Carl Icahn: Inflation Is The Worst Thing An Economy Can Have

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Following is the unofficial transcript from a CNBC interview with Icahn Enterprises LP (NASDAQ:IEP) Chairman Carl Icahn on CNBC’s “Closing Bell” (M-F, 3PM-4PM ET) today, Tuesday, March 14th.

Inflation Is The Worst Thing An Economy Can Have, Says Billionaire Investor Carl Icahn

SCOTT WAPNER: Billionaire investor Carl Icahn finding his latest activist target in biotech firm Illumina taking issue with that company’s acquisition of Grail, which specializes in cancer testing. The deal being contested right now by European regulators.

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Mr. Icahn, nominating three people to that company's board and gearing up for a fight. He joins us now to discuss that issue and of course, the state of the markets, the economy, the Fed. Carl, welcome back. It's nice to talk to you today.

CARL ICAHN: Yeah, good to talk to you, Scott.

WAPNER: You know, we're gonna get to the Illumina thing in a minute, but just given where we've been over the past few days, I want to get to the markets first and I want your take on on what you think has transpired here over the past few days from a market standpoint.

ICAHN: Yeah, I don’t think it's the last few days necessarily. I think we have some major problems in our economy. Maybe they'll be fixed, but just look at many, many factors.

We’ve been on a, you know, spending spree and, you know, the rising tide the tide lifts all ships, but a lot of people in our economy are not doing well obviously, you know, the net worth of the median household is nothing basically and you you just look at what is going on, I think Powell really has to raise interest rates sooner or later.

I can't talk about next week or even next month but inflation is the worst thing an economy can have and I think people underrate that. If you look in history, every hegemony has been destroyed by inflation or almost everyone. I mean, just go back to Rome.

That's what happens and one of our major problems I think in this economy right now, is is there is no leadership on the corporate level, you know, forget politically and I'm not going to get into politics, but I think you do feel that in Washington, nobody knows what's really going on.

But forgetting that, in our corporations and I've lived with that I mean all my life basically and companies today really have with many exceptions, many, many exceptions, leadership is is worse than mediocre.

And that's why we're so successful. I mean, not because we're geniuses but because you go into a company today that's what we've done over and over and over again and it's really horrible what you find in many of them. Just—

WAPNER: We’ll get to your, we'll get to your latest one as I mentioned in a minute but I just want to drill down on this for a moment. So, so you think the Fed should keep going, you think the Fed should continue to raise interest rates despite what we just witnessed with, you know, the bank failures?

ICAHN: You know, in a way, they go together. Your, your, bank failure is a manifestation of the leadership in our companies and the way they spend money and you really have a moral hazard if you just keep bailing them out of, in this case I’m not going to opine on trying to save some poor people, although the depositors in Silicon Valley weren't exactly poor people, but that's not the issue. The issue is you have to stop inflation.

So you say, do we keep going on I don't think you have a choice. If you don't keep going on, I really believe that the problem with inflation can become such that this very it's very difficult to get to get out of it. Maybe there's something we can you know, that happens maybe there’s some miracle, but you do have inflation.

I mean look, if you stopped, you know, if they don’t raise rates next week or next month. I don't know but I don't I really don't think there's a choice, Scott. I think you can't have inflation in this country. You’re paying the price. You know, if you’ve gone out on a binge, you spent the family wealth and you just keep spending at the end you pay the price for it. I mean—

WAPNER: I want your reaction to what Citadel’s Ken Griffin told the FT about this very issue in which he suggested that the government should not have bailed out all of the depositors. He said, quote, “The U.S. is supposed to be a capitalist economy, and that's breaking down before our eyes.” There's been a loss of financial discipline with the government bailing out depositors in full. What do you make of that statement? He also goes after the regulator but what do you think about that?

ICAHN: I can't opine on what Griffin is saying there because I don't quite understand where it goes. But I am saying that he is right that our system is breaking down and that we absolutely have a major problem in our economy today. And I'm not going opine on whether or not you bailout a bank or something like that.

