So, yesterday Doug Kass defended short sellers and today Martin Whitman of the Third Avenue Value Fund (TAVFX), take them apart. Now, I do not have decades of investing experience but I do not remember a time where there was such clear and intense battle lines drawn.
MBIA (MBI) & Ambac (ABK) are at the epicenter of this battle. Whitman writes:
“In management’s letter last quarter, it was observed that short sellers and bear raiders have never been more powerful. TAVF operates differently from short sellers. At Third Avenue, Fund Management tries to avoid investment risk, i.e., something going wrong with the business or the securities issued by that business. TAVF pretty much ignores market risk, i.e., fluctuations in market prices. Short sellers, on the other hand, have to be acutely conscious of market risk. If the security they are short rises in price, short sellers have to come up with more collateral. If short sellers buy puts, and the security price does not go down, it is “sudden death” at the date of expiration of the put options.
As a consequence of the need to be so sensitive to market prices, bear raiders seem to tend very much to engage in nefarious activities, whether legal or not. First, the shorts condition markets any way they can, whether by spreading rumors or issuing
analyses where the consequences for long security holders are deemed to be draconian if the buyer continues to hold. Sometimes the true intentions of the short sellers are masked. For example, William Ackman appears to be disingenuous when he writes and
talks about saving MBIA’s policyholders. Why does he care about policyholders? Ackman’s objective is to drive down the market price of MBIA securities. The bear raiders have enjoyed great success. Bear Stearns (BSC) lost its creditworthiness when customers and counterparties reacted to rumors and stopped doing transactions with Bear.Lehman Brothers Holdings has been hurt by the same kind of rumor mongering. TAVF no longer will invest knowingly in the common stocks of companies that need relatively
continuous access to capital markets; or where customers and counterparties can flee without appreciable costs. Fund management does not believe that Ambac and MBIA, both of which are the objects of bear raiders, can ever have a Bear Stearns type of experience. The great weight of probabilities seems to be that both companies enjoy such financial strength that they can survive almost any stress. For TAVF, the activities of the short sellers have meant that securities became available for purchase at far, far lower prices than would otherwise be the case. The most nefarious aspect of the short sellers revolves around their concerted efforts to destroy, or at least diminish, the companies’ existence as going concerns. In the cases of Ambac and MBIA, the short sellers have been bringing as much pressure as they can on rating agencies, insurance regulators and securities regulators to downgrade Ambac and MBIA, to demonstrate insolvency and to prevent either company from accessing capital markets.It should be noted that until the recent SEC inquiries, short sellers were pretty much free to say, or write, whatever they like. There is no apparent downside for being a “loose cannon”. Managements and insiders, however, are quite restricted in what they can say or write because of securities laws, in general, and
Sarbanes-Oxley attestations and auditor limits, in particular. In informing uninformed investors, there does not seem to exist a level playing field.I will write to you again when the Annual Report for the period to end October 31, 2008 is published.
Sincerely yours,
Martin J. Whitman
Chairman of the Board”
Read Full Letter Here
Disclosure (“none” means no position):Long TAVFX, none
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