(Below is part 3 of the narrative of my trip to Pasadena to attend the final meeting with Charlie Munger. All quotes are paraphrased from my notes and memory. Here is Part 1 and Part 2.)

Charlie then turned his attention to the investment scene. First up was a favorite topic: the evils of modern investment banking, which Charlie compared to a casino. Asking banks to pull back on the risky stuff is like asking a casino to give up slot machines, blackjack, and craps, but allowing it to keep roulette. You’re gonna run into some opposition.

But while the government pussyfoots around real reform, these casinos-on-‘roids continue to operate — Goldman Sachs doesn’t need to buy slot machines or pay Wayne Newton. Charlie called the repo system, an overnight funding mechanism popular with investment banks, the “most seductive credit-granting system ever invented by mankind.” They used it to leverage themselves 30, 40, 50 to 1, and eventually collapsed.

This led into a rant on contrition, as in, he doesn’t seem to be hearing any from the main culprits. None of the accountants, whose arcane rules aided much of the silliness, have come forth to repent. Neither have the heads of the investment banks, Bernie Madoff, the regulators (perhaps with the exception of Greenspan), and the traders who sold ticking time-bomb derivatives to their naïve, but trusting, clients.

But if we lack the shame necessary to prevent another go-round, there must be stricter rules enforced, and whole classes of activity banned. Charlie summed it up by saying, “I don’t think we need this kind of inventiveness in American finance.”

The investment scene was next on Charlie’s hit list. He agreed with Bill Gross’ notion that we’re facing a “new normal” of lower investment returns in the future — paltry interest rates and a high stock market will see to that. To make it worse, these returns will be chiseled by fees paid to money managers, consultants, analysts, and the rest. And, even ignoring the “new normal,” institutional investors have done some strikingly stupid deals in recent years.

The rants continued in Charlie’s usual understated style. High frequency trading: “What the hell is the government thinking (by allowing it to continue)?”; the tax system (“You can’t just soak the rich, but too much egality is equally stupid); the pension system (“Encourages evil, manipulative, and overly aggressive behavior, yet everyone thinks it’s totally justified.”)

He ended on a softer note, commending the wisdom of post-WWII economic restructuring. Somehow, we learned our lesson from the first inter-war period and not only did we not punish Germany, we gave it money! Charlie credited Keynes and his book, The Economic Consequences of the Peace, for changing minds and influencing the Marshall Plan. The discussion came full circle as Charlie allowed that, although we have our issues, we haven’t necessarily lost our capacity to make smart political decisions.

Let’s stop here for today. In my next piece, we’ll dig into the Q&A portion of the meeting. Lots of Munger wisdom left!

Disclosure: I may own positions in the securities mentioned. The above is not a recommendation to buy or sell any security.

Follow us on Twitter @CompleteGrowth!

(Below is part 2 of the narrative of my trip to Pasadena to attend the final meeting with Charlie Munger. All quotes are paraphrased from my notes and memory. Here’s a link to part 1.)

Charlie continued with his first book recommendation of the day: The Rational Optimist by Matt Ridley, which he called “terrific.” So good, in fact, he was re-reading it.

But even Ridley had fallen prey to “one and done” problem-solving. Trying to explain the success of capitalism, Ridley repeatedly hits on the concept of “division of labor” — where one divides up larger tasks into smaller ones and each worker specializes, thus creating efficiency. A marvelous and productive system, no doubt.

But Charlie’s point was, hell, even Stalin benefitted from the division of labor. In his enthusiasm for the pin factory, Ridley glosses over key factors, like the force of free competition, and the benefits of constant feedback, concepts that don’t exist in command-and-control economies — Soviet Russia being Exhibit A.

Though he didn’t mention it, Munger had used another mental trick here: thinking backwards. To solve the question “Why has capitalism worked so well?” people must ask themselves “What hasn’t worked so well and why?” This inversion leads you to the complete explanation.

Charlie ended the academic discussion there, and brought us back to “primordial Berkshire” – the trading stamp company Blue Chip Stamps. (Trading stamps were a sort of loyalty program long before the Capital One card.)

