Are you a farmer?
Are you learning to be a farmer?
Or is it something that you've always wanted to do or?
Well, my grandfather was a farmer in Wisconsin.
It's very good for one's mind.
So I enjoy it, sort of but a different version.
My main passion is my family and these goofy ass stocks, and these crappy companies.
But to unwind a little bit I do this and I have fun with it.
Marc Cahodes is well known for his very public stance on Canada's home capital group.
A company he believes will eventually go to zero.
In my recent conversation with him at his chicken farm in Sonoma county, Marc recounted
his Home Capital story, as only he can.
Amazingly our conversation was so good, so varied and so wide-ranging that what you're
about to watch had to be left on the cutting room floor.
Now think about that for a moment, if the Home Capital story didn't make it into the
final cut for the interview with Marc Cohodes you'll sure as hell want to see what did.
So there's few people who I really respect investment-wise, one is Steve Eisman who is
a pal.
I like him.
And he, I think, mentioned Home Capita Sohn Conference I don't know if it was '13, '14
or '15, he brought it up.
And it put it on its radar for me, cause I didn't really know about it then.
And he was right but they doubled the stock on him, which doesn't make him wrong, just
makes him early.
It's happened to me more than I'd like to remember.
So I was watching it cause again I'm a huge fan of his, and the Canadian housing market
was booming.
And Home Cap with insider selling comes out and misses a quarter, and I'm thinking "Fuck,
how are these guys missing a quarter with the market booming so much?"
And I shorted the stock that day, it was down 3 or 4, low low 50s and that got me started
on it.
I didn't know at the time it was a fraud but there was clearly something going on which
caused them to miss, they had to come clean on a billion eight of mortgage fraud, first
900 million then a billion eight.
Stock then traced to low 30s.
Only then did I realize that this thing was just a major fraud.
I mean Home Cap is a bank, that should have failed.
It's a fraud, it's a fraud on the public, it's an admitted fraud.
They've still done a bunch of stuff they haven't confessed to, but in order to build this thing
out the Canadian banks, the legitimate banks, wanted nothing to do with them.
So the only way to solve this thing was with a Warren Buffett type figure because the real
banks and the finance people in the know in Canada wanted nothing to do with them.
I know people who are in the meetings, that the government ordered them to do things and
everyone passed, and this bank was gonna fail.
So they go to Warren Buffett...
Let's leave it... we'll come back to things, just because there are going to be people
watching this that don't know the full story.
So I just want to go back to as Home Capital starts to buckle and the pressure's building,
they've admitted to 900 million dollars of bank fraud, they've doubled to 1.8, and at
this point, your call on the stock is working like a charm.
Yeah, the call was working great, I mean the stocks in the low mid-20s, my cost in this
thing is in the low 50s.
But the narrative of this thing is done, right?
Well, the thing's going downhill, it doesn't get done.
See the weird deal is we're sailing along and then all of a sudden the OSC charges Salloway,
Martin Reed, the finance guy.
Then the stock goes from like the low to mid-20s to the high teens.
And all of your apologists keep apologizing for them, it's cheap cheap cheap, it's below
book, this that and the other.
But they still haven't come clean on anything, and I think it's getting worse.
So the stock closes, I think, on a weekend or a Friday at like 17 or 18 or 19 something
like that, then all of a sudden, they have a liquidity crisis, and/or a run on the bank.
That of course was blamed on the shorts aka me or this that or the other right?
But it's only because their finances are so fucked up.
So they come out on a Monday or a Tuesday or a Wednesday and said they have this emergency
financing in place at some user returns by some Director of Home and this pension fund,
and its highly dilutive, the company won't make money again and this that and the other,
and the stock literally goes from like 17 to 6 or 5.
And the bank was gonna fail.
Yeah because I mean this deal they did was the kinda deal you were only gonna do if you're
going out of business, I think the guy, the fool on the board gets on their version of
CNBC and basically says its dip financing, essentially means you're broke.
So this thing's 5, 6, 7 bucks and they're essentially tits up and then came the socialist
end around "Home Cap's too big to fail, it's a great Canadian institution" on and on and
on and our borrow rate in the stock went from 2, 3, 4 all of a sudden it miraculously went
to 100 because they didn't want people shorting the stock.
And people were writing op-eds, "what a great company it is", no it's not a great company.
It's a fraud.
Right?
The government should have issued preferreds, wound the thing down, said depositors will
be safe and make an example that if you do bad things this is what happens to you.
The shareholders should've been wiped, depositors made whole, mortgages go wherever.
Now for people that don't know enough about this, I mean everyone's familiar with JP Morgan
and stuff because it's such a big deal but for those people who aren't familiar with
Canadian banking sector, how systemically important was/is Home Capital.
It's not.
They make loans or liar loans to people who can't get loans elsewhere.
Which is my point because this is not a JP Morgan when they talk about it being too big
to collapse.
I subsequently have OSFY stuff that indicates how bad it is, I haven't released any of it.
I haven't let it go I just want to see how this plays out a little more.
They've gotten rid of the management, this that and the other but they haven't cleaned
up the problem that's Home Cap.
