Fannie Mae-No Politics (FNMA)

[Hvp123]

The added time in the trade allowed the position to build increasing larger over the years leading to staggering gains at the climax. In August 2007, when Pershing’s CDS contracts had risen from their initial $16,000 cost to protect $10M of MBIA debt has risen to $250,000 for the same $10M Ackman wrote to investors. “We believe we are still in the early innings”.

Here is yet another lesson for investors. Keep your eyes on the end, not the now. How many would have cashed out at this point, worried they would lose their gains? Had they done the work Ackman did, they would have been as sure as he was of the eventual outcome. Price does not equal value……

By November 2007, the same $10M insurance cost $345,000. The Pershing staff, at the time had the collective thought, “You’ve proved your point, get out while you can”.

Ackman’s retort? “I have never seen such a good risk reward opportunity in my entire lifetime”.

By mid December the same $10m of insurance cost $580,000 and Pershing was still buying..

In Mid January 2008 when MBIA sold $1B of notes at 14%, none other than Warren Buffett commented, “When a company issues a 14% bond when US Treasuries at under 4% and it is still rated AAA, we have now seen the cow jumping over the moon”.

On Jan. 17th 2008, the same $10M of insurance now cost $1.2 million a year, up from Ackmans original $16,000. This is the equivalent of a $16 stock rising to $1,200.00. By the end of the day on the 17th, the price had risen to $1.5 million.