confidence game

[link01]

<<Hedge fund manager William Ackman gave author Christine Richard impressive access. She writes, "Ackman gave me a CD-ROM containing every e-mail he had written or received that mentioned MBIA as well as years of appointment calendars and access to an office filled with more than 40 boxes of documents he'd collected in researching MBIA. He encouraged colleagues, advisers, and friends to talk with me and spent hours answering my questions."

 

The result is a fast-paced, behind-the-scenes look at how a "short" investor uses the press, stock analysts, and the government to beat down the price of a stock he has bet against.....There's plenty of other rich detail here. The broker who gave Mr. Ackman the idea to short MBIA worked for, of all places, Lehman Brothers.

 

The dependent relationships among short-sellers, regulators, and the press are illuminated for all to see. At one point, Mr. Ackman asks an SEC official what it would take to get the agency to act. The SEC official's reply? "A story on the front page of the Wall Street Journal or the New York Times, especially the New York Times."

 

Also illuminated are the interactions between and among the shorts. When Morgan Stanley put out a research report on MBIA, Jim Chanos and David Einhorn emailed Mr. Ackman about it. Daniel Loeb, who "had talked to Ackman for several years about MBIA" and "also held short positions on the bond insurers," sent Mr. Ackman a book in the mail as a gift.>>

 

fascinating stuff here. i wonder how patric byrne & his deep capture friends would react to ackman not only  willingly, but almost eagerly, proudly, admitting to the political-courting, media-mongering, & research-sharing pile-on tactics that are recounted here in hi-def living color? because acman obviously thinks he not only done nothing untoward, but has performed a valuable public service.

 

http://www.futureofcapitalism.com/2012/confidence-game

 

 

 

[Parsad]

I think many of these large hedge funds working together in coordination is a dangerous thing.  Ackman is a very smart fellow and has a remarkable disposition.  But just like institutions that are "too big to fail" and cause imbalances that are difficult for even the government to handle, I think large hedge funds pose the same threat when they are working together.  Unfortunately, regulation is a necessary evil that is a result of abilities to reap such economic destruction.  Cheers!

[link01]

I think many of these large hedge funds working together in coordination is a dangerous thing.  Ackman is a very smart fellow and has a remarkable disposition.  But just like institutions that are "too big to fail" and cause imbalances that are difficult for even the government to handle, I think large hedge funds pose the same threat when they are working together.  Unfortunately, regulation is a necessary evil that is a result of abilities to reap such economic destruction.  Cheers!

 

i think the real problem with hedge funds working in concert with one another occurs mainly when the object of their disaffection happens to be a financial institution, ie, an industry that lives or dies by having the publics trust. sharing & diseminating "research reports" amongst one another & peddling it to the public via well-honed media contacts or political strong-arming, leading to sec inquiries, strikes me as a dangerous game too. they are playing uncomfortably close to the lines, where calling the shots in or out becomes inherently fraught with a greater risk of being wrong. and i guess the same could even be said for any early stage publically traded co that is dependent on the capital markets for financing its growth.

 

bill ackman strikes me as a very smart investor who confidently operates according to a code of conduct that he believes in. but the true north on his compass might be calibrated a little differently from someone like buffett or watsa. those 2 would probably have agreed with ackmans thesis about jay brown & mbia, & maybe even placed a short bet against them (in prems case at least) but they would never use the media to air their negative views to aid in bringing a co down.

[ubuy2wron]

Pump and dump- short and distort they are two sides of the  same coin How ever the repercussions of those activities which are both manipulative IMO are asymetric. SEC involvement and other regulatory agency investigation can only have one impact on a stock price. Hedgies learned long ago that the simple announcement of an investigation would have an extremely negative impact on security prices. I believe that the rules that define what exactly is manipulation have to be loosened to keep hedgies honest. As certain players discovered it really is not required to be right in your investment thesis you only had to convince a regulator or journalist that you may be right to ensure you have a profitable trade. Journalists are a lot like regulators in the sense that a negative story is much more likely than a positive one to have an impact on a securities pricing. Also I believe journalists are much more likely to chase down a negative story over a positive one. Bad news sells papers or attracts eyeballs a story on how much the sitting president loves and respects his wife would garner zero attention a photo shot of him oogling an asst. would race around the world in a heart beat.

[link01]

Pump and dump- short and distort they are two sides of the  same coin How ever the repercussions of those activities which are both manipulative IMO are asymetric. SEC involvement and other regulatory agency investigation can only have one impact on a stock price. Hedgies learned long ago that the simple announcement of an investigation would have an extremely negative impact on security prices. I believe that the rules that define what exactly is manipulation have to be loosened to keep hedgies honest. As certain players discovered it really is not required to be right in your investment thesis you only had to convince a regulator or journalist that you may be right to ensure you have a profitable trade. ..

