William Ackman of Pershing Square: We Erred in Buying AIG Post-Bailout

In his Q3 2008 letter to investors (embedded in full below - originally uploaded by DealBook), William Ackman of Pershing Square explains how his hedge fund - which profited greatly from shorting a number of major financial firms - is navigating this wild market.

One statement of note from the letter - Ackman acknowledges a mistake in purchasing shares of AIG directly following the government bailout:

we did so because at the price paid, we purchased AIG at a substantial discount to book value, and we believed that book value was a conservative estimation of the value of AIG’s underlying businesses net of derivative losses.  We also believed that there was the potential for a renegotiation of the government’s extremely harsh financing commitment to AIG which provided for 80% dilution, enormous commitment fees, and a high interest rate... After acquiring our position, we met with other large holders, policymakers and contacted Berkshire Hathaway and other potential investors about a proposed recapitalization of AIG.  Unfortunately, the collection of shareholders that were attempting to restructure the government deal was exceedingly disorganized and some large holders were conflicted by a desire to buy certain assets from the company.  We ultimately concluded that the return on invested brain damage from this investment exceeded the probability-weighted opportunity for profit, and we decided to fold the tent.  We sold our stock and incurred a modest loss to the funds.

Read the entire letter below:

Pershing Square Q3 2008 Investor Letter

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Comments

[Gtarras:]

Mt Ackman shorts MBI, that has exactly same issues as AIG, namely subprime ABS CDOs, and then screams at every corner how bad MBI book is... He tried to do exact same thing back in 2001, but was not LUCKY back then... AIG has SAME book problems as MBI, and yet Mr Ackman, after loading heavily on its stock, promotes its stock heavily... What does it tell you of Mr Ackman, his "acumen" and whether anybody in his right mind should ever pay attention to his self-promoting rubbish... ???

2008 Nov 17 10:35 AM

[Ishortyou:]

almost all the units of AIG are profitable except the one involved in MBS, ABS, CDP, SIV's, to my common sense this is probably the only and the only one unit or subsidiary that needs to be sold of at fire sale price, but hey what do I know?

2008 Nov 17 05:00 PM

[CanadianInS...:]

" a modest loss to the funds " was actually a substantial loss on the funds' AIG positions. He lost the majority of the funds' AIG investment. Very quickly. He is minimizing that disaster by placing it in a convenient for him (if we swallow it) and utterly irrelevant context (overall fund performance). An honest assessment would be "Yup, I f*d up on that one."

2008 Nov 17 11:46 PM