Right, I mean I have these guys running loan-loss provisions through SG&A to claim their loan-loss
provisions don't exist, and in the next Canadian credit cycle which I think is at hand, cause
now housing's going down, I think Home Cap's gonna be the first bank to fail.
Clearly.
But in the socialized bail-out things, and I call 'em the kitten and rainbow crowd, you
know, more know and the powers that be had done Canada a huge disservice bailing out
a fraud, which is what they ended up doing.
And they did it with none other than Warren Buffett.
I mean they didn't break out BB gun or a handgun or a magnum, I mean they broke out the bazooka
to try to do this and he got a dilutive deal and he's double collateralized in anything
he lends to them and he can do fine and I can do fine, but the ultimate question here
is what's the quid pro quo?
Because he only has 200 million dollars in this thing which is like you and me carrying
around 200.
But he gave them what, 200 million dollar credit line, is that right?
He gave 'em a line, an emergency line if they needed it at 9% and borrow money at 9% to
loan it at 4, is no way to run a railroad.
And not only is it 9% it's double collateralized.
So anyone would do that deal and then he got stock at 10 with the book at 24 and he now
has registration rights so he can sell it if he wants but it's a nothing deal for him
but I call it a loan shark deal which it clearly is, what it is.
Look, fair play to him right?
He's got the capital and they need it.
Well he has the capital and the funny thing is he the reputation so let's just say it's
the Warren Buffett bank in Canada but that didn't stop the last quarter's originations
from being down 85%.
No, but it did send the stock from 6 to 22?
No 6 to 14, and now it's 16, cause everyone thinks the worst is over.
To me the worst hasn't even begun because they have the whole credit thing and they
took a negative loan loss provision in the quarter, I mean it's just a complete exercise
in what I would call insanity.
But this is a by-product of what happens in an easy easy easy money environment where
frauds get bailed out.
And I can easily use the word fraud because Home Cap's admitted to fraud, you know, as
my lawyer said: "you own the label."
Right.
Right so, so.
And that's not Dior.
Fraud is not a label that's in demand.
Right, I mean you own what you are and that's what Home Cap is, and they still are but again
I have no issue with Warren Buffett whatsoever, I wish the old man nothing but the best, I
have great respect for him.
But clearly, the Canadian government needed to recruit someone outside of Canada cause
the Canadians themselves want nothing to do with it.
So let's get, just relating this back to this art of short selling.
You know, here you are, you have an initial bet that you've grown to feel more confident
about as you've dug deeper and deeper into it, it's going your way.
Going really well your way.
Most people would've covered it when it got down to 6, they'd have taken their money off
the table and walked away and said great, that was a profitable trade.
I'm not that smart.
But how do you, everything is pointing that you're right, everything is pointing that
this thing is going to zero.
How do you then deal with the fact that this agent out of nowhere comes in, they insert
the Buffett, it completely screws you in the short term, it makes you look like you're
wrong, makes you look like everything you've said is nonsense, how do you deal with that
mentally, how do you deal with it emotionally, and how do you regroup and re-assess how the
situation is going?
That's a good question.
Cause the stock moves doesn't make me wrong.
The fact that they needed him to bail this thing out actually shows how right I was/am.
The part of the question that's interesting is so the stock's 50-30, and going back to
my chat with Roland and this is tremendously valuable for me and I think for other people
watching this.
So Roland always keeps me grounded, on some of these names, so he says at 30 bucks he
goes "Marc you've made 20 points in this thing, the stock's 30 down from 50, why don't you
take the chips off the table and move on?"
I said no, the story hasn't played out.
I'm actually doing more.
Then there's this pause on the phone and he says "You are?"
I say, yeah!
This hasn't played out yet.
So then bad news happens and the stock goes to 25 and he goes "Are you covering yet?"
I go, no.
He goes "well they'll try something."
I said, maybe they do, right?
And about 2 weeks later they announce this Dutch tender, this buyback and the stock,
goes 25-30 and then they do this Dutch tender 37.
I'm getting my ass killed on this bounce and Roland's saying "I told you to cover."
I said thank you.
Thank you.
Just what I wanted to hear yeah.
Just what I need from the likes of you.
He goes "what do you think now?"
I said, I'm just laying in the weeds letting them do whatever the hell they want and when
they do this Dutch tender I'm gonna take my bet and if I don't triple it I'm gonna double
it, I'm gonna ante it in, cause after this stupid Dutch tender then it's double triple
over.
So they do the Dutch tender I do a whole lot more 37 or 36 or 35 or wherever I did, I did
all the way down and then the thing blows up.
And then back in the 20s, Roland says "Are you covering yet?"
I said, no!
I'm not covering, I'm not covering cause it hasn't played out.
I mean, I covered some when I was in single digits but I just covered back that trading
stock that I did higher but I'm still short a ton of this thing.
But along the way, he's checking me and my thing is when the world has everything I've
been playing for in their stream of consciousness and everyone knows it and everyone's thinking
of it, then I have no value-add and I probably cover cause I'm bored, right?
Or everything I know is out there.
But everything I know today is not out there at Home, I still think it's gonna fail, I
still think they're wrong, I still think there's no way out.
I still think the bank's gonna close, still think they got problems.