Harbinger’s Falcone Lays Out Biggest Short in History

The recent frenzy to shoot against hedge funds is the latest bubble to hit Wall Street. People who did not know what a 13-F was 3 months ago are now seemingly experts on hedge fund holdings.

But the game might be getting a little long in the tooth, and the next smart move might be to shoot against the people shooting against the hedge funds.

I have watched in horror as nearly every long position held at Atticus or Harbinger has imploded; while Atticus is no doubt hurting, most of the damage was done prior to September. They might have sold or hedged their remaining positions early in the month, given Atticus Global was down less than 5% in September. Unfortunately the people piggybacking them for the past few years were not as fortunate.

Betting against Hedgistan has been hitting 52-week highs the past few weeks, but it is not quite as simple as some would believe.

Sept 16th
But hedge fund’s exposure can change day-to-day, and relying on outdated 13-F’s is not as airtight as it might be for the vanilla guys, given the use of equity derivatives.

True, many of the funds hold core positions for years in some cases, and their past history is a guide to how they operate, but the growing popularity of the filings, which were once only perused by hardcore BuySiders, is likely to backfire on some of the people who might be shooting at mere shadows and ghosts. 1440 Wall Street

Falcone might indeed live to fight another day, thanks in part of one of the largest bets in the history of Wall Street:

.....one trader who foresaw weakness in Wachovia in the spring has managed to book a $2.5 billion profit on a single trade on the ailing bank, The Post has learned.

Philip Falcone, of New York-based Harbinger Capital, rang up the incredible profit by shorting a whopping 117 million Wachovia shares at $30 back in May after his top analyst and investment chief pointed out problems with the Charlotte, N.C.-based bank’s mega-billion dollar Option ARM loan portfolio.

The mortgages were defaulting at a fast rate which could make them worth only pennies on the dollar by year’s end, the analyst’s research revealed, according to sources at Harbinger. In addition, Wachovia would be socked with sky-high capital costs related to $40 billion of debt maturing in the fourth quarter, the sources added.

The one-two punch would be enough to send Wachovia shares down sharply, Falcone was told, these sources noted.

So Falcone swung for the fences and sold the 117 million shares.

“That was the largest short position I have ever seen on the street,” one investor in Falcone’s fund told The Post.

“I am not shy when I see opportunity,” Falcone told The Post last week, after being told of the investor’s comment.

Harbinger’s profit in Wachovia (WB-NYSE) gave him some breathing room, and might allow him to start putting long positions back on assuming he sees some opportunities.

People will continue to guess what the big hedge funds are up to, but much of it is mere speculation. Thankfully the SEC will not require hedge funds to file Form SH as initially unveiled, which would have listed the hedgies short positions approximately two weeks after the positions were put on.

That would have led to more insanity. Putting the recession trade on after the bailout bill passed was rational, in my opinion. But much of the recent trading activity has been motivated by other considerations, as the pile on against Hedgistan picked up speed.

Discussing dividend discount models and fundamentals will get you laughed out of any cocktail party in Manhattan, but I pine for the days when traditional investing disciplines and methodologies will once again matter.

And until they come back into vogue piles of capital are likely to stay on the sidelines, sitting this one out.

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FALCONE’S WACHOVIA SHORT BET
New York Post

Previously
Falcone: Harbinger’s 13-F Doesn’t Mean Jack
1440 Wall Street
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No Position

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