You can’t have the country feeling that doesn't matter if they save. It doesn't matter because they could spend all the money they want. They could do whatever you want because the government will bail you out. You can't he's right about that. You can't have that. Now, should you bail this bank out? I don't know.

That's a part of the I don't like to opine on things that I’m not really that conversant in. But I do agree that the system is breaking it. Now, one of the major reasons not the only reason obviously but one of the major reasons is that you don't have good corporate leadership. So you say so what? But I'll tell you so what.

If you don't have good corporate leadership in companies, yeah when the tide is high and things are great, it doesn't matter and all these guys who are running these companies are partying and having a good time and giving themselves bonuses. But their agendas are different than the people who invest with them.

You know, they are only there to get their bonuses. And I tell you, I live it so I go into it and there’s a reason that we make so much money. I mean just to make the point. Over the years, if you invested in IEP, you annualized, you made and reinvested the dividends, you made an annual return of 15%.

And the closest is Buffett who I believe made around 9%, S&P made 7%. But why? Because we go into companies and clean them up. And there's so much to clean up and it's getting much worse now. We’re one of the worst countries in the world as far as corporate governance goes, and I could go on and on about that, but—

WAPNER: No but we’ll get into—

ICAHN: The whole economy—

WAPNER: I said—

ICAHN: The economy's breaking down but I don’t think it’s right because you bailed out some investors but I do say he's right in the sense that our economy is breaking down. I don't understand the capitalist way how you define capitalistic system.

WAPNER: You've been fairly negative on the market for a while. You've been hedged and I think you had given us an idea of how your positioning looked. I just had a guest come on and suggest that we're not out of the woods quite yet.

You now have, you know, the stock market had a nice gain today, which was a bit of a relief rally obviously given a lot of that up. Do you feel like, you know, we still have some tough sledding ahead in the market and how are you positioned as we're having this conversation today?

ICAHN: Yeah, my book is very, I try to keep hedge, right, I try keep hedge so I don’t, I try not to bet on the market or pick, you know, the market’s going down tomorrow. But sometimes, I do talk about what I think is gonna happen over a period of six months, a year, two years.

I remember being on your show, I think the last time maybe last couples of times a year ago, six months ago, eight months ago, and I said the same thing that this market is gonna really get hurt. And I was right on that. But big deal.

You know, you really can't make a living picking the market, you know, day to day, month to month. But if you’re asking me how I’m hedged, I’ve, you know, the book is more short than long. And that's the way I've set it up.

We have and the long positions are the ones that for the most part, we're going to be activists or are activists in. So, I figure, you know, I could do better in those companies than the the market. And you know, you have some bad times and some good times. It's doesn't work day in day out. But that's how I feel and—

WAPNER: Well, if you're, if you're more short than long, you I think at one point your biggest, maybe your biggest position overall but certainly your biggest short was commercial real estate related which some are now suggesting is potentially the next shoe to drop in all of this. What are your thoughts?

ICAHN: Well, we were in that three years ago, as I told you three, four years ago, we bought CDS of complicated derivatives audit, coming to fruition, pretty good. But it takes time, right? It's a very complicated derivative.

I wouldn't suggest the average guy even thinks about doing it, but our real estate markets were completely, totally overvalued. These malls were completely overvalued even if you even if you didn't have this mess, Amazon was taking a lot of business away and you look at things simply, I mean and so today actually some good some good companies around, there’s some bargains around in the meat and potatoes kind of companies that I like to be in.

But generally, I think you can’t justify buying some of this S&P stuff, these technology stocks and whatever where they can’t justify price of value meaning that with higher interest rates which I think are here to stay, you really can't justify some of the prices of these tech stocks where you looked at the price of value and said well, you're better than an interest rate.

That was true when you were talking two percent interest rates, but now, even there, these tech stocks that are run by people in many cases that shouldn't be running companies. I mean, I'm not saying they're not bright people but I am saying they should not be running companies. And many of the ones that do run them I don't think I don't think have the trust of shareholders that put money into it.

WAPNER: Have you, did you buy any, have you been buying anything in the last couple of days? You know, maybe bank related regional bank related have you used any of the dislocations in the market to actually buy some stocks?

