to provide some balance. I got to the board just as a few folks here were outing Hempton for posting under a pseudonym (coward). However, I do value a lot of what Hempton says, even though he uses broad brushes, and has a history of questionable actions. If he were still short (I don't know, but maybe from what I've gleaned) I would seriously value the opportunity to hear his pitch against FFH. Ben - Materially long FFH, my name is Ben Hacker, not John Hempton. ;-)

You talk to their customers... Some businesses you can't meet workers, and you can't meet customers, and you can't verify physical locations (without expense)... in those situations you have to acknowledge you are at a distinct informational disadvantage, and make you peace and either not invest, or invest in a measured way and not allow yourself to double down when basic facts are challenged. Defending Sino Forest by saying you can't do scuttlebutt on a company as basic as Wells Fargo seems like a pretty big stretch. It's not that we don't take leaps of faith or coattail on implied research in investing, we do. For some Scuttlebutt on WFC, I only have to look to my clients who probably 20-25% have WFC bank accounts, and many have brokerage, mortgage, auto loans, etc with them. Their cross sell metrics pass the sniff test for me. Take that as a tiny data point, but there are many others that are not hard to find. Ben - no position in Sino... read the report, thinks everyone would be better off just waiting and not wasting their time trying to determine the odds at a table that doesn't follow the rules you are used to. and I hope Sino is legit.

Wow, I really have set my sights too low. ;-) Ben

I have no knowledge of Koo (he's on my reading list) beyond what is on this board, but this quote reminded me of something very (VERY) dumb I said once to someone who was trying to convince of something (correctly). "Don't bother me with the facts, I have the truth." I really said that, and I wasn't that young when I did so... here's to us all looking at more facts, especially me!! Ben

There is $330B indexed to the NAZ 100??? i'd like to see a source for that... more like 10% of that number. Ben

Biaggio, I think the bonds are probably good, but if there are mass defaults, that $1.6B won't go far... however, they didn't ensure a whole ton of bonds, so the backing is actually pretty solid. If you are buying the nearer maturity BHAC bonds, you are totally covered. Further out stuff is still likely good. You get two benefits with BHAC backing: 1) Actually backing with insurance funds set aside 2) Due diligence done by Ajit / Team on underlying munis that presumably led them to believe they were zero loss bonds from an insurance standpoint.

Berkshire only has put $1.6 in capital into BHAC, so I think it's hard to imagine the muni issue really doing much damage there. BHAC is not backstopped by BRK, so it's a non-recourse arrangement for those BHAC insured munis. Ben

"There are no toxic assets, only toxic prices." The problem is, in this situation, it seems hard to measure the toxicity. There are millions of ways to lose money, this one seems better than most, I'd stay away. Ben

To be blunt, I don't think you learned the right lesson. A businesses' numbers have to make sense, and management should act rationally if their business is trading at a crazy price (where were the huge buybacks with all that supposed cash they were making?). You can't blame this one on the auditor... the numbers didn't make any sense, and it was all over the internet for any to see that was the case.... why do insanely profitable companies go public via reverse mergers (a regulatory dodge) to sell themselves to retail US investors???? ANSWER: They don't... frauds do. Oh yeah, and this fraud was perpetuated in the US, not in emerging markets. We all have to own our mistakes, the auditors don't get to be your shield on this one... Starr is a tough one, but we all have to do our own research. By the way, the 10-Q's weren't even audited, which as MOI pointed out is why the fraud went down now (10-K time). Ben

Perhaps some education is in order so we all maintain our perspective on what is and isn't meaningful information. https://self-evident.org/?p=893 Ben