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Todd Sullivan
Todd Sullivan

Marty Whitman vs. Bill Ackman

March 04, 2008 | About:

This is becoming the investing world's Ali vs. Frazier. Legend Martin Whitman takes on Bill Ackman for another round in his latest letter:

I am torn on this one. The only mutual fund I own is Whitman's Third Avenue Value (actually my son has it in his Coverdale) and I am a huge fan of Ackman and do watch his action closely. So who is right? I have documented Ackman's stance on both MBIA (NYSE:MBI) and Ambac (ABK) here in the past in detail so let's go to Whitman's retort.

Whitman states "MBIA is now strongly capitalized. It ought to qualify easily for an AAA rating with a $17 billion claims paying ability. If so qualified, MBIA would be in a position to underwrite a large amount of profitable new business."

He then says there are 3 main reasons this may not happen:

1- Capricious regulators (they actually seem to get as much of his wrath as Ackman does)

2- NY State insurance Regulators and Elliot Spitzer

3- Ackman and his "bear raiders"

He then says that while Ackman is an "articulate advocate" (this contrasts to the "slick salesmen" comment he made late last year) who is wrong for three reasons.

1- The "cheapness" of AAA insurance is not a broken model

2- GAAP analysis of the insurers portfolio by a "mark to market approach". Whitman claims this is "arrogant nonsense" and that they should be judged on "what percent of obligations default and how they work out". He sarcastically points out the the market has "correctly predicted 9 out of the last 5 recessions."

3- Debt senority: Whitman says that MBIA's structured debt appears to be almost all "senior" or even "super senior" and the risk of default is minute despite what Ackman and others claim.

So, what do we think? They are both right. Ackman has been dead on to this point and Whitman will be right long term. Ackman correctly predicted the current situation the insurers find themselves in. He was the first to make the call in 2002 and has not wavered in his belief.

Whitman will be right long term because there are too many parties with too much at risk to let the insurers fail. Now, there will be a massive dilution of shareholder interest along the way, but they will not fail.

That being said it does not mean that shares may not see low single digits before then so if you are going to invest, do so with a very strong stomach.

With all the plans out there and all the big fish billionaire investors like Buffett, Whitman and Ross circling around, my guess is Ackman will take his winnings and leave the tale very soon, if he has not already. He will does so as a huge winner in this fight.

Please read the full letter here:

Disclosure ("none" means no position):Third Avenue Value Shareholder and now long MBIA through the fund, Ackman fan


Source: Todd Sullivan's - ValuePlays

About the author:

Todd Sullivan
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 3.1/5 (22 votes)


Eric McGough
Eric McGough - 9 years ago    Report SPAM
Anybody want to attempt to explain this comment by Marty (on page 3) concerning MBIA, ABK, MTG, RDN:

In prior distress investing for the Fund, the fulcrum

security had always been a debt instrument. In these cases,

however, the fulcrum security is the common stock.

Gangstarr - 9 years ago    Report SPAM
He means the most "Senior" security, the one with the least risk, the security that will turn out to be profitable, despite vast pessimism and negative sentiment surrounding the company and/or industry as a whole. Remember that Marty's approach is "Safe and Cheap." The fulcrum security is just this. Usually, this is the most senior tranche of corporate debt, because a stockholder holds only a residual interest in the event the company is liquidated. In other words, stockholders get nothing. Senior bondholders hold a preferred claim on corporate assets to the extent that their interest is secured. Full recourse debt would be preferable in such situation. Actually, with the bond insurers, both their debt and equity are lucrative at the moment due to the misunderstood nature of their businesses. Hope this helps.
Gangstarr - 9 years ago    Report SPAM
I should have explained that these companies aren't going to have to liquidate and are not in as bad of shape as some think. Their business models allow them to take in income immediately, even though they book revenue as it is earned over time. They only have to cover interest payments on defaults for several years before the obligation would even become due. Thus, stock is safe and cheap, you just think its hella risky.
Eric McGough
Eric McGough - 9 years ago    Report SPAM
At first I thought he was using "fulcrum" in terms of safety.

In a normal bankruptcy debt is senior to common stock.