ICAHN: The only thing and I'd like to get through it for a moment is this Illumina which I think is a quintessential example of what's wrong in corporate America. I mean, I’ll ask you the question, I just like to say if you own a farm or inherited a farm and you found out that the manager of your farm took your best equipment and sold it to somebody that they knew.

And then went back to them and bought it back eight times what they sold it for. Would you be justified in going in and questioning them and finding out what it is and not be satisfied with it. I mean that's what goes on in corporate America.

That's what went on at Illumina and Illumina is a great company. But the stock lost, the management in that company managed to lose at the end, the last year and a half, the lost $50 billion of shareholder value in the stock market.

50 billion and they don't really feel contrite about it. They say well, business judgment. What the hell does business judgment even mean? And that is what I that is what our corporations hide behind, they hide behind these words.

WAPNER: So you bought, you own—

ICAHN: I mean, I can’t, it’s a sad commentary.

WAPNER: You own 1.4% of the stock and your issue is really with their acquisition of the cancer testing company, Grail, correct because they did it in your contention knowing that the EU was going to fight it and be against it. Is that the principal part of your argument?

ICAHN: Yeah, well the whole argument is it's insane because they went in and paid a huge price so they sold to a group of savvy investors. They sold the same company, they own this company Grail. They sold it to them a few years ago at a very low price. The company hasn’t really had any revenue since then. But, it's a good company.

I'm not saying it's not a good company with some good ideas, but no revenue since then, they went back and gave these guys basically a profit of five and a half billion to buy it back when that company didn't even have FDA approval. Okay, that's bad enough.

But they did it. They did it after the EU told them that they weren't gonna let them do it and told them they didn't want them to do it and how do you do that without going, it’s laughable, you go and spend, I could understand if they could, if they could get it back for a billion dollars, 800 million.

Okay, let's take a shot. But they spent 8 billion dollars for it. And the thing has no revenue so they, and close over what the EU tells them. So the EU stopped them in their tracks, the EU won’t let them touch this company. It’s costing them $800 million and the EU is making them, they’re putting in 800 million so the stock went down by 70, 80%.

But how can you justify that? And so you say it’s business judgment, it's time I think we're moving in this direction, that the courts are not going to accept this as judgment anymore to the extent they do.

I think these guys violated their fiduciary obligations. I think they were grossly negligent and they take the attitude you know they still say yes we want to do, we’re here or something about I’m going to save the company. We're not saying, we're not going to tell them what to do in -  we're telling them, let us go in, we fixed up numerous companies we just, the same guys that were put on that board just it.

WAPNER: Yup.

ICAHN: Yeah, okay, so we just—

WAPNER: Let me give their response. Okay. You let me give their response. So you want three nominees on the board let's just get that out there. You're nominating three people for the board. In some respects, I would ask you you got 1.4% of the company. Why did you think that justifies having three of the nine people—

ICAHN: I’ll answer that. The chairman of the company doesn't know very much about science, and in my opinion, and he doesn't have any stock. So does having no stock justify being the chairman of the company and being on the board? So I don’t see how we have to relate how much stock we own. And we own a lot of stock.

I mean, it's not that we don't have, we are much, much, much more than all the board members combined. Like you just said, you know it better 2, 3% because you know, the company is a huge company even though they lost a lot of money. So the whole bullet hole is 1/10 of 1%. They justified to be on the board. I mean if you use that logic, but I wouldn't use that logic because there are good board members that don’t own stock but that logic is absurdity.

WAPNER: They say you—

ICAHN: And everybody on that board, you know, that board doesn't have business acumen in my mind. No one that could do a deal like this has business acumen. And I’ll tell you something, the stock went up, I’m laughing, you know, people talked about when I did Apple (NASDAQ:AAPL), it went up like 17 billion but Apple is a much bigger company that day. This stock went up $7 billion when they heard I was in it. Does that tell you something, does that tell you how the shareholders feel about these guys?

WAPNER: They say the company has responded, let me give their response.

ICAHN: Sure.

WAPNER: They say that you're being quote, unyielding in your demands, that any resolution should give you out, outsized influence and control. They say your board nominees lack relevant skills and experience.

