Peartree

I have been fascinated by the @HindenburgRes $IEP situation, and there are some interesting learnings here. For example, one learns from $IEP that a controlling shareholder of a company with a small float that pays a large dividend can cause his company to trade at a large premium to intrinsic value, best approximated in $IEP by its NAV per share. The premium to NAV creates liquidity for the controlling shareholder by enabling him to access margin loans secured by overvalued shares that can be used to fund investments. The $IEP premium has been sustained by a large dividend yield, which is not supported by operating cash flows. The yield is generated by returning capital to outside shareholders, which is in turn funded by the company selling stock to investors. This system has worked for a considerable period of time, but it is highly dependent on the maintenance of the premium and the placidity of Icahn's margin lender(s). $IEP stock held by Icahn is not a liquid asset as it represents approximately 85%+ of $IEP shares outstanding. The shares also purportedly represent 85%+ of his net worth so he apparently does not have much outside resources to draw upon. A sustained premium requires confidence in Icahn and $IEP. If Icahn were to sell any shares, the stock would likely drop precipitously as the overhang of additional sales and the further resulting loss in confidence would catalyze other shareholders to exit before the deluge. The problem Icahn has is that his system has been outed by @HindenburgRes. Transparency is not the friend of $IEP having caused a more than 50% decline in the shares, which has caused Icahn to post more shares, now more than 65% of his holdings. Further declines over the last several days will likely require additional postings. Even after the recent share price decline, $IEP still trades at a 50%+ premium to its NAV. Its performance history and governance structure do not justify a premium; rather they suggest that a large discount to NAV would be appropriate. Icahn's margin lender(s) must be extremely concerned with the situation, particularly in light of the recent involvement of the @TheJusticeDept, which will also likely be investigating the lenders' involvement in the situation. There is likely more than one margin lender involved here because of the very large size of the loan and the risk limits that margin lenders have. $IEP reminds me somewhat of Archegos where the swap counterparties were comforted by each having relatively smaller exposures to the situation. The problem is that multiple lenders make for a more chaotic situation. All it takes is for one lender to break ranks and liquidate shares or attempt to hedge, before the house comes falling down. Here, the patsy is the last lender to liquidate. I am surprised that Icahn has not disclosed the terms of his margin loans including who provided them. My understanding of the @SECGov 13D rules is that they require disclosure of sources of financing and even copies of financing agreements, although many investors ignore these requirements. Icahn's favorite Wall Street saying: "If you want a friend, get a dog." Over his storied career, Icahn has made many enemies. I don't know that he has any real friends. He could use one here. We are neither long or short. Just watching from a distance.