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 It is a rare moment when Pershing Square Capital Management LP's vocal activist William Ackman lays off of his battered financial sector short targets, but it appears he has a soft spot in his heart for the ailing Lehman Brothers Inc. In an appearance on CNBC's "Squawk Box" on Wednesday morning, the hedge fund manager discussed Lehman, Fannie Mae, Freddie Mac and Longs Drug Stores Corp.
Lehman's been picked on enough When asked about his thoughts on Lehman, Ackman said the bank is in a "tough spot," adding that he'd rather not talk about Lehman because "I think they have been picked on enough." He further explained that Pershing bought put options on Lehman as a market hedge rather than a bet against the company. Shareholders of bond insurers Ambac Financial Group Inc., MBIA Inc. and Financial Security Assurance Holdings Ltd. may have appreciated the same sympathy from Ackman, who continually questioned the viability of these sinking monoline ships and offered up his own split-book solution for MBIA and Ambac. Ackman said Lehman's reported discussions to sell to Korea Development Bank (which reportedly died) was a sign of the bank "scraping the barrel a bit" in terms of potential buyers, adding that the company is unlikely to have a buyer and will have to heal itself organically by shrinking its balance sheet. Frannie, the super GSE Ackman used his hour on "Squawk Box" to also sound off about federal regulators' seizure of Fannie Mae and Freddie Mac. While he praised regulators' move to look beyond financial statements in determining Fannie's and Freddie's solvency, he said the bailout is only a temporary solution, which he said was reflected in the market's extreme volatility over the past two days. He said where the regulators went wrong is that the restructuring involves the government investment taking junior status to an insolvent capital structure. He added that the "equity is deeply out of the money" because Fannie's and Freddie's assets are not greater than their liabilities. He reiterated his plan to eliminate subordinate debt at the mortgage intermediaries and convert some portion of the senior debt to equity, creating for solvency. Ackman took his plans for Freddie and Fannie a step further, calling for a merged "Super GSE", which CNBC's Carl Quintanilla coined "Frannie." Ackman said merging the mortgage giants would create economies of scale and improve their liquidity. And where would Frannie live? Ackman proposed Frannie move out of the Beltway and onto Wall Street in close proximity to the major investment houses where it could potentially poach talent. Go long on Longs Ackman also advised investors to go long on Longs Drug Stores, which had agreed to be acquired by CVS Caremark Corp. for $71.50 per share, or $2.9 billion, including debt just a week after Ackman filed a 13D with Longs disclosing that he had purchased a roughly 8.8% stake in Longs in common stock between the end of June and the end of July, paying between $40.47 and $45.92 per share and boosted his stake in the company to 23.6% through total return swap arrangements. He prefaced his Longs recommendation by saying, "I very rarely like to make stock recommendations. ... I'll call it an interesting opportunity." He noted that Longs is trading just a nickel above the CVS offer price, and under the terms of the deal, the tender offer has to remain open for a year or get a two-thirds vote from shareholders, adding that Longs can continue to pay a 14 cent dividend. "So you are getting paid to wait." - Michael Rudnick Categories Deal Video
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