ICAHN: Okay, so let me answer, you said three things. So let's start with I tried control, I would have three seats out of 12 they say they're gonna have so I don't know how that ever gives you control because I could add three against 12.

Right? So it's certainly not control. I need these three guys because it's such a mess that we need to influence boards. I know boards and most boards contrite when they do something wrong, most boards maybe even with one or two, you could do something. This board would be tough to influence them with three because they are all, they all really look at this as nothing's wrong. It's amazing when you talk to them.

Oh, what the heck? We think it should be done. We have to have that because we're gonna get nowhere with these guys. And even with three it's gonna be hard to influence but usually with three smart guys and the guys we have that are going on are very experienced om companies that are in a mess and have been put in a mess.

And I think that the three is right and I understand control. We're going to have three people out of 12, you do the mathematics—

WAPNER: I'm told Carl, I'm told they've had numerous conversations and discussions with you before you went public. What did they offer you if anything?

ICAHN: You know, it's funny that they violated the agreement so I guess I can. We both agreed we're not going to talk about what those discussions were, but they seem to have violated that and talked to you in all this about those discussions. And we told them –

WAPNER: Well I’m asking you what they were about. I just know that you've had them. I just know that they've had you know – I’m told that they’ve had numerous discussions.

ICAHN: I really feel that – about talking about what went on at those discussions, because we said we weren't going to talk about them. But it appears they talked to you about those discussions.

And came to certain conclusions about them, which are ridiculous. I mean, so I don't understand the question. I mean, I don't want to go into verbatim exactly what they said and I said and they said. But I told them pretty much what I'm telling you. I mean in a nicer way perhaps I wasn’t as –  I get a little strident sometimes.

But I will tell you that it is basically the same thing. How can you go and do something like this? That's really what the discussions were basically. I mean that's not telling a secret. And just pretty much what I said to you just now. I saw many violations over my lifetime of boards. I mean even in Occidental Petroleum (NYSE:OXY) when they are overpaying like crazy for – but they wouldn’t dare – over a government agency with that kind of money.

When you put in that kind of money and in this case, didn't buy the stock from people that she had sold that same stock to and I certainly chastise her but at least – because nobody was close to what they're doing here. It’s an absurdity what they are doing. I basically told them – but I said the same thing.

WAPNER: So do you – I want to get to the bottom of –do you want them to have this company, Grail, or not? Because that seems to be a little unclear. You may have issues with how it all unfolded. Do you want it or not?

ICAHN: I have to tell you, without saying anything that we discussed, I will tell you this. That what should be done in this company -- they have a real problem now even from a financial standpoint in my mind because they feel oh, they can borrow any money.

They are Illumina and they can do it. In this environment, knowing that this company is in quicksand now they're not going to be able to – where are they going to get the 800 million dollars that they have that the EU says they have to spend to fix this Grail up. Grail doesn't have any income. This is what is amazing.

They don’t have any income, they’ve got to spend $800 million in the next year. So I say what they should be doing – and I think most shareholders would agree with me – they’ve got a great company in Illumina in gene sequencing. They should get rid of this Grail that they own in a way – in the following way because they did it in such a way, so haphazardly and so amazingly ridiculously.

They put it in a way that if they sell it to somebody, it's going to be somewhat difficult because they’re going to have to pay big tax. Even if they have a big loss, I'm not going to get into why this is, but they did it in a way that the guys that they sold it to don't have to pay taxes on their gains. I mean, it’s amazing.

WAPNER: So they put out —

ICAHN: Let me say something. So what I think should be done is they spin it in a way with a rights offering, so the money – so if you want to buy – so if you're a shareholder – so you can sell the rights to somebody that wants to buy it, or you could exercise your right to be a part of Grail.

And that money that you put in doesn't go to this company – doesn't need that money because they're not making money. That money would go into Grail to do what Grail has to do.

So the shareholders benefit by owning Grail at a cheap price and having a good management team in Grail. These guys – a little bit of go back to what they seem to know best or think they know best and run their company. That's what should happen.

