Carl Icahn

Several months ago, as John Arnold was terminally unwinding long gas positions into an illiquid market, sending natgas as low as  $1.80, various pundits called for a bidless market in natgas. Today they are silent, because 3 months later, nat gas is 60% higher, and is on the verge of crossing the $3.00 psychological barrier, and going unchanged on the year, in the process pushing Chesapeake energy above $20 for the first time since the vendetta-like Reuters battery of negative articles allowed such activists as Carl Icahn and Dan Loeb, not to mention Zero Hedge readers, to accumulate a position in the name in the mid-teens.

• With big conditions, China Offers $43 Billion for IMF Crisis War Chest (Reuters)... US offers $0.00
• Mexico is not Spain: Mexican Yields Drop to Record as Spain’s Borrowing Costs Soar (Bloomberg)
• And live from Las Ventanas al Paraiso: G-20 Leaders Focus on Banks as Spain's Woes Challenge Merkel (Bloomberg)
• German Constitutional Court Gives Victory to Opposition in ESM Suit (WSJ)
• EU Europe’s Leaders Urged to Resolve Crisis (FT)
• Backing Grows for One EU Bank Supervisor (FT)
• Greek Leaders Close to Coalition, Aim to Ease Bailout (Reuters)
• China Economy Improves in June, Commerce Minister Chen Says (Bloomberg)
• China Looks for Loan Boost (WSJ)

Three weeks ago, when the hit campaign on Chesapeake was in full swing, we made a simple prediction: hate the company for whatever reasons but not because of the balance sheet. We explained that "under ZIRP, when every basis point of debt return over 0% is praised, and an epic scramble ensues among hedge for any yielding paper no matter how worthless, the balance sheets of companies just do not matter. In other words, for companies that have massive leverage, high interest rates, negative cash flow, which all were corporate death knells as recently as 2008, the capitalization structure is completely irrelevant." Alternatively, some other, far bigger, company with a pristine balance sheet and lower quality assets could swoop in and do a full management purge, removing the Mclendon overhang, firing the disgraced Board and commingling liabilities while boosting the quality of its assets. Think the TBTF putches from September 2008. Because at the end of the day, it is all about the quality of the assets. And the reality is that CHK has some quality assets, which, however, are burdened by many legacy issues. There is of course the issue of near all time record gas prices. But there in lies the rub: the prices are already at near all time lows. They could continue sliding, or in a world in which hard assets (and even gaseous) are becoming more and more precious by the day, they could go up. In which case CHK would be a very interesting bet. Needless to say, two weeks after our preliminary CHK assessment, Carl Icahn put his money, or rather $775 million of it to be precise, to essentially confirm what we had said previously. Which brings us to the next question: is CHK really worth more? Well, in keeping with the tradition of keeping it simple, we have decided to present one delightfully simple chart from Bloomberg, which shows where the biggest downside in the stock comes from - it's well-known leverage - as well as where the upside is hiding - its asset base - which has the lowest valuation of its peers.

Recall when Zero Hedge said two weeks ago that in the age of ZIRP, corporate balance sheets simply do not matter. The reason for that conclusion were of course the endless public debates over whether Chesapeake's massively overlevered capital structure would lead to its demise. Our view was that while balance sheets certainly matter in a normal market, one not dominated by central planning and endless hunger for yield, in the new ZIRP normal, none of the old school metrics of solvency, viability or even profitability matter. One person who appears to have agreed with our assessment, and put his money where his mouth is, or $775MM more specifically, is none other than legendary corporate raider Carl Icahn, who minutes ago announced that funds controlled by Icahn have raised their stake in CHK to 7.56%, making him the second biggest holder of the stock, and in a letter just sent to the CHK Board, in rather angry tones, demanded 2 board seats for his own representatives and 2 for Chesapeake's largest shareholder Southeastern Asset Management. Below we chart just how it is that beginning on April 19 at a price of $18.03, Icahn's funds accumulated over a period of 18 days, a total of 49.4 million shares of stock at what appears to be a Volume Weighted Average Cost of $15.70/share, meaning that as of the stock spike on this announcement he is currently in the money.

• Default now or default later? (FT)
• Monti warns of tears in Italy's social fabric (Reuters)
• Fear Grows of Greece Leaving Euro (FT)
• Greek Elections Loom as Key Bailout Opponent Defies Unity (Bloomberg)
• Santander, BBVA to Set Aside 4.5 Billion Euros for New Cleanup (BBG) - Thank god they both passed the stress test
• Austerity Blow for Merkel in German State Election (Reuters)
• Apple Founder Wozniak to Buy Facebook Regardless of Price (Bloomberg) - so... another ponzi.
• Dimon Fortress Breached as Push From Hedging to Betting Blows Up (Bloomberg)
• Saudi and Bahrain Expected to Seek Union: Minister (Reuters)
• Obama Pitches Equal Pay to Win Women Even as Charges Drop (BBG)

Back in January, when we wrote "Subordination 101: A Walk Thru For Sovereign Bond Markets In A Post-Greek Default World", we said that "because while the bulk of the bonds, or what is now becoming obvious is the junior class, can be impaired with impunity (pardon the pun), it is the UK-law, or the non-domestic indenture, bonds, which are the de facto fulcrum security."  In other words, from the very beginning the ball game was all about the non-Greek law bonds, whose indentures make it impossible for a non-makewhole take out settlement. Alas, we underestimated the stupidity of the European authorities who in their pursuit of a prompt if messy conclusion to the Greek restructuring, which ended up with a CDS trigger, were left with a tranching of the Greek balance sheet into a ridiculous seven classes, which crammed down the Greek law bonds into yet another separate class, an outcome which will shortly bite the European pre-petition sovereign market (i.e., Portugal, Spain and Italy) in the ass. What we did not however underestimate at all, is the critical value of strong indenture provisions, or, in other words, the willingness of UK-law bondholders to not comply with terms forced down their throat. As reported earlier today by the Greek Ministry of Finance, a whopping 20 of 36 classes of non-Greek law bonds have rejected the nation's attempts to restructure, and now appear set for an epic legal showdown, whose outcome will determine whether or not the UK non-UK law spread will explode, or if the entire European bond market will shoot itself in the foot itself, after all strong indentures appear to be merely a bond prosectus placeholder which will never be honored. Most importantly, we are delighted that UK-law bonds have understood one thing - by being the fulcrum security as we said, they have all the leverage. If Greece thinks it can take them in court and not pay them anything, well that may well be the ballgame for the European bond market.

