Carl Icahn just joined us at the Value Investing Congress. He’s speaking on the current financial crisis and the role of shareholder activism.
According to Icahn, the real problems with these financial companies are the Boards. The Boards do not in any way hold managements accountable. They take risks when they shouldn’t. When Boards work they then can become very dangerous.
First, the CDOs were dangerous. They created tulip bulbs, and here they were houses. Then you print mortgages and then you securitize them and then place them in mortgage backed securities. Then they take the lower traunches and put them in a CDO and they became really toxic but got AAA rating for diversification. What good is this diversification if everything in it is no good. The Boards did nothing about this. They hired the fox to guard the hen house.
He is announcing United Shareholders of America to address this problem with Boards. I’m not sure if this bit of news has been announced elsewhere yet.
Then Icahn discusses the history of his first proxy fight that lead him to be added to a Board. A big guy, Don, told him there is either to either agree or resign and not say anything. Icahn stayed quiet for several meetings until there was an issue associated with the acquisition of the garbage disposal unit factory. Then another Board member asked for Icahn for his opinion. Mr. Icahn then said that this was the worst deal in the history of America. That got some laughs. Then Icahn said he was voting against it and everyone else was going to be personally liable. Don never brought up the issue again and then he sold the company.
He saves tons of money with these actions. Then he provides the examle of money saved at Imclone and Federal Mogul.
“The fault falls not on the stars but ourselves,” recalls Icahn from shakespeare.
We need to change the law that requires a Board to put an issue on a ballot.
This system blew up because we allowed ourselves to do these insane derivatives. There are some investment banks that made it through this because they avoided this things. The $10 trillion out there needs to be deleveraged. Its going to take a while to work through this. The scared money can panic and pull out. The Fed is going to need to come in and in again to keep lending them money.
He saw something similar in 1990 and Mr. Icahn bought up junk bonds but its nothing like today with all these banks tied up.
Finally, he is taking questions and asking the audience go to his blog and join United Shareholders of America.
In response to the first question, he warned to invest very carefully. There is opportunity in energy companies and pipeline companies. You have to have a lot of staying power to invest right now. Cash is very important to invest right now.
Icahn doesn’t understand accounting right now in response to a question on fair value accounting. We need to allow some leeway with accounting for these companies right now to do with massive right downs.
When asked about the change in leadership, Icahn brought up the cost of proxy fights. Yahoo (YHOO) spent $36 million to fight him and it cost Icahn about $5 million to respond. The laws need to be changed. Some hedge funds come along for proxy fights but mutual funds dither on issues. It can be argued that the system is completely disfunctional at this point and needs to be changed. Mr. Icahn believes most other countries are doing a better job on corporate governance than the United States, including Canada, United Kingdom, and Australia.
Updated: 9:55 PM September 6, 2008 to incorporate some edits and remaining Q&A comments that weren’t captured earlier due to my laptop running out of power.