Through Berkshire, Buffett and Munger acquired Blue Chip in the 1970s as a way to gain access to its “float” – money the company had collected, but had not yet paid out in satisfaction of its stamps, and which could be invested in the meantime. It was a considerable sum and, though the trading stamp business would not last, Buffett and Munger would use that float to create billions in shareholder value, a trick they’d later repeat through insurance companies.

But even with that wonderful float, Blue Chip bought only three companies in several decades: The Buffalo News, See’s Candies, and Wesco. How to explain this slothfulness?

For one, they were much more active in the stock market. This allowed them to put capital to work while avoiding the temptation to overpay for whole companies. But even so, sparse acquisition requires an extraordinary level of discipline. Buying companies is fun, Charlie admitted. You take airplane trips, you talk to bankers…stuff happens. Magic is in the air.

On the other hand, sitting and waiting is boring. Operating businesses is boring. The desire for the “rush” of mergers and acquisitions (M&A) drives many companies into the poorhouse as they overpay for mediocre businesses, usually aided by sooth-saying bankers and consultants. Berkshire’s rise, then, can largely be explained by unusual patience and discipline, traits Charlie considers essential for success.

Of the three purchases, it turns out Wesco was probably the worst. The Buffalo News, a monopoly newspaper– once a highly lucrative position — and See’s Candies, a beloved seller of sweets, were far more profitable. And yet, the runt of the litter, Wesco, saw its stock price go from $5 to $385. Charlie’s retort: “That’s not the best result in the world, but it’s in the top 1%.”

Charlie then reminded us of the impact See’s has had on Berkshire’s fortunes. It’s not just that See’s itself was a wonderful acquisition, but owning a company with nearly unlimited pricing power taught Buffett and Munger a potent lesson in the merits of a strong brand name.  They hadn’t appreciated this early on: early acquisitions included a failing textile mill — Berkshire Hathaway itself — and a second-rate department store. But the experience of owning a wonderful business shoved them in the direction that has served shareholders so well since.

Next week: The investment scene

Disclosure: I may own positions in the securities mentioned and the above is not a recommendation to buy or sell any security.

Follow us on Twitter @CompleteGrowth!

(Below is a narrative of my trip to Pasadena to attend the final meeting with Charlie Munger. All quotes are paraphrased from my notes and memory.)

The “cult” of Warren and Charlie — Buffett and Munger, respectively — has two annual conventions. The first is the Berkshire Hathaway (BRK) shareholder meeting, held in Omaha during the first week of May. The second is the Wesco Corp. (WCC) shareholder meeting, held a week later in Pasadena. Wesco, chaired by Munger, was, until recently, an 80% owned subsidiary of Berkshire Hathaway.

The Omaha meeting is the granddaddy — a full day of Buffett and Munger answering questions ranging from succession plans to favorite authors. But the hard-core followers cherish the Pasadena meeting, where Mr. Munger — who usually plays Robin to Buffett’s Batman — takes center stage. More intimate than the Berkshire meeting, which has become a swollen, carnival-like attraction in recent years, the Wesco meeting allows Munger to exhibit his considerable wisdom and intellect.

But the times they are a-changin’. Two weeks ago, Berkshire closed a deal to fully consolidate Wesco, endangering the Pasadena gathering. In lieu of the usual meeting, Wesco announced an “Afternoon with Charlie” which, unfortunately, Charlie intimated would be the last get-together in Pasadena.  Shane Parrish, my partner at NFI, and I decided to attend, knowing that an 87-year old man would probably have few public appearances left.

In-N-Out of Charlie’s Mountains

After our usual pleasant experience with the airlines, we arrived on Thursday for the Friday meeting. Pasadena is a beautiful city north of downtown LA, and bordered by the San Gabriel Mountains, which lurk in the distance as you amble through town. Our first priority was making the pilgrimage to In-N-Out Burger, which, Shane alleged, had the best fast food hamburger.

