How Icahn's margin loans hurt him
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Carl Icahn just settled with the SEC for failing to disclose personal loans secured by his shares in Icahn Enterprises — but the borrowing gambit cost him much more than that.
Why it matters: While the $2 million in fines announced Monday is barely noticeable to a man of Icahn's wealth, the drop in his eponymous company's share price, after short-seller Hindenburg Research got wind of the loans, was much more damaging.
Driving the news: Per the SEC, starting in 2018 Icahn borrowed billions of dollars against his shareholding in Icahn Enterprises — and then neither he nor the company revealed the existence of those loans, as required by law.
- The loans started to appear in some public filings in 2022, but only really got noticed by the investing public in May 2023, when Hindenburg put out a devastating research note on the company, accusing it of employing "Ponzi-like economic structures."
- Shares in the company immediately plunged, and have never recovered.
Between the lines: "Icahn pledged the majority of the company for loans which he used to gamble in losing market bets," Hindenburg's principal Nate Anderson tells Axios.
- "And he's still in the process of trying to unwind those loans."
The big picture: The loans ended up costing Icahn five times over.
- He had to pay interest on the loans to the banks who lent him the money, including Bank of America and Morgan Stanley.
- He lost money on the bets he took with the money he borrowed.
- He lost money on his Icahn Enterprises stock when the loans became public and the shares plunged.
- Icahn was forced to put up additional collateral against the loans, to avoid margin calls that might have forced a fire sale of his assets. He also agreed to a repayment plan that commenced with a $500 million payment in September 2023.
- He had to pay a fine to the SEC for not disclosing the loans.
The bottom line: Leverage is very dangerous, even if you're a multi-billionaire.