WAPNER: So they've got –

ICAHN: I didn't even demand that they do that in these discussions. I didn't even demand that. I was really reasonable with what we talked about. However now I'm saying that's got to be done because I realized how stuck in this thing these guys are.

WAPNER: Okay, so we're making some news then on what your actual, you know, ideas or demands are. So they threw a 10k –

ICAHN: I didn’t make the demand. I want to make it clear with them. Yeah, I guess from this discussion, that's the first time I'm saying basically what should be done in my mind.

WAPNER: Okay. That is what I mean –

ICAHN: But I’m certainly going to listen to the other shareholders – we’re going to call other shareholders, you know, big shareholders, and see what they think. And hey, if the other big shareholders like what they are doing, and are going to go with them, hey, so be it. You know, I made a profit in the company. But I think it would be crazy to let this company go with this management team calling all the shots.

WAPNER: I mean, because they say that they've recorded a $450 million reserve, which is the amount that the EU may find the company – that's number one. And they also give a statement suggesting that the divestiture work, if it needs to go in that direction, is already underway. That's in their statement. They say it's already underway. Now, I suppose they can –

ICAHN: But can I speak, or –

WAPNER: Let me finish real quick.

ICAHN: But that is nonsense. That is nonsense –

WAPNER: Let me finish real quick.

ICAHN: Because the – shows it's going to take years to do this. Because they said we are going to go to court and fight it out. Okay. What’s the divestiture? What do we have to do? How do we do it? They will argue over that for two, three years. I am telling you. I've seen it. I've seen what these legal things.

There's never going to be – the EU feels very, very strongly about this. And I'm not saying they're wrong, by the way. I mean, I can see the EU’s point here. I'm not getting into that because I'm not a lawyer. I haven't really studied it. But they're going to go and they said they're going to keep these guys from doing this.

Okay, now in court, if they tell them they can do it, it’s going to be – I think there'll be a divestiture. When they say underway, that’s saying things that they have been doing all along. They are obfuscating these issues. They don't think they have to tell you the facts. They wrote a letter to answer what I did and it’s completely wrong.

This thing is not going to be done. This company is going to bleed and bleed and bleed. Looking ahead if they don't get rid of this albatross –  it's not an albatross to other people that have money to take this company and make it work but it's an albatross to these guys. Okay, because the EU will not let them have it.

I can understand a company that could go in – even then I would bet against this. But I wouldn't have fought it I don't think. If they did this and the EU said fine, come on in, then maybe. Maybe. I think they overpaid like crazy. But even then you could say well, that's maybe a business judgment. What they did is gross negligence at the least. It may be worse.

 

WAPNER: Okay. So, theoretically, I mean they could win, however unlikely you think it is, they may win the appeal with the EU. If that happens, will you stick around or will you sell your stock and leave? And if you do get on the board through this proxy effort, or even through some sort of an agreement, do you want the CEO to stay or not?

ICAHN: You are asking questions I can't discuss on this program obviously, but I will say this to you. You got to understand what win means. When you're up against an agency like this, as you know, FirstEnergy we finally turned around by going on and we did a great job.

And these two guys that are going on this did First Energy. But what I will tell you is winning – they don’t understand this. They really I think don't understand it. And it's gross negligence – because they do $8 billion and when they say they reserve 450 million, what about the 3. 9 billion they wrote off already for this little venture that they got into?

How much work did they do on it? When you talk business judgment, there's going to be more definition for business judgment and I said this board might well be personally liable, personally liable for just ignoring this whole thing.

I think there's got to be – this has got to be looked into. Because you can't let this –and this might be a watershed case in the future about what the hell goes on in corporate America and why there is no accountability.

And by the way, Scott, that's why one of the major reasons that we have problems in this country is the average worker doesn't understand what the hell goes on in the boardrooms. And we really have problems in many, many, many companies. Not every company. So that is all I’m saying. This might be a watershed case in what's going on.

WAPNER: Okay. Let's leave it there. I got 20 minutes left in the trading session here and I want to get back to what's happening in the market because as you know, it's been volatile. We'll talk to you again soon. Thank you so much for your time today.