Yesterday, Reuters' blogger Felix Salmon in a well-written if somewhat verbose essay, makes the argument that "Greece has the upper hand" in its ongoing negotiations with the ad hoc and official group of creditors. It would be a great analysis if it wasn't for one minor detail. It is wrong. And while that in itself is hardly newsworthy, the fact that, as usual, its conclusion is built upon others' primary research and analysis, including that of the Wall Street Journal, merely reinforces the fact that there is little understanding in the mainstream media of what is actually going on behind the scenes in the Greek negotiations, and thus a comprehension of how prepack (for now) bankruptcy processes operate. Furthermore, since the Greek "case study" will have dramatic implications for not only other instances of sovereign default, many of which are already lining up especially in Europe, but for the sovereign bond market in general, this may be a good time to explain why not only does Greece not have the upper hand, but why an adverse outcome from the 11th hour discussions between the IIF, the ad hoc creditors, Greece, and the Troika, would have monumental consequences for the entire bond market in general.

In an almost verbatim repeat of Carl Icahn's words of caution which we noted yesterday, Templeton's legendary chairman Mark Mobius said that "another financial crisis is inevitable because the causes of the
previous one haven’t been resolved" during a luncheon (menu included herb crusted chicken breast with cheese and tomato sauce, mashed potato and green vegetables, seasonal salad) at the Foreign Correspondents’ Club of Japan in Tokyo. Bloomberg reports: "There is definitely going to be another financial crisis around the corner because we haven’t solved any of the things that caused the previous crisis,” Mobius said at the Foreign Correspondents’ Club of Japan in Tokyo today in response to a question about price swings. “Are the derivatives regulated? No. Are you still getting growth in derivatives? Yes." Unlike Icahn, Mobius stopped short of calling for a return to Glass-Stegall and a repeal of the abominable Gramm-Leach-Bliley which unleashed the era of zero margin derivatives and financial system neutron bombs. On the other hand, it is nice of Messrs Icahn and Mobius to speak up now, two years after the ongoing systemic instability transferred $3.5 trillion in capital from current and future taxpayer generations to the present financial elite. We do, however, forgive them because in their better late than never contrition, they join the likes of Zero Hedge who since January of 2009 have warned, over and over, that nothing in the structure of capital markets has changed, and that the market could any day open not only bidless, but broken beyond even Brian Sack-ian band aid repair.

Confirming our ongoing observations that the pursuit of leveraged beta is the only game in town ("Levered Beta Uber Alles: NYSE Borse Margin Debt Jumps To Three Year Highs, Investor Net Worth Remains At Record Lows") is this surprising confession by hedge fund titan Carl Icahn, who not only warns that the levels of leverage achieved in the current centrally planned regime is as bad as it ever was, and that some form of Glass-Steagall should return, but that, stated simply, the entire "system is not working properly." His warning, stated in a very politically correct fashion, is that "there could be another major problem" either next week, or next year. Which is not surprising: after all not only has anything changed, but the very same drivers of risk that nearly crashed capitalism in Q3 2008, are back and arguably stronger than ever. That the Fed is the last recourse mechanism preventing an all out systemic wipe out probably should not be a source of comfort to anyone. In the end, the Fed, as any other authoritarian institution promoting central planning, will always lose.

It has been a literal power struggle for the past few months between Dynegy, Inc. (DNY) and its investors. The climax came on Wed. Dec. 15 when Dynegy said it accepted a buyout offer of $665 million, excluding debt, from Carl Icahn.

The Getty Oil takeover battle between Texaco and Pennzoil was probably one of the ugliest in Wall Street's history. Here is a rare video of Carl Icahn recounting the event.

As of January 1, 2010, Icahn Capital LP had $5.8 billion under management. Icahn Partners LP and Icahn
Fund Ltd. (collectively, “the Funds”) continue to be focused on a handful of core activist positions. As of
December 31, 2009, the Funds’ five largest long positions (equity or debt) represented an exposure of
approximately 68% of the Funds’ NAV, and the ten largest long positions (equity or debt) represented an
exposure of approximately 94% of the Funds’ NAV. The Funds had 17 long equity positions and 14 long
credit positions at quarter end.

"Forget Icahn, forget the exchange - Neither Icahn's offer nor the revised exchange (which reduces maturities by 6 mos.) provides the best value to creditors. Creditors can realize more value via a sale/liquidation of CIT assets." Egan-Jones

"The amateur investor is going to get hit badly again because they're pouring money into these funds. Some of these funds managers I do not think are experienced enough to handle some of the distressed stuff they're buying and they're going to get burned." - Carl Icahn

Michael Mauer, head of Citi's leveraged syndicate has left the TARP-laden firm to join hedge fund Icahn Associates. Mauer, who was hired in 2001, had previously worked at JP Morgan where he ran the syndicated loan business before the JPM-Chase merger. Mauer's departure comes as Icahn's hedge fund is focusing more on distressed debt opportunities.