Wednesday, November 3, 2010

Iridian Opportunity Fund – 3rd Quarter 2010 Letter

Our typical quarterly letter has three parts. We describe our current macro view of the world, discuss briefly a current investment theme, and conclude with an examination of micro-market dynamics. Our goal with this structure is to share with our investors what we are seeing from the front lines of the global capital market battleground. But rather than write one more description of the pros and cons of QE 2, rather than write one more post mortem of the SEC report on the Flash Crash or the pernicious impact of correlation on stock picking, we have decided to devote this entire letter to an in-depth review of an investable theme that we are currently researching and acting upon: the mortgage backed securitization (MBS) crisis of 2010. This theme also has secondary and tertiary macroeconomic implications, and therefore influences our portfolio-wide views on risk and exposures.

We call this an MBS crisis, as opposed to “foreclosure-gate” or “robo-signing”, because there are three distinct dimensions to the crisis, only one of which is directly related to the foreclosure process, but all of which are inextricably part of the mortgage securitization process. The dimensions are:

1) Securitization and Underwriting

2) Trust Formation

3) Servicing

We believe that there are substantial investment risks and opportunities stemming from each. Before we discuss these opportunities, however, a brief review of the mortgage securitization process is in order.