Forgoing the smart option — a taxi — we decided to walk from downtown Pasadena to the closest In-N-Out — five miles round trip, it turned out. While I can’t say I enjoyed the walk in 85-degree heat, the burger made sweat and fatigue seem palatable. We explored Pasadena for a while and then settled in for the night, fat and happy.

Luckily, our hotel was much closer to the Pasadena Convention Center, so we had an easy stroll in the morning. The meeting took place in a large auditorium, half of it anyway, with mikes placed strategically around the room to allow for questions. The pre-meeting mob around Charlie was a strange sight; while worshippers gathered to bask in the glow, he struck me as detached, almost disinterested. After joining him for a photo, I imagine a few “Hey Charlie, how ‘bout that weather!” efforts were met with silence. But the crowd got its way; Charlie sat graciously for dozens of photos and “Hi-how-are-ya’s,” and then exited to start the meeting.

Charlie Speaks

He opened by answering the question on all our minds: Who’s paying for the meeting? Charlie assured us that Berkshire shareholders were not footing the bill. Rather, he’d pay for it himself as a gesture of goodwill towards his longtime fans, or, as he called us, “the greedy bastards that you are!” — which, of course, brought down the house.

He first discussed the Berkshire-Wesco merger, calling it “the port we always wanted to reach.” Indeed, shareholders of both companies have been expecting this for many years, but Warren and Charlie, value investors that they are, had been reluctant to pay a premium to Wesco’s book value. Charlie proposed that Berkshire’s share price had recently gone “way lower than either Warren or I ever anticipated,” benefitting Wesco shareholders in the deal, who thus received more Berkshire shares as payment. He added his amazement at how patient Berkshire has been in waiting for the opportunity to do the right thing.

Charlie finished the discussion on Berkshire and Wesco with the quote “How nice to have the power of a tyrant, and how awful to use it like a tyrant.” Berkshire’s reputation for doing the right thing, even when it could have reasonably chosen otherwise, has been a net benefit for shareholders.

Lollapalooza!

Next up was one of Charlie’s favorite topics: lollapaloozas. Not as in the rock festival but, rather, in Charlie’s mind, it’s an event caused by multiple factors acting in the same direction — i.e., the banking crisis. He typically explains the lollapalooza by proposing a few problems and then applying his multidisciplinary mind to solve them. Hot knife, meet butter.

And so he teed up the first puzzle: Why are movie theater concessions so expensive?

Millions of man-hours have been devoted to a problem, which Charlie could “solve with his left hand,” and the left-handed solution was thus: consider a car manufacturer charging $400 for a $20 add-on gizmo. We hardly blink because, hey, we’re already writing a $40,000 check. What’s another $400? Charlie believes this psychological trick is the answer to the movie popcorn dilemma.

Admittedly, I was skeptical about his solution. I’ve always considered movie theater concessions like buying $10 beers at Yankee Stadium: what other option do I have? It’s natural for a captive (and thirsty) audience to pay up. Either times have changed since It’s a Wonderful Life was in theaters, or I didn’t understand Charlie’s reasoning.

Moving to thornier issues, he turned to Japan. Why, over the last twenty years, have standard monetary tricks not improved their economy? According to Keynesian theory, government spending and interest rate manipulation should alleviate recessions, but Japan has been unsuccessful in its efforts. Partially, Charlie said, it’s because everyone “knows the plays,” whereas in 1939, they were fresh out of Lord Keynes’ playbook.

But Charlie proposed a second cause: the rise of Korea and China. These hungry new competitors must have hindered the export-driven economy of Japan. Naturally, I’d never considered this rationale, but I thought it was sound reasoning and decided to forgive his movie popcorn gaffe. While most analysts stop at one explanation and call it a day, Charlie urged us to find all the answers, even if it means reaching into multiple academic disciplines — perhaps especially if that is the case.

He added a final observation: the Japanese people have handled their problems extremely well, perhaps better than any other country might have. Americans would have considerable difficulty swallowing 20 years of stasis, but the Japanese have a culture that endures struggle with equanimity.

