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Why did the hedge funds short FFH a couple years back?


stahleyp
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I've tried to read as much as I could about the situation. From my understanding, lawsuits are still pending.

 

Chanos seems like a really smart guy. I really like Einhorn from what I understand. I just get how these guys were so wrong. Just a big an analytical error? Greed?

 

Perhaps I'm being partially judgemental, but I try to avoid learning from those that show signs of greed or poor poor anaystical error.

 

As always, thanks for the help! :)

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Bottom line is the hedge funds felt that they could make money with FFH.

 

- FFH had issues (two large aquisitions had reserving issues that FFH did not fully understand until after aquisition).

- Stock had just started trading on NYSE.

- Stock was thinly traded.

- Confidence (banks, investors) was key to company remaining going concern.

 

Having lived through the dark days, my takeaway is the hedge funds felt they could drive the share price lower through a short and distort campaign. Given the incredible volatility we saw in FFH shares my guess is they made money on the downside and also on the upside.

 

What likely stopped FFH from going to zero was the strength of their management team and the relationships they had with the investment community that allowed them to get more capital despite the misinformation campaign being waged by the hedgies. In the dark days they were able to get money from Templeton, Markel and Southwestern.

 

Times kind of felt like the wild West!

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I think the best thing to do to get the picture is to locate a copy of the lawsuit allegations.  They may be in the FFH Sedar filings.  The covering pages run about 70-80 pages of easy reading.  The whole situation was pretty creepy.  Chanos appears to be culpable.  There were legitimate shorts who were not involved in the short & distort campaign but the majority were naked shorts.  At one point there was more stock shorted than actual trading float and it cost 20% to rent the stock to short it.

 

I feel today, in retrospect, that without the rescue from Markel, and Southeastern, and selling ORH and NB, that much of FFH would have been toast.  NB, and ORH may have survived as separate entities, but the US P&Cs were basically all but wiped out before the infusion.  The team at FFH is that much stronger then they ever were, and the Prem no longer makes use of leverage in the same way. 

 

Put another way.  They were a very easy target at the time. 

 

Too bad the old board is gone.  You could have gone through threads dating from 2003 on the topic.

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i have another question for you guys, that i'm sure you'll be able to shed some light on.

 

 

Why does Watsa use quite a bit of leverage? I know Buffett and Watsa are very different people, but Buffett has almost AA+ credit rating, down from AAA (which it had for many years), but FFH is at BBB-/Ba1, borderline junk to junk from Moody's.

 

To me, if you want to borrow funds, you'd want to have the highest credit quality possible to borrow at the lowest rate. Furthermore, many value investors tend to shy away from company's with a lot of debt, so I don't understand why a great value investor would want so much. Thanks for the help!

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Personally, I think the credit rating agencies have it completely wrong...nothing new there!  ;D  Fairfax should be rated AA.  They are over-reserved, leverage has been reduced significantly, they have a ton of cash on hand, their portfolio is hedged and generating alot of income, runoff is no longer an issue, and their recoverables have shrunk in half relative to equity.  So I ask you how they can still have virtually the same rating as five years ago?  Go figure!  Cheers!

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If Credit ratings agencies actually knew what they were doing or were on the up and up we wouldnt be in this mess we are in now. Ive stated many times before the debacle unfolded that I dont trust 'em as far i can throw em.

 

They are a joke.

 

That being said, Insurance cos are glorified leverage plays really. They borrow the policy holders $ in hopes they can make more than the interest they pay back in the form of premiums.

 

I thought Prems latest debt raising was a guy idea basically for the reason I stated above. When you are in this line its better to raise in good times rather than bad. He can always pay it off with little penalty.

I agree he should be getting better rates though.

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