 

there's certainly a lot of truth in what you say.

 

but to be fair i also think its an inherently difficult position to navigate when you are a large, high profile hedge fund that goes short stocks with equal conviction as it goes long...its a real tight-rope they are walking. how do you lay out the thesis on your long positions in letters to your shareholders but keep mum on your shorts? do you keep your shorts sealed in a black box while exposing only your longs to the light of day? how would you rationalize that? there just seems to be alot more ethical pitfalls lying in wait managing short positions vs long. its much trickier.

 

i do admire the quality of bill ackmans research & published analysis, & i also think he's a high grade guy in his own way. but enlisting the help of politicians, instigating sec inquiries, & leaking stories to the media when you have a large short position strikes me as inescapably...dubious. even if you 'know' you are right in your analysis.

 

i thought this section of pershing squares august letter was interesting, commenting on "reputational capital":

 

<<Landry’s Restaurants In November 2009, the Funds acquired stock and cash-settled total return swaps representing approximately 25% of the economics of the common stock of Landry’s Restaurants, a restaurant company which was subject to a going private offer at $14.75 per share. This investment

opportunity was brought to our attention by former Pershing Square analyst, Mick McGuire, who

owned the stock personally. Based on our analysis, we believed that Landry’s was worth substantially more than the buyout price and that we could be a catalyst for unlocking that value. In July of this year, Mick and Pershing Square entered into voting agreements supporting the new going private price of $24.50 per share, a 66% premium above the November 2009 deal price.

While this was a small investment for us at approximately $60 million, we believed the

opportunity for profit was large enough, the time required to effectuate the outcome limited

enough, and the downside minimal enough that the investment made sense for the Funds. Our

original analysis appears to be correct as the transaction is on a path to close as early as October.

 

We were also mindful of the potential reputational benefits of working to protect minority

shareholder interests in the Landry’s situation in deciding to make this investment. We have

often spoken to you before about the importance of our continuing to build what we call

“reputational equity” to the long-term success of the strategy. While Landry’s was a small

investment, our success here for the benefit of all shareholders will not go unnoticed by the

thousands of shareholders who own the stock as well as by other companies who are considering

going private transactions at prices that are below fair value.

 

The Landry’s investment had one additional benefit in that it provided us with an opportunity to

partner with Mick McGuire. As many of you know, Mick was formerly a Pershing Square

analyst who is currently launching his own fund called Marcato Capital. Mick intends to

implement a Pershing Square-style strategy in the smaller capitalization universe. We wish him

well and look forward to the opportunity for future partnerships in situations where our

involvement can enhance our respective returns.>>

 

http://www.scribd.com/doc/36476281/Pershing-Square-Q2-10-Investor-Letter

 

 

 

[SharperDingaan]

The reality is that all PM’s are adept at both the long & short - & you’d fire them, if they weren’t. A ‘conservative’ portfolio may be 130/30 long/short, with the ‘short’ achieved through an option or futures position. To borrow physical & sell is to actively drive the short, to use an option/future/cash is to passively short (hedge).

 

To actively short, you need the complicity of long shareholders. The longs gets the loan fees, reduced cost base from buying at the low, & realized gains as they squeeze the price back up. The short gets the spread. The bystander gets hit with whipsaw, & the target collapses if you can cut off its market access. Higher gains for both longs & shorts, but when the longs do it well - the shorts get bled white.

 

Short an entire market, & you force passive hedgers to help you - as they can’t sell their underlying physical. They have to buy the options at whatever price, & with the fear in the market – the only option seller is you. The target market gets hit with whipsaw, & the underlying economy collapses if you can cut off its access to cheap money.  But to do an entire market you need to spread the short risk (gang approach) & the longs are the globes central bankers.

 

To short at all - you need large amounts of risk seeking capital, you need to tie it up, you need it away from regulators, & you need it tax-free (off-shore). You maintain discipline through the law of the jungle, & you ‘store’ your wealth in trading positions that can only benefit from your actions. You get bigger, you squeeze out your competitors, & you get forced to hold something non fiat – as you’re destroying currency values.

 

Collapse the Euro$ off-shore market, & you squeeze the short capital in jurisdictions where laws are lax. The bigger they are, the more they’re forced to sell which collapses the market – except that this time the market is flooded with off-shore liquidity, & all of it flowing through the globes central bankers. Buy up the market & we’re suddenly back to the old fashioned model -  & the ‘right’ shorts getting bled white in some very unfriendly neighbourhoods.

 

The non fiat stores of value collapse as there are too many sellers, & there’s a rush for state protection when the only one selling is the state.

 

SD