Monday, February 24, 2014

Stocks DD Cites: Bill Ackman comments on legal outcome and value of Fannie Mae shares for the 1st time

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Bill Ackman is an activist, value investor with a knack for in-depth research to uncover asymmetric risk-reward bets and putting the thesis in public domain. I have personally tracked Ackman's investments for about 7-8 years. I have walked away from his investments in mediocre or even bad businesses (commodity businesses-JC Penney, Target or businesses with secular headwinds as in Borders), and of course risky short bet on Herbalife. However, I followed closely his GGP thesis (although I never got the balls to bet heavily), HKD  thesis. Please note, Bill Ackman does make bold comments in the public and some have been famously wrong including his JCP thesis. So as an investor one needs to do his/her own due diligence to be comfortable with the thesis or investment. In the case of GSE, it is my belief that everything rests on how the court case on Aug 2012 amendment goes.

Bill Ackman on GSE shares -> Link
Mr. Ackman predicted the Supreme Court would side with the plaintiffs if the suit reaches the court. He said the common shares upon a legal victory would then be worth about 10 to 15 times their current value, according to the people who were there.Mr. Ackman also said that despite various legislative proposals in Congress that would create new mortgage guarantors, he believed Fannie and Freddie would escape liquidation and instead be revamped, perhaps with increased capital requirements and other protections.Mr. Ackman made his comments at the annual meeting of Entrust Capital, a New York firm that invests billions of client money in hedge funds. The event was closed to the press.
General Growth Investment by Bill Ackman in 2009 where Ackman predicted several legal outcomes many of which were legal precedents 
- Is this somewhat of a parallel for his GSE investment ?
Landmark legal and regulatory decisions were made in GGP to thwart mass liquidation(the ordinary course) of defaulted properties in CRE sector and favor consensual loan extensions. Ackman predicted these in his famous 68-page thesis "The Buck's Rebound Begins here". I would like to highlight a few of those precedents below:

1. Bankruptcy court says "Bankruptcy remoteness of SPE does not mean it is bankruptcy proof"
GGP the parent company dragged a number of so called Special Purpose Entities/those were the collateral behind the CMBS securities (even those where loans were not due for number of years and where they had not defaulted). The SPE subsidiaries were set up expressly to protect the collateral of investors of mortgage backed securities from any bankruptcy event at the parent. And after dragging all properties under chapter 11, plaintiffs then were able to argue that the court should follow plaintiff's reorg plan vs 100's of rival plans from the individual property CMBS owners. The reorg plan simply included extending maturity of the loans by a few years.

2.  Treasury eases restructuring of CMBS or Loan modification of CMBS securities -  Removal of tax implication for CMBS work outs
 “The Treasury, responding to the growing pain in the commercial real-estate industry, released new tax rules that make it easier for distressed property owners to restructure loans that were packaged by Wall Street firms and sold as securities.”

3. Federal Reserve says - Secured loans don't need to be written down solely based on decline in collateral value, if the borrowers can meet mortgage payments.
It incentivized banks to modify loans with borrowers instead of trying take possession of properties and having to deal with writing down that asset.
All the above paved the way for consensual loan modifications in lieu of piece meal liquidation of properties.

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Friday, February 21, 2014

Wednesday, February 19, 2014

Stocks DD Cites: Ralph Nader's 02/19 letter to Treasury Secretary

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Monday, February 17, 2014

Stocks DD Opines: 21st Century Corp Governance 101: How to improve Accountability & Transparency and Align Boards with Shareholders in listed companies

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Further Disclaimer: Let me qualify by saying, I am absolutely NOT writing this post on ANY specific company. Absolutely no reference to any company is implied, alluded or intended here.

Public listing helps companies to get valuable capital from millions of small shareholders to fund operations or to grow. Yet the rights of these very shareholders, their voice, their participation in value creation, accountability and transparency of Board to these very shareholders  is weak today. The only right that a shareholder has in the ordinary functioning, is an Annual proxy vote. If you think about it, this is really astounding: You collectively own a property/estate but there is no way to exercise your right to protect or improve the property except to go to courts. Because proxy access is not easy, generally nominations are from ceo and cronyism runs large. Board members are beholden to CEO. Board members have forgotten they are there to SERVE shareholders at large and need to be reminded. It is the Shareholders that voted the Board members to power. It is ludicrous to say shareholders cannot question the Board members who have supported value destruction ideas and cannot hold them accountable, without having to wait helplessly for another year or in many cases 3 years for the next proxy vote. Also, the Board functioning is opaque and the contribution/performance of individual board members is not known to public shareholders. This leaves accountability out of the equation. 

