10 Apr 2010 Leucadia National - 2009 Annual Report ( Portfolio )
2008 was an infamous year, not unlike 1929. A group of financial engineers almost brought down the U.S. economy and subsequently a significant portion of the world’s as well, resulting in a deluge of red ink. Happily, 2009, was much different. There is increasing evidence that the financial carnage brought on by excessive risk taking is beginning to repair itself. In 2009, Leucadia recorded $550.3 million in profits while shareholders’ equity grew $1.7 billion.

We concluded last year’s letter by hoping that despite our “Fortress Leucadia” mentality, “we will continue to look for companies to buy, but only consider companies that earn money, have a bright future and are durable!”

Our newest addition is a good start on that promise. Berkadia Commercial Mortgage LLC is now the country’s largest non-bank owned provider of commercial mortgage servicing. We purchased the business out of the bankruptcy of Capmark Financial Group Inc. Berkadia, a 50/50 joint venture with Berkshire Hathaway, acquired Capmark’s servicing assets and loans with $434 million of partners’ equity and a line of credit from Berkshire. The foundation is in place for a business with solid, long-term growth.

At December 31, 2009, we owned approximately 25% of the outstanding common shares of AmeriCredit Corp. (NYSE: ACF) for an original cost of $418.6 million. ACF is an independent subprime auto finance company that purchases and services automobile sales finance contracts, typically for consumers who struggle to obtain traditional financing from a bank or manufacturer’s captive finance company. At December 31, 2009, our investment in ACF is classified as an investment in an Associated Company and is carried at fair market value of $639.8 million.

For almost 20 years, we owned a similar business and as a result carefully followed ACF. ACF’s large volume and efficient processing and underwriting abilities made it a fierce competitor. In 2004 we exited our business, deploying our capital elsewhere, rather than fighting a pyrrhic war with larger, more efficient competitors, some of them willing to accept puny returns. But, we retreated with our eyes open. We observed that in previous recessions ACF suffered its share of poor credit performance; however, when a recovery was underway ACF made larger profits by being able to select more credit worthy customers and to charge more for loans.

Although the current recession has been much harder and deeper than we anticipated, ACF performed as expected. ACF is acquiring more credit worthy customers and is able to charge higher rates. Credit performance is improving. Securitizations, which were completely frozen until the Federal Reserve’s TALF program got rolling, have come back to life. During 2009, ACF issued two separate TALF-eligible securitizations, one of which had investors who benefited from the TALF program. All indications are that ACF has adequate liquidity for the foreseeable future.

Jefferies (NYSE: JEF) is a full-service global investment bank and institutional securities firm. Jefferies offers its customers capital markets executions, mergers and acquisitions, restructurings and other financial advisory services.

At December 31, 2009, we owned approximately 29% of the outstanding common shares of Jefferies for an investment of $794.4 million (the largest single investment we have ever made). The fair market value of our investment was $1.2 billion at December 31, 2009.

Jefferies is not in trouble, not a ward of the U.S. Government, not burdened by toxic assets and not overleveraged. Its employees own a substantial interest in the firm and their pay expectations are being managed with the best interests of the firm in mind.

Jefferies has successfully hired talented individuals from troubled or failing firms, acquired a municipal bond trading and underwriting business, became a Primary Dealer in U.S. Treasuries and many other governments’ bond issues and also expanded its global fixed income and commodities business. We believe that Jefferies, unscathed by the imprudent and irresponsible behavior of other investment banks, will thrive as the world’s economies improve and will increase its market share and profits. It doesn’t hurt that some of its competitors have gone out of business.

Most of our assets are tied to a recovery in the world’s economy. In 2009, we have seen the baby steps of recovery. We hope the baby does not flop back on its bottom. In the current recessionary environment, earnings from our operating businesses and investments do not cover our overhead and interest. We have cash, liquid investments and securities and other assets that should carry us through these difficult times. We are energetically cutting costs. We have talented managers and employees working hard every day.

Out of prudence we take a pessimistic view as to when this recession will end. To think otherwise would be a gamble that we are unwilling to make.

In these troubled times there are sure to be opportunities for investment and we will remain on the hunt. The acquisition by Berkadia is the first fruition of that hunt. We recognize a good deal when we see one and will strive to execute.

We intend to resist what we consider “financial bets.”