In my next installment, we’ll see what Charlie had to say about the rise of Berkshire, the financial system, the Great Recession, and then we’ll move to the Q&A. Come back soon!

Disclosure: I may own positions in the securities mentioned and the above is not a recommendation to buy or sell any security.

Follow us on Twitter @CompleteGrowth!

April 2011

Dear Partners,

The stock market is jubilant, yet many problems remain. America’s approach to economic recovery seems like an alcoholic trying to avoid a painful hangover: wake up and take another swig. In our case, the abused substance is debt-fueled spending.

But as with alcohol, more debt only delays the inevitable, and its continued abuse can make the final reckoning even more painful. We believe restoring fiscal sanity will require either a unified effort towards austerity or another crisis, and while we hope for the former, the incentives in our system seem to encourage the latter. It can be pain now or pain later, but there must be pain.

Unlike the Great Depression, which nudged multiple generations to embrace a conservative approach to financial life, the Great Recession has had no such effect. Tempting fate, investors have reverted to increasingly speculative behavior. At NFI, we tread these waters carefully.

During the first quarter of 2011, we added three new companies to our holdings. Two of them possess a durable competitive advantage, sell necessary products, and generate far more cash than they need for operation. The third is a free “option” to invest alongside a talented manager while assuming a very limited risk of loss. All three (as well as our other two holdings) are “sleep well at night” investments which trade at low prices in relation to their business prospects. We continue to search for new investments meeting our criteria.

With over 50% of the portfolio in cash, we remain ready to act quickly when great opportunities arise. Because our primary goal is to preserve your hard-earned savings, we operate as if were the stewards of your entire nest egg. We’d rather sit in cash than do something stupid, or as one investor put it, “we’d rather lose our clients than lose our clients’ money.” We reiterate our main principles as follows:

1. We view “margin of safety” as the central tenet of wise investing.
2. We take a business approach to investing, rather than a trading approach.
3. We believe strongly in concentrating our investments in our best ideas.
4. We’d rather have a loaded gun (extra cash) than play Russian Roulette (use leverage).

***

Thanks for being excellent partners thus far. We’re still hunting for new partners as good as the current ones, so please pass our letters to those who you believe fit that description.

Our best wishes,
Jeff and Shane

DISCLAIMERS

Account Performance
Past performance may not be indicative of future results. The performance results shown on the first page of this letter are presented on a net-of-fees basis and including the deduction of management fees, brokerage fees and custodial expenses, and reflect the reinvestment of all dividends and earnings.

Index Returns
S&P500 index returns are reported based on the information provided by Standard & Poor’s and include the effect of re-invested dividends. NFI is not restricted to investing in those securities which comprise the index and its performance may or may not correlate to nor should not be considered a proxy for the index. The investment objective of NFI’s managed accounts is to concentrate its investments in a limited number of positions with certain positions representing an intentionally large size in the accounts. This concentration is likely to result in greater volatility than the overall market as measured by the S&P 500 Index, which is made up of 500 large companies.
NFI may also hold large positions in cash and equivalents at times, which will further skew comparisons versus the S&P 500.

Forward Looking Statements
The information in this letter is not intended to provide specific investing advice or recommendations, and is provided solely for information purposes. This letter may include forwardlooking statements, which are based upon expectations, estimates, opinions, and assumptions of the manager that are subject to uncertainty and should not be considered a promise or guarantee regarding future events or future account performance.

Thought you might be interested in reading the introductory letter from Noise Free Investments.

***

October 2010

Dear Partners,

We want to start by thanking our partners who have made a commitment this early in the game. We won’t soon forget your loyalty and patience.

We write to you for the first time as Noise Free Investments begins operations. The purpose of this letter is to outline our principles: what we can and cannot promise, what we can and cannot do, and what we feel is reasonable for you to expect. Lastly, we’ll make a few brief comments on today’s environment and our current actions.

Why Noise Free?

The first question on all of our minds: Why Noise Free Investments? Admittedly, it’s a quirky name for an investment advisory business.

