The Big Short hits Home

So here’s a funny thing. Marc Cohodes, big- time American short seller, contacted me Monday on Twitter, asking me for my phone number. It must be tough down there in California, moving around chicken- farm refuse while simultaneously cranking out a steady stream of sensational Trumpish tweets about the looming catastrophe in Canada’s bubbly mortgage market. No time to take a second to Google “Terence Corcoran” and track down the company telephone number.

Even stranger: Why did he want to talk to me? Here’s one guess. Maybe he planned to reveal precisely how much money he and his fellow short sellers have made obliterating Home Capital Group with the help of the Ontario Securities Commission.

In a column last week, I had said that the official short position in Canada on Home Capital was 2.5-million shares. That was technically right, as far as the TMX data go, but way off base in the great world of short sellers inhabited by the likes of Marc Cohodes.

The otcmarkets. com site, which tracks U. S. short positions, reports that more than 18 million Home shares were being shorted as of April 13.

Last week, I had sent Cohodes a tweet asking him to reveal his short position. “Show us your books,” I said. No answer then. So I wondered if Cohodes, no doubt a man of high integrity who favours full disclosure in all things corporate and investment, wanted to call me and point out that he and his shorting comrades were actually short 12,695,228 Home Capital shares. I just came up with that guess, but it’s possible.

So, based on my rough assessment, it appears the short sellers sold Home Capital shares at an average price somewhere in the ballpark of $ 35, hoping to someday get them back at a much cheaper price. At that price, if Home Capital should slide all the way to zero, if they were indeed short 12,695,228 shares, Cohodes and his co-conspirators stand to make a profit of $444 million.

Add in other short sellers in Canada and the U. S. — some estimates are that as much as 50 per cent of Home’s 60- million outstanding shares have been shorted — and the total take raked in by shorts on Home’s ruination could approach $1 billion.

We await Cohodes’ confirmation of his share of the cake, which, depending on how you want to cut it up, has in the last month been ripped from the portfolios of Home Capital’s shareholders. While Cohodes and associates are getting rich, investors under the protection of the Ontario Securities Commission are getting wiped out.

Unless Cohodes gets caught in a short squeeze. Slim chance. But Home now has a new board controlled by high- reputation Canadian investment personalities. Home shares were trading 25- percent higher Tuesday. On Thursday, the company will release new financial data that could show a relatively solid mortgage book, despite the cash crisis created by depositors yanking funds. If it turns out the company still has net value, shares could rise more.

The momentum in Home’s crisis began last February. Cohodes had been calling for the OSC to move in on Home and, uncannily, seemed to foresee in a January 27 tweet that drama might be coming: “The OSC has a New Director of Enforcement … Everyone thinks they are a DO NOTHING BUNCH ... I think it’s High Time something happens BIG.”

A few days later, something BIG did happen. On February 9, the OSC sent an “enforcement notice” to Home claiming the company had “failed to meet its disclosure obligations” when it discovered a small proportion of its mortgages were granted on the basis of false information. It’s been downhill ever since for Home: management has been sacked, the board replaced, shareholders decimated, depositors in flight. Shares of other lenders, including Equitable Group, Home’s competitor, have been pummeled.

Over at the OSC, they are proceeding with their case against Home. Hearings will be held, backed by 22,000 pages of documents, with lawyers from the company and its former executives defending against charges brought by Jeff Kehoe, the OSC’s new director of enforcement.

Kehoe is a former criminal lawyer who became “interested in white collar crime issues.” In an interview with Investor News published last February — just days before he served notice on Home — Kehoe said his objective is to protect investors.

In the interview, Kehoe outline how the OSC enforcement branch operates. The commission’s caseassessment team reviews complaints, he said. “We prioritize cases that pose the highest risk to investors and we investigate them. And just like you see on TV, we have trials with lawyers on both sides, we put forward the evidence, we have cross-examinations and then a panel of three Commissioners decide whether we have proved our case.”

But what happened to Home Capital was not just like you see on TV. The trial hasn’t even started but the accused have already been drawn and quartered, stripped of their jobs, while investors pay the price. Home has been found guilty until proven innocent.