For more crisp and insightful business and economic news, subscribe to The Daily Upside newsletter. It's completely free and we guarantee you'll learn something new every day.

Never, ever question the grit, moxy, and relentlessness of that uniquely American species we call the mall rat.

Wall Street legend Carl Icahn bet big and -- so far -- has lost big on a wager against US shopping malls by way of a risky derivative strategy. Now, the 87-year-old Ichan tells The Wall Street Journal that the game was rigged. But is this illegal market manipulation or just another reason fellow investing legend Warren Buffett once called derivatives "weapons of mass destruction?"

Dying Malls Still Alive and Well (Enough)

Malls haven't been doing great since the mid-2000s, due to the steady erosion of foot traffic brought on by the rise of e-commerce. The downward trend prompted a plethora of investors to buy credit-default swaps (CDS), a sort of bond insurance policy that would pay out big time when shopping malls began defaulting on their debt. Once the pandemic hit, the strategy looked even more like a lock, with investors including Icahn piling into CDS on the CMBX 6 index, which was overloaded with mall debt seriously at risk. In 2020, Icahn called the short bet "one of the best I've ever seen," the WSJ reported, and by the end of 2020, his positions were up by almost $1 billion.

Funny thing happened, though: As the pandemic's impact waned, shopping malls just...survived. And due to some pro-mall investors on the other side of the bet, several shopping centers negotiated debt sales that avoided triggering a debt payout. For investors like Icahn, who had upped his bet substantially during the pandemic, that meant he was still paying CDS premiums on a position that was increasingly underwater. In 2022, Icahn's CDS took a $742 million paper loss, the WSJ reported, and are money losers so far in 2023. And it largely came down to one mall outside of Albany, New York:

  • The Crossgates Mall made up an outsized portion of Icahn's CMBX 6 bet. While the mall was seriously struggling, the special servicer of the debt received a superior bid before it was going to auction that helped avoid the automatic CDS payout to investors like Icahn.
  • Ichan cried foul, calling it a "rigged market," but the WSJ quoted other analysts who suggested that this is just life in the derivatives market, and the entire episode highlighted the difference to the CDS fiasco during the housing crisis.

Home is Where the Shroud Is: In an interview with the WSJ, Manus Clancy of real estate data firm Trepp, said "You couldn't really do this [bet against the debt] so much in the last crisis because homeownership is shrouded -- you didn't know which homeowners were backing certain bonds, but here you do."

– Griffin Kelly