Not that they are going bankruptcy, but I think he maybe using "fulcrum" not from the prop him up at bankruptcy definition, but form the "one that supplies capability for action" definition http://www.merriam-webster.com/dictionary/fulcrum

In a normal bankruptcy, the holders of the senior debt have a big say in our things are worked out.

I think he is saying since he does not see bankruptcy, it is the common shareholders who have a biggest say (via votes) on how things are worked out. Debt holders of an on-going concern would typically not have any voting rights. Voting rights are usually limited to common stock holders.

Eric McGough
Eric McGough - 9 years ago    Report SPAM
I should add he says this for all of these:

ABK common

MBIA common

MGIC common

RDN common
Eric McGough
Eric McGough - 9 years ago    Report SPAM
Here is an overview of distressed and special situations investing where the term "fulcrum" security used


"in order to receive equity in the post-reorganization capital structure, the distressed investor must properly identify the fulcrum security.

The key determinant in this assessment includes identifying the ultimate enterprise valuation, as well as the appropriate debt capacity

Condition of capital markets

Stability of cash flows

Seniority / subordination structural issues

Significant secured leverage from second lien tranche

Inability to “cram-up”in the same manner as unsecured debt

A thorough understanding of the leverage and motivation of all participants in capital structure will frame the ability of the distressed investor to achieve his ultimate objectives

Are senior lenders seeking a recovery of principal or equity in the reorganized entity?

Are unsecured creditors willing to put up additional capital in conjunction with a plan?

Does equity have a credible argument to support receiving a meaningful recovery?

Are third parties available and willing to introduce new capital?

Identify other opportunities to enhance “fulcrum”position

DIP facility

- Subordinated secured position (i.e. second lien)

- Backstop rights offering

Extramiler - 9 years ago    Report SPAM
The answer above is not right. The fulcrum security is the most junior security that will still have value in a bankruptcy. For example, the company may have secured debt, unsecured debt, general unsecured creditors, preferred stock and common stock. In a bk, the senior securities are paid off first, and if they are fully paid off, the next level of securities have value, and if they are fully paid off, the next level, etc. If there is not enough money, some securities (often common stock) will be worthless. The fulcrum is the security at the level between the senior securities that are fully paid off and the junior securities that get nothing. When MW says that the MBIA common is the fulcrum, he means that he thinks MBIA can pay off all their liabilities and preferred stock with money left over -- i.e. there would still be value in the common stock.
Eric McGough
Eric McGough - 9 years ago    Report SPAM
Extramiler - your answer sounds logical
Gangstarr - 9 years ago    Report SPAM
It all sounds the same to me. Essentially he wants to make money, as I imagine you do to.
Gangstarr - 9 years ago    Report SPAM
Oh I get it, you mean the security that is providing "support."
Danielw - 9 years ago    Report SPAM

Just my two cents. Whitman brought up the term fulcrum security in discussing how he has usually participated in the restructuring of companies.

In previous situations, such as Kmart, that security was the company's senior debt issuance of which he owned a boatload. (And which I sat on the sidelines for somewhat regretfully, though it was a wise choice.)

This time around, Whitman expects the company's to remain going concerns but that they will need to raise capital via the equity markets. Being a large shareholder, he will be able to participate in such offerings--which has already proven correct.

Whether his thesis on the bond and mortgage insurers is a correct one remains to be seen. I again don't know enough to make a wager, though I've been studying little by little as my time permits.

Again, just my take. But I believe it is the correct one. A good write-up and especially commentary on MGIC was recently submitted to ValueInvestorsClub--as a promising arbitrage opportunity.

As I've said before, I like that some very bright people are investing here. But just because professionals are doing something, doesn't mean it's safe or advisable for rank amateurs like myself to.
NelsonBenson - 9 years ago    Report SPAM
Guys, here is a rule I learnt in business that you should always keep in mind


Even if Whitman is correct, why buy troubled companies that made dumb stuff. Also, do you think Ackman can drive Exxon down 95%?
Sivaram - 9 years ago    Report SPAM
NelsonBenson: "Even if Whitman is correct, why buy troubled companies that made dumb stuff. "

The answer is obvious... Because the upside is very large.

AlbertaSunwapta - 9 years ago    Report SPAM
Does anyone know if there is an ETF with significant exposure to Whitman's selection?

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