NFI was originally the name of a blog written by one of the undersigned (Shane), wherein he examined the business world and addressed some specifically attractive investments. Jeff stumbled across the blog early in his learning process, quickly becoming fascinated by the author. Many years, emails, and meetings later, a business relationship emerged.

We kept the name as a reflection of one of our main tenets: the investing process is full of noise. So much of what we hear and read is extraneous and unimportant information. Eliminating this noise and getting into what matters is the heart of a successful investment approach.

So, what really matters?

What we do

NFI is built on a set of principles laid down over 70 years ago by an investor and Columbia professor named Benjamin Graham, in his book Security Analysis (later simplified in the more readable The Intelligent Investor.) These principles have been somewhat bolstered in the years since by his most successful pupil, Berkshire Hathaway’s Warren Buffett, and his partner Charlie Munger, but they have stood the test of time. (That’s what makes ‘em principles!)

“Value investing,” the common name for this approach, is rooted in human nature and sound business practices that we trust and understand. Ultimately, to be comfortable as our partner, you should understand the basics as well.

***

You can read the full letter here.

The internet is a lovely tool. In seconds, we can find data ranging from Walgreens’ 1999 cash balance to the birthplace of Lady Gaga. As a professional research analyst, this is nice. Back in Ben Graham’s day, it would take me at least a week to find Walgreens’ 1999 cash balance – a process that involved writing letters and a lot of patience.

However, there is mounting evidence that the bombardment of short-form learning is destroying our brains. Clicking links, switching our attention, picking up bytes of information, scanning, surfing…these are addictive habits. Drugs. And like drugs, these activities produce a pleasureful response in our brains, as discovered by several neuroscientists. Consider this post from the Farnam Street blog:

The less constrained reading afforded by the internet encourages us to multi-task. While it can be argued that books also allowed us to multi-task, the way we use this freedom has no doubt changed. We’re clicking on a lot more and understanding a little less.

In the process, our ability to think critically and apply our brains to a problem has been reduced.  In the race for our mind’s attention, nuance and thoughtful prose are losing to quick summaries. When summaries become to long, we shift to soundbytes.

We’re constantly distracted and interrupted online, our brains are, in the words of Carr, “unable to forge the strong and expansive neural connections that give depth and distinctiveness to our thinking. We’ve become mere signal processing units, quickly shepherding disjointed bits of information into and out of short-term memory.”

Sears Holdings (SHLD) reported its first quarter results. Overall, much more of the same from Sears. On the positive side, we saw Kmart and, somewhat surprisingly, Sears Domestic record positive same store sales growth — the latter due to a “Cash for Clunkers”-type program for appliances. On the negative side, Sears’ big ticket items still don’t seem to be moving, and we’re not seeing many signs of the increased efficiency that Sears stores so badly need. Sales per square foot and overall margins lag behind competitors substantially. Their moves in online retail, brand management, and commercial real estate are not yet big enough to really impact results, but are worth keeping a close eye on.

There were also some details on the purchase of Bill Ackman’s stake in Sears Canada. It looks like the purchase was financed with short-term debt in two ways: first, the sale of roughly $300M in commercial paper to Lampert and ESL, and second, a draw down on their revolving credit line. A few days after the purchase, Sears Canada announced a $377M Cn dividend, roughly $340M of which will go straight to SHLD. I imagine that they’ll use this to pay off the commercial paper borrowings from ESL, essentially showing that Lampert gave Sears a bridge loan to help purchase the stake.

While I understand the advantages of using ESL to finance SHLD when needed, I’m hoping this doesn’t become a trend. The rate he charged on the commercial paper wasn’t egregious at 1.9% — remember that short term interest rates are basically zero — but too many related party transactions will bring up questions that are better avoided.

Besides that, Sears was more of the same in the first quarter. We’re still waiting to see whether Lampert will finish the privatization of Sears Canada, but if the market turmoil continues, and depending on Canadian takeover laws, his patience may be rewarded with a lower price.

