Carl Icahn, a star corporate raider brought down to earth

Decades ago, character Carl Icahn gained insight by reading American novelist Theodore Dreiser. The billionaire investor was captivated by Dreiser’s two novels, The Funder and The Titanwhich describe the rise of industrialist Frank Cowperwood.

In a crucial financial conflict, Cowperwood’s opponents seek to initiate a bank call on his large personal debts. But unbeknownst to them, Cowperwood has a vast reserve of wealth upon which “to draw and speculate.” If deployed, Dreiser writes, “these people should finally see how powerful and how safe it is.” Cowperwood rules, and Icahn says he’s learned an important lesson: always have a “war chest” of cash.

The 87-year-old is famous for spending decades orchestrating shareholder battles with companies such as Texaco, Trans World Airlines, Apple and McDonald’s. These battles reshaped U.S. financial markets by changing corporate governance and directing management toward the interests of large shareholders such as Icahn.

For nearly half a century, the mere mention of his name has struck terror into the hearts of corporate executives and moved the markets. But most of Icahn’s power came from an obscure, thinly traded public vehicle called Icahn Enterprises that was largely unscrutinized.

This month, Icahn was besieged by a skeptic named Nathan Anderson, who revealed in a report published by his company Hindenburg Research the heavy debts the investor had taken on Icahn Enterprises stock. The revelation revealed a surprising vulnerability in one of the world’s richest financiers. Icahn has vowed to “fight back,” but his plans to protect his empire remain mostly a mystery.

In recent years, Icahn has made increasingly large bets against the fast-rising market to protect his investments from a future crash. Instead of building emergency reserves, the trades resulted in losses of nearly $9 billion. When faced with those losses last week, a cautious Icahn admitted: “Maybe I’ve made the mistake of not following my own advice in recent years.”

The predicament has shocked many leaders on Wall Street. “It’s one of those moments in a crisis when you say, ‘Damn, everything I thought about somebody was wrong,'” said the head of a major financial firm.

Bill Ackman, the billionaire investor with whom Icahn fought in a legendary battle for the fate of a multi-level marketing company, gave the most brutal assessment. “Icahn’s Favorite Wall Street Saying [is]: “If you want a friend, get a dog,” Ackman tweeted. “During his storied career, Icahn made many enemies. I don’t know if he has any real friends. You can benefit from one here.”

Born in 1936 to teachers, Icahn grew up in the working-class New York neighborhood of Far Rockaway, Queens. After graduating from the local public high school, he earned a degree in philosophy from Princeton University and supported himself on poker winnings.

He briefly enrolled in medical school, but dropped out and joined the army before settling down as a stockbroker. In the late 1960s, a rich uncle bankrolled the purchase of Icahn’s seat on the New York Stock Exchange, where he became a specialist in “risk arbitrage” and betting on prospective corporate mergers.

Icahn rose to prominence in the 1980s when he acquired control of Trans World Airlines with financing from junk bond king Michael Milken. He ruthlessly sold TWA assets for cash and fought unions, earning a reputation as a “corporate raider.” The episode helped inspire Gordon Gekko’s character in the film Wall street.

In recent years, Icahn, who divorced his first wife and married his assistant Gail, moved his company from a skyscraper overlooking Manhattan’s Central Park to Miami. He also worked more closely with his grown children, Brett and Michelle.

Brett helped identify successful bets on Apple and Netflix and was appointed as his father’s eventual successor. Michelle’s work at the Humane Society inspired Icahn to run an unsuccessful campaign against McDonald’s over its treatment of livestock.

The attack on Icahn comes as he continues to struggle with companies he has mismanaged. On Thursday, it reached a tie in its war against Illumina, a company that makes machines to sequence the human genome. Icahn accused Illumina’s management of conspicuously reckless acquisitions and asked shareholders to give three seats to candidates. He was able to oust Illumina’s chair, but failed to win the other two seats, which would have helped dethrone the CEO. The result underlines its lasting effect. But it’s in uncharted territory.

This week, Icahn Enterprises plunged more than 30 percent, adding to a decline that more than halved the company’s value. This cost Icahn billions and made the threat of a creditor margin call more immediate.

Whether it can prevail may come from the lesson it learned decades ago from Dreiser’s Cowperwood. Icahn told the Financial Times last week that billions were sitting on his mass vehicle. If so, the “war chest” would give him one more hand to play.

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Additional reporting by James Fontanella-Khan