Activism, a tool to bring about accountability is not enough
Unfortunately in the market , Activism is the only way to get any accountability and force change. Enjoy this successful activist letter from my twitter friend Scott Matusow, an activist pharma investor against little known company called Solta ->link . Activism is a tool generally not used by retail shareholders for various reasons. Activism requires resources and retail generally lacks it.  I also think we need quarterly shareholder referendums (so voice of all shareholders are heard) for Board accountability and transparency to Board's meetings. If majority of the small retail holders have a view, it may not come out unless there is a referendum.

So what can SEC do to improve transparency and accountability of Boards and align them with shareholders ? Here are some things needed to improve transparency and accountability to shareholders and need to be institutionalized via SEC changes. I believe millions of shareholders (retail as well as more powerful institutions) in publicly listed companies will benefit if they have a more material say in maximizing their property value and protecting their property from apathy or shenanigans of the unaccountable Boards. All of the below can be released in the public domain, in due compliance with SEC's Fair disclosure law.

5 Simple Ideas 

1. Responsiveness to Shareholders/Owners - Company needs to be Bound by SEC to respond to Quarterly Top 10 Shareholder questions or proposals
 Once a quarter  top 10 shareholder questions have to be answered and debated by the management/board in a shareholder forum. There can be a public database of such questions where verified shareholders can submit questions and structured way to sort and rank top 10-20 shareholder questions/ideas. Now there are certain things like forward-looking guidance or per product revenue which some companies would rather keep it private (for business/competition reasons), which is ok. But not getting any response on "answerable" shareholders questions is NOT ok.

2. Board's Transparency to Shareholders/Owners Quarterly publication of Board's minutes 
These minutes can be "scrubbed" to remove any confidential content for business reasons
  • Positions(for or against) of individual Board members on top 10 proposals/ideas is important to assess the Board member's contribution to the company. 
  • The number and quality of proposals/ideas originated by each Board member should be known to public shareholders at large. 

3. Shareholder/Owner Appraisal of Board - Quarterly Referendum on Performance of Individual Board Members & CEO - Provides for feedback loop between shareholders and Board. A Board member failing to garner the  minimum rating on performance(solely based on value creation and value protection) is automatically voted out. For the independent directors in majority controlled board, if they fail to garner the minimum rating from the "majority of minority" they need to be booted out.

Shareholders should have the ability to rate performance of key executives and board. The results of this should also be published right before the annual proxy vote so shareholders can make informed voting decisions board member's performance.
Every Quarter, the individual Board members as well as the overall Board's performance should be evaluated on the following 5 dimensions (On a scale of 1-10):
- Support for Value creation ideas
- Origination of Value creation ideas
- Support for Value protection ideas (esp so in Majority-controlled boards)
Origination of Value protection ideas
- Accountability and Alignment of Top Management to shareholders

In my opinion these quarterly shareholder referendums as well as Board's minutes need to be attached in the Annual Proxy Vote Form. You really don't need Proxy advisory firms that will take any position depending on who (shareholders or company) hires them . If shareholder hires proxy advisory firm A, company will hire proxy advisory firm B and both parties can shamelessly and very easily take diametrically opposite positions.

4. Shareholder/Owner Participation in Value Creation
 Improve shareholders ability to directly contribute to value creation as in "submitting actionable acquisition ideas" and getting feedback on them on a Quarterly basis from the management/board. In fact just like how IR Teams are available to be contacted by shareholders, I would suggest the M & A rep should be made available for shareholders.

5. Shareholder/Owner Support for Key Proposals - A Quarterly shareholder referendum on key proposals/ideas. Proposals failing to get majority support cannot be taken forward by the company.

6. Shareholder/Owner Protection in Majority-controlled boards
In majority controlled boards, shareholder protectionism needs to be improved due to conflict of interests in majority-nominated boards. While I think majority of minority vote for some director positions is a good step, it is not good enough to protect minority shareholders for implementation reasons(We live in the world of Cayman trusts and secrecy laws protect the identity of true beneficial owners). Where possible the SEC should mandate Bylaws to be changed in the interest of shareholder protectionism of all shareholders. For example, minority of the seats should be reserved for nominations from ONLY minority shareholders.  

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Sunday, February 16, 2014

Stocks DD Cites: Creation of Shareholder-Director Exchange

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