By now you probably all know that Biglari Holdings (BH) has proposed a new pay package whereby Sardar Biglari will receive 25% of any book value growth over 5%, subject to adjustments for share issuance, buybacks, and dividends. He has to spend 30% of that sum, before taxes, buying shares of BH in the open market.

To put it bluntly, the arrangement is a large-scale transfer of future shareholder wealth to Sardar. His main problem today is that he only owns roughly 1.5% of the company, low for a controlling stake. And the question was asked at the annual meeting in various forms: “Sardar, given that you own so little of the company, how will you keep control? How will we compensate you enough for doing this when you could earn more elsewhere?” Turns out there was a simple answer: “Over time, assuming I make some money for you, you will give large pieces of the company to me.” It is a rapid mechanism to move control and wealth into Sardar’s hands in a relatively short period.

*   *   *

Two arguments in favor of the package, the “alignment with shareholders” idea and the “pay for performance” idea, are flimsy. What if he took 50% of the gains? 75%? The alignment would still be there, we’d still be paying for performance, and it would still be an egregious pay package.

The other argument is that hedge fund managers regularly make this amount. Where’s your outrage for them? This one has problems too because hedge fund managers have handicaps. One is the lack of permanent capital; investors can pull their money out if they feel compelled. Second is the lack of cash flow coming in the door every day as Sardar has in the restaurant business. With no capital allocation ability at all, BH’s book value will grow on its own. Third is that the capital in BH was not raised by Sardar in an explicit agreement. On the other hand, a hedge fund manager comes to his partners and says, “Here’s how it works: I invest your money and I get 20% of the profits, capiche?” At a public company, it is not so. It shouldn’t be so, either; shareholders should not have to pay that much for a good steward.

To put this in perspective, if Prem Watsa at Fairfax Financial (FFH) had the package and he compounded his company’s book value at a modest 10% per annum over the next decade, the company would pay him a cumulative billion dollars. At his target of 15% p.a., that number would rise to $2.6 billion dollars.  Anyone OK with that?

The truth is that Sardar genuinely ended up in a tough position with SNS (now BH): control without substantial ownership. He couldn’t continue to run his hedge fund and BH, given the obvious conflicts (which he recognized at the annual meeting). But he couldn’t gain more control without outside cash flow to buy shares. What easier way to solve the problem than to take the stake from shareholders over time in return for performance?

In hindsight, his intentions were made clear at the annual meeting. First, by telling us not to compare to BH to Berkshire (even though he’s trying his hardest to make it look and sound like Berkshire — look at the new website). Second, by telling us to instead compare BH to a hedge fund. Little did we know how literal he was being. Third, his speech about how Roberto Goizueta made over a billion dollars at Coke but wasn’t he worth every penny?

I believe Sardar truly sees himself in this “cut-above” mold. This is not the worst thing in the world, Buffett is similar, but the way he is playing that hand scares me. Pay for performance is fine, even very high pay by most standards. But this is an unprecedented  grasp for shareholders’ wealth over time: If he compounds BH by a modest 10% per annum over the next 20 years, he stands to make roughly $150 million dollars. At 15%, he makes $500 million. At 20%, he makes over a billion. And so forth. This is off a $300 million equity base and doesn’t include the growth in the value of his current shares.

But if I brought this to him, he would argue it as a perfectly reasonable pay package. “At 20% per annum, shareholders would make more than $6 billion over that period,” Mr. Biglari would say.  I would argue that we can pay for performance without paying that much for performance. Sardar is young, ambitious, brilliant, and will make himself and others a lot of money. I admire him. But I think he’s trying to get to the finish line too quickly: He’s a 32 year old millionaire who wants to be a  billionaire while owning a tiny piece of a $500 million company.

*   *   *

Ultimately, my problem is not so much the idea, but the implementation. His bogey, 5%, is too low, and his cut, 25%, is too high. The average company earns 10-12% on its capital and even that average level of performance, with 100% capital retention every year, will generate significant bonuses for Sardar. If  the arrangement were 10% of profits above 10%, I could swallow that. In fact, I would be happy to give him a cut of his kill at those levels. But 25% over 5% is too easy, too gigantic of a wealth transfer for the CEO of a public company.

