How Elon Musk became Wall Street’s juiciest trade

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In today’s newsletter:

• Carl Icahn takes Twitter to the bank

• The end of Lars Windhorst’s football days

• Wall Street helps the wealthy save on taxes

Carl Icahn collects a jackpot from Elon Musk

Few figures have contributed more to Delaware’s Chancery Court than billionaire activist Carl Icahn, who for years has waged war in America’s pre-eminent merger court.

So it’s fitting for Icahn to earn a nine-figure windfall from Elon Musk, a billionaire who is on track to be his heir apparent in contributing to Delaware’s accumulated case law.

Icahn stands to be perhaps the biggest winner of Musk’s decision to move forward in completing his $44bn takeover of Twitter at an originally agreed price of $54.20, DD’s Ortenca Aliaj, Antoine Gara, Sujeet Indap and Arash Massoudi report.

In recent months, Icahn bet more than $500mn on Twitter, then trading in the $30s per share as Musk attempted to back out of the takeover.

Icahn studied the merger agreement Twitter had Musk sign and decided that there were two realities: Musk had no way out of the deal. And the world’s richest person was wealthy enough to absorb what some analysts now calculate is a $20bn mistake.

“It is sort of simplistic. You could obviously see he wants this platform and in my mind, he very well could afford it,” he told the FT on Wednesday.

Other prominent investors such as hedge funds Pentwater Capital and DE Shaw put on more complex arbitrage trades and now stand to earn returns as high as $200mn, the FT reported.

Some with smaller portfolios profited as Twitter stock cratered this spring and summer, then earned a second windfall this week when Musk alerted Twitter that he would move forward with takeover.

Short seller Nathan Anderson of Hindenburg Research first shorted Twitter in May, appropriately observing that Musk would have buyers remorse as financial markets unravelled and would try to walk away from the deal.

After Musk formally petitioned to terminate the deal, causing shares to plunge and an epic legal battle to commence in Delaware, Anderson joined the long side of the trade.

“Anyone who uses the term arbitrage for any deal involving Elon Musk is misusing the term,” he said on Wednesday. “It connotes a low-risk endeavour but Musk lives in an Alice in Wonderland kind of world.”

Icahn is known for managing his risks more prudently. He has floated plenty of hostile takeovers in his time — Clorox, Texaco and Dell, for instance.

Unlike Musk, Icahn reserved enough wriggle room for corporate boards to be uninterested.

Lars Windhorst hangs up his Hertha shirt

For many fans who witnessed Hertha BSC Berlin football club’s 1-1 draw against Hoffenheim on Sunday — stretching their unbeaten streak to four matches — the most satisfying triumph was yet to come.

Let’s rewind to last week, when FT’s Cynthia O’Murchu and DD’s Rob Smith reported that the club’s majority owner Lars Windhorst had allegedly enlisted an Israeli private intelligence company in a campaign to oust Hertha president Werner Gegenbauer. (DD breaks down the story here.)

On Wednesday, the controversial German financier — who DD readers will be aware has more than enough on his plate already — announced he will terminate his involvement with the club.

Though Windhorst dismissed the FT story as “nonsense”, Hertha subsequently announced it had hired a law firm to investigate the allegations, adding further strain to the relationship between the financier and the club’s senior leadership.

The backlash has been swift. Hertha supporters who held up signs at Sunday’s match demanding Windhorst’s removal, with one banner reading: “smear campaigns, detectives and millions will not end it. Hertha BSC remains firmly in our hands”, have gotten their wish.

Windhorst, whose investment company Tennor first bought its stake in Hertha for €374mn in 2019, was the first to break the news on his Facebook page.

His alleged attempts to undercut Gegenbauer, who ultimately stepped down in May after 14 years as president, were due in part to the team’s continued poor performance. Hertha narrowly dodged relegation to Germany’s second tier over the summer.

Now that the club could be on the way to becoming the “big city club” Windhorst had pledged to transform it into, he’ll likely be forced to watch from the stands like everyone else.

Despite facing numerous lawsuits from aggrieved creditors over alleged unpaid debts, DD is willing to bet that he’ll at least shell out for good seats.

Wall Street’s side-hustle: offsetting taxes

In the absence of blockbuster IPOs to keep the fees rolling in on Wall Street, bankers have found a way to make the best out of fickle markets: helping rich clients sell investments at a loss to lighten their tax bills.

This so-called “tax-loss harvesting” strategy is nothing new — investors have turned to the faithful strategy since the federal tax code was established more than 100 years ago.

But the practice has been trending as of late, the FT’s Josh Franklin and Mary McDougall report, as markets have been shaken by consecutive periods of turmoil and rising interest rates.

JPMorgan Chase launched a new “tax-smart” platform last week, throwing its hat in the ring against existing programmes at Morgan Stanley, BlackRock and other asset managers.

“It’s the only gift you have in a down market. There’s economic value in a loss,” said one wealth adviser at a large US bank, who said that the majority of client calls in recent weeks have been about tax-loss harvesting.

This could be “the largest tax-loss harvesting opportunity in decades’‘, as money manager State Street Global Advisers declared. By the end of August, 99 per cent of mutual funds and exchange traded funds were trading at a loss for the year, the firm estimates.

The strategy could grow even further in popularity as the surging dollar and climbing interest rates cause even more wear and tear on the market. An index of stress generated in the financial system by the US Treasury’s Office of Financial Research has soared to its highest level since May 2020.

Tax-loss harvesting is a win-win for well-heeled investors and banks in periods of downturn. Should the current market tumult escalate into something more, it will be harder to find silver linings.

Job moves

Dana Remus, formerly White House counsel for US president Joe Biden, has joined Covington as a partner in Washington, DC. The firm additionally promoted 15 lawyers to its partnership.

Smart reads

Underdog story Melanie Perkins was rejected by 100 venture capital firms before her design platform Canva became a $26bn business. The Silicon Valley outsider is now gearing up to take on Google and Microsoft, Fortune writes.

Beijing on the brink On top of its unravelling property sector, China’s economy has a growth problem. Strong-armed president Xi Jinping can still turn things round, the FT’s Edward White reports, but only if he relinquishes some political control.

Here’s a smart podcast: Years of low interest rates ignited a race by dealmakers to snap up the song catalogues of best-selling artists. DD’s Kaye Wiggins and the FT’s Anna Nicolaou explain why they may now have to face the music on the latest episode of Behind the Money. Listen here.

And one more thing: The emotional rollercoaster experienced by retail investors over the past several years is well illustrated by Barstool Sports founder Dave Portnoy in this video compilation by Reddit user r/TheSneedles. Viewer warning: there is strong language.

News round-up

Ex-Jones Day partner told to pay £635k over instruction to ‘burn’ app (FT)

Kwasi Kwarteng to meet UK bank chiefs over mortgage market turmoil (FT)

Blackstone in talks to buy Emerson Electric assets (Bloomberg)

HSBC taps JPMorgan for potential Canada exit (Reuters)

Allen & Overy, Linklaters suffer worst talent drain as rivals fight for top lawyers (Financial News)

Naver/Poshmark: paying a first-hand price for second-hand goods (FT)

Vale seeks to sell metals stake as battery demand soars (FT)

Private capital party, interrupted (Alphaville)