Bill Ackman's Herbalife Short Is Subprime Bet 2.0: Street Whispers
Updated to include disclosure of Third Point stake in Herbalife
NEW YORK (TheStreet) -- After roughly six years of battle, it took the choking off of credit to the subprime mortgage market for hedge funder Bill Ackman to see a multi-billion dollar short bet on bond insurer MBIA(MBIA) payoff.
Now Ackman, the head of Pershing Square Capital Management, is hoping a roughly $1 billion short bet against multi-level marketing supplements supplier Herbalife(HLF) will provide a quicker payout.
While Ackman's bet against MBIA, once among the nation's top municipal bond insurers, was vindicated by a souring of mortgage and structured securities the firm guaranteed prior to the financial crisis, his short position in Herbalife follows a similar logic.
Notably, Ackman's accusation that Herbalife's supplements and weight loss products are little more than a pyramid scheme hinges, in the near-term, on a ground level flight from the company by its millions of distributors who are spread across 80-plus countries.
In the financial crisis, an award winning CNBC documentary House of Cards detailed how it was the choking off of funding to key go-go real estate markets, which eventually spelled the demise of the U.S. subprime mortgage market and the trillions in securities tied to it. According to Ackman, a potential flight of Herbalife distributors could, similarly, kink the operations of the supplements seller and cause its downfall after an over 30-year history in the public eye - were the company to be a pyramid scheme.
Without the lubricant of new money, Herbalife might suffer a similar fate to the subprime market and the housing securities MBIA guaranteed, according to Ackman's implied logic. He pegs Herbalife's worth at $0.
On Wednesday, Ackman's bet against Herbalife took a dramatic twist when a late morning filing disclosed that Dan Loeb's Third Point had taken an 8.24% stake in Herbalife.