Whitman’s Q2 Letter

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.”

He continues:
“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.”

Now, I have no problem with short sellers. None at all. What I do take issue is their ability to establish positions and not be held to the same reporting requirements “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 in that vein , especially when you consider the MBIA (MBI) and Ambac (ABK) cases have the longs and shorts pitted against each other, the disclosure requirements and lack thereof gives one side a decided advantage over the other.

I do not know ultimately who will be born out right regarding MBIA and Ambac but we do know, 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 (“none” means no position):Long Third Avenue Value (TAVF), None

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