Whitman's Q2 Letter and Disclosure Requirements

As usual, great reading regarding Whitman's Third Avenue Value Fund (TAVF).

On "Bear Raids":

It seems as if it is now easier, and more economical, to conduct bear raids than has ever been the case heretofore – even before 1929.
1) There is no longer an uptick rule. Prior to July 2007 and since the early 1930’s, a common stock listed on the New York Stock Exchange (as was Bear Stearns Common) could be shorted only at a price that was higher than the last price or change of price.
2) There are now well-developed options markets, where one can go short without incurring any material cash outlays – say, buy put options and offset the cost of
put options, by selling call options.
3) It is now feasible to sell short specific indices, e.g., the Markit ABX.HE, the indices that track prices of residential mortgages.
4) Perhaps most important, the means are more available, and more effective than they have ever been, to spread rumors through new communications devices – the Internet and business television stations.

Bear raids will continue unabated unless those people leading shortselling forays can be shown some downside, whether economic, legal or both. For example, there appears to be a four-pronged approach toward trying to destabilize MBIA as a going
concern. First, there are efforts to strip the holding company of assets so that the holding company might become insolvent. Second, there is pressure brought on the
ratings agencies to remove the AAA ratings from MBIA’s insurance subsidiaries. Third, there are pleas to regulators suggesting that they restrict the insurance subsidiaries’ ability to write policies. Finally, and as part of the other three, the bear raiders are trying to discourage clients from doing business with
MBIA. None of these actions seem to have any merit at all. But from the bear raiders point of view, why not press these approaches?

After all, there is no downside.

I have no problem with short sellers. None at all. What I do take issue with is their ability to establish positions and not be held to the same reporting requirements that "longs" are. If you can make money by either being long or short, all the power to you. But, to enable those being short to hide positions, while requiring those long to fully disclose, is questionable.

It seems as the disclosure requirements, and lack thereof, give one side a decided advantage over the other, especially when you consider the MBIA (MBI) and Ambac (ABK) cases where the longs and shorts are pitted against each other.

I do not know ultimately who will be born out right regarding MBIA and Ambac, but we do know that Ackman has shrunk his position dramatically. Whitman has increased his. Dinallo will not let the insurers blow up on his watch as regulator, it would be viewed as his failing.

I think the shorts were right to this point and Whitman will be proven right by the this time in the next year or two.

Read Full Letter Here


Disclosure: Long Third Avenue Value (TAVF)

 

Comments

[apppro]

You have no problems with short sellers! Makes me puke!

Those 4 reasons are problems enough!!! Especially the 4th one. Deplorable! Is no one at the SEC watching?

[crashof2008]

This is absurd. Did it ever occur to you that the historical volatility assumptions used in modeling the "value" of MBI's CDOs are completely irrational?

Duh.

Maybe if you had beyond college algebra you would understand that MBI is truly, irrevocably bankrupt.

See you in January, when FASB 163 takes full force.

[Ishortyou]

In respect to AMBAC and MBIA, they need to keep and save all the cash possible including stop paying dividends, deleverage from all their risky liabilities specially those CDS, CDO's, RMBS-ABS of uncertain value, in order to remediate their book values, once their book values are sound they need to reinstate their triple A rating again to write new low risk public bond insurance business. They can also open or extend a line of credit to make sure to continue operations and dissipate doubts.

They are already doing these, so it will take some time to deleverage their books from uncertainties and rewrite new business again. This coming back will be the best advertisement to recruit new clients.

[crashof2008]

Enter your comment hereSome of you have heard about MBI and ABK attempting to cancel 125 billion in credit default swaps in intense negotiations with Citibank, Merrill and UBS. Most accounts put MBI's share at 80 billion of this.

Any negotiations to cancel the 80 billion in insurance contracts that MBI wrote will be extraordinarily problematic, especially in this environment of collapsing bank profits.

To understand why, you need to master the difference between a CDO and a CDS. The difference between these two is an absolutely VITAL distinction that so many overlook.

I'll keep it short and sweet. But you need to master this distinction. Read carefully for just 30 seconds and it will serve you well.

Think of a CDS (credit default swap) as an insurance policy. MBI insured 80 billion of largely worthless paper to various banks. They are, after all, an insurance company and thought this would be a logical extension of their insurance business.

Now MBI wants the banks such as Merrill and Citi and UBS to cancel the insurance policies. MBI is basically offering to simply refund the premiums paid.

This would leave the banks holding 80 billion dollars of collateralized debt obligations (CDOs) that had been insured and guaranteed by MBI.

It's like if your house is destroyed in a fire. The insurance company, instead of reimbursing you for the value of the home (say $400,000) offers instead to rebate you the $1200 you have paid in premiums.

Would you take it?

This is what MBI is offering.

[johnhaskell]

there is no need for "bears" to discourage anyone from doing business with Ambac or MBIA. No one in his right mind would buy insurance from either company, as they obviously can't pay claims (despite their loud denials).

As for "bear" attempts to strip these zombie companies of their AAA ratings, that is called "sound regulation," not a "bear raid."

I wonder if Whitman would have made these bets 20 years ago.

[Did U Think The Ponzi Scheme Would Last?]

You forgot one thing - most of the evidence shows that ABK and MBIA are leading the charge in bringing their own businesses down by the use of disgusting amounts of leverage. Their greedy actions are affecting the whole market. They are the bathwater, not the baby.

[oldlures1]

Mr. Sullivan, I'm in your camp.

Ultimately, I sincerely hope that the false propoganda disseminated by the bear raiders doesn't, in time, become self-fulfilling prophecy by virtue of the masses following their espoused "facts".

I am naive, obviously! I had no idea how easily people could be led, nor how easily (and pervasive) the markets could be manipulated. At the base level, the whole matter is very disheartening. However, it is equally disappointing that no one (of authority) is doing anything about it.