The hard part is turning this into an investment decision. At CGI and personally, BH is my largest holding. Does the egregious nature of the package outweigh his brilliant prospects?

As Einstein used to say in accented English; “A little let me tink.”

About a week ago, Sears announced they were buying out Bill Ackman’s stake in Sears Canada – about 17%. With the acquisition, Sears will now own over 90% of the company, paving the way for a privatization.

The backstory is interesting here. In 2006, Lampert attempted to take the company private at $18, and he and Ackman butted heads.  Ackman and a group of shareholders called the offer inadequate, things got nasty, and they were successful in scuttling the deal. Four years passed as Lampert slowly acquired shares in Sears Canada — through Sears Holdings not his hedge fund — and brought Sears’ ownership to roughly 73%.

Now, at $30, Ackman seems happier to part with his shares. It’s interesting that back in 2006, Lampert and Ackman fundamentally agreed on Sears Canada as a good investment at the price. Now, it seems they’re on opposing sides, with Ackman selling and Lampert buying. Of course, Lampert may have strategic reasons for wanting all of Sears Canada, especially its cash hoard.

So will Holdings take Canada fully private? In my opinion, odds are that it happens soon. I’m not an expert on Canadian takeover laws, but from my understanding, Sears will have a lower hurdle to clear (in terms of shareholder approval) to take the rest of the shares private.

This sets up an interesting arbitrage. With Sears Canada trading at $27.50 as I write this, it seems unlikely to me that Lampert takes out the rest of the shareholders at a price lower than $30. Wouldn’t that be fundamentally unfair? But there are two risks. First, Canadian laws may allow Lampert to take them out at any price he considers fair — including a price below $30 — without their consent.  Second, there is a timing risk. If Lampert decides to wait on completing this privatization, one’s annualized returns would drop by the day and currency fluctuations become an issue.

Thus, if you consider this trade, you’ll want to evaluate Sears Canada as a standalone investment opportunity with a potential value-realizing event. If you don’t want to be stuck with the shares, don’t buy them. In the meantime, I need to brush up on my Canadian securities law.

The depravity leading up to the financial crisis was bad. Really bad. Goldman Sachs, as alpha dog of the investment banking world, was clearly at the forefront of the depravity.

With that said, I’m not sure I’m behind the SEC’s case against Goldman. When you boil down the argument, IKB and ACA — the bank on the losing end of a CDO trade with John Paulson, and the firm that selected the collateral inside of it — are saying they wouldn’t have bought the security had they known he was involved in choosing the underlying mortgage exposure.

So here we have two highly sophisticated — or so they tell their shareholders — institutions complaining that they were duped. Great! If we’re to take their argument at face value, not only did they know John Paulson would go on to make several billion dollars betting against mortgages (which no one else seemed to know), but his participation was so material that they’d have stayed away altogether. Otherwise, how could the SEC sue Goldman for not telling them Paulson helped choose the securities in the CDO?

This is crazy. Paulson chose the securities he wanted to bet against, and submitted that list to ACA, which left some in and took some out. Were Paulson never involved, would ACA have chosen less toxic securities? Perhaps, but that’s beside the point. By leaving many of the securities he chose in the pool, they implicitly approved of them. My mother taught me that looking the other way makes you complicit.

Thus, I don’t buy the case on two grounds. First, that IKB can absolve their poor credit analysis by saying “Had we known John was involved, we’d have stayed away.” Second, that ACA is above fault even though they approved the composition of the CDO. Rather, I see two firms trying to pass the blame for their own mistakes.

The truth is, most banks couldn’t get enough mortgage exposure at the time and IKB was rushing to catch up with the Goldmans of the world. But it was already too late. I’ll believe in the tooth fairy before I believe IKB would have said “Oh, Paulson’s on the other side of the trade? No thanks.”