Knuckleheads vs Marblehead

Stalingrad

USC/Notre Dame

Ali vs Frazier

Battlegrounds each and all.  The past year we have enjoyed a front row seat to another battle that will live in infamy.

Knuckleheads vs Marblehead

First Marblehead is engaged in the nuts and bolts of lending money to college students. It is a specialized niche of lending, and can be extremely profitable if done correctly.

The specialty finance sector has traditionally offered up a bounty of riches to short sellers...Mercury Finance and a host of others come to mind.  Apparently the shorts thought this was another zero...until Tom Brown ambled into the firefight.

You remember Tom Brown right?  The man who nearly ten years ago had the temerity to call Ed Crutchfield, CEO of First Union (now Wachovia) the “serial diluter” for his questionable acquisition strategy. Tom pioneered Wall Street humor long before Dan Loeb of Third Point LLC arrived on the scene. 

Mr. Brown eventually lost his job after criticizing investment banking clients.  But he moved on to bigger and better things, founding a hedge fund and the publishing the quirky website bankstocks.com. The site has provided a forum to refute knuckleheads and intelligently discuss the current state of the financial services industry. But back to our story…

The past year and a half witnessed a steep plunge in First Marblehead’s shares followed by a sustained rally.  Along the way the longs and shorts have traded catcalls, personal insults and a slew of published research supporting their view. Talking their book fersure.

The latest potshot came from Zach Maxfield, one of Tom’s sharp as a tack analysts and his point man in the battle.

Brown’s lead-in to a letter Maxfield sent to the UBS analyst covering the stocks reads as follows…

We’ve had run-ins with the sell-side before, but I have never encountered an instance of sheer analytical incompetence as glaring as UBS analyst Mike Taiano’s coverage of First Marblehead. In my opinion, the guy knows nothing about their company. Clients who neglected to buy Marblehead (or shorted) based on Taiano’s sell recommendation ought to be able to sue the bank for malpractice.

The cavalcade of cluelessness never seems to end. Taiano’s research note “analyzing” the company’s fiscal first quarter earnings report (sorry, no link) , published yesterday, is the worst yet. Zach Maxfield, our main man on First Marblehead around here, had several conniptions after he read it. Once he calmed down, in the spirit of analytical helpfulness, he fired off the following email to Taiano to help set him straight:

you can read all about it here

We think the shorts might want to consider waving the white flag.  We are not sure what Sun-Tzu would say, but an orderly retreat can allow you to live to fight another day.

For now we are calling this one game over.

Editors Note-The first in our new series...Battleground Stox

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