WHAT A DIFFERENCE TWO DECADES MAKES. IN THE 1980s, Carl lcahn loomed large as a corporate raider, in the mold of the Gordon Gekko character in the movie Wall Street. Icahn made a lot of money but was vilified for what some considered a slash-and-burn approach to taking over companies. Twenty years later, Icahn has morphed into a shareholder activist and rails against what he considers to be incompetence among senior executives and on boards. "They call me raider. They call me an activist," says lcahn, who, at 72, shows no sign of slowing down. "I dont know what those labels mean. All I know is that something should be done to improve corporate governance and management If we don't, managements will remain unaccountable and our economy will suffer."

Performance at his hedge fund has suffered this year, thanks in no small part to large holdings of senior debt that have been marked down. And he's had his ups and downs in targeting various companies recently. Icahn's recent winners include Time Warner (ticker: TWX); ImClone, which Eli Lilly (LLY) bought recently; and the Stratosphere, a Las Vegas hotel and casino that lcahn sold at a big premium. His effort to get board representation on Biogen (BIIB) came up short, however. And the jury is still out on Yahoo! (YHOO) and Motorola (MOT), in which he has large stakes and board representation.

In an interview with Barron's in his midtown Manhattan office last week, Icahn was upbeat, the recent market carnage notwithstanding. He doesnt have a lot of leverage, which has sunk some hedge funds, and he has a big cash hoard. For more on his views, please read on.

Barron's: Is this the worst market you have seen in your years as an investor?

Icahn: It is probably the worst as far as the debt market is concerned. We've done a lot of investing in the debt market in past recessions, notably in 1990 and 2000, but I have never seen the senior bonds as cheap as they are today. Even since the 1930s, I dont think the value of the senior debt relative to equities was as bad as it is today.

Do you see any silver linings?

One of the great opportunities I have seen in a great many decades is senior debt. I'm not saying that it won't get battered even more. So I want to make it clear that because of various external pressures like margin calls, which trigger forced selling, you cant pick the bottom, and the senior debt could go lower. But it is a great opportunity, as are certain stocks. The prices of these securities are out of whack with the reality of their value.

Are you finding more buying opportunities than, say, three months ago?

Yes. We have a hedge fund, and obviously anything we bought, including this senior debt, is marked down, so we are losing this year. But I never used much leverage, so we havealot of cash, and we are starting to use that cash to take advantage of the debt markets and some of the equities. Having said that, there is no question this might not be over.

How has shareholder activism changed since the 1980s when you first came to prominence?

It hasnt really changed from that time. Sarbanes-Oxley hasn't done anything to change it You still cant mount a proxy fight unless you are willing to spend a great deal of money and go up against a company's legal team that's paid for with shareholders' money.

One of your pet peeves over the years has been that chief executives are too often people who know how to get to the top but who don't know enough about running a company effectively. Was that a problem with the recent debacle on Wall Street?

Yes, that's been a major problem. In this country we do not have our companies run by the right people, although there are many exceptions. We dont have true elections in these companies, so we dont have true democracies. It is more like Czarist Russia, where you just have these absolute monarchies at these companies. I think these guys who run these companies are still in denial They still believe it is theirs and that they almost have a divine right At a lot of companies where I have been on the board, there was a lack of accountability.

Now, I'm not against CEOs making a lot of money if things are good for the shareholders. But the shareholders are getting killed. There is nobody watching the store, and that's what happened to Wall Street Everybody was just interested in making all this money. The punch bowl was never going away, and the boards should have been responsible for making sure that there wasnt this crazy risk-taking. Boards should not micro-manage, but they should take a very strong interest in what risks are going on. And they should not have permitted these crazy severance packages that were were being paid and accepted.

On your blog [www.icahnrepoit.com], you've written about starting a group called United Shareholders of America. What's that all about?

Thousands of people have joined. Shareholders should have the right to choose whether or not to accept an offer for their company-not the board, which often owns no stock. Also, shareholders should have the right today [to change where a company is incorporated from one state to another]. That could be a federal law, allowing you as a shareholder to move [where the company is incorporated] to states that are more shareholder-friendly. And the only way you can get this done is for shareholders to voice their opinions and to let their senators and congressmen know.

One of your best-known deals was TWA, which you controlled from the mid-1980s through the early 1990s. With the benefit of hindsight, what's your assessment of that deal, which was turbulent and controversial?

TWA was one of the worst deals I ever did. I made a mistake by staying in for too long. We cleaned that company up and saved hundreds of millions dollars. We could have made a good profit and got out but we stayed in. I had a couple of guys working for me who loved it. At the end it was my own decision. I should have got the heck out of it. It was very difficult.

I get criticized a lot for that deal. But if you look back at history, we kept TWA alive while others, like Eastern and Braniff, all went under, and they were in better shape than TWA was when we bought it. So we did keep it alive for a long time. We cut the costs. We did a lot including that Business Saver fare. But the airline industry was just very difficult

I'm not here to make excuses, but you could look at so many other companies that we have gone into and cleaned up. Look at the Stratosphere, a hotel and casino in Las Vegas. We took it out of bankruptcy, invested $200 million to $250 million, and we sold it last year for $1.2 billion. Or take National Energy Group, including Panaco and TransTexas, where we put in about $300 million and sold it for $1.5 billion in 2006. Another of our recent wins was ImClone Systems, which was sold last month to Eli Lilly for $70 a share. We got in when it was $30 to $35 a share.

How does this tie in with how you go about targeting companies?

These examples prove my thesis that if you put the right managers in-not me, I'm not a manager-you can be very successful. If the management does the job, then let them run the company. That's what I believe in. If they don't then you have to let them go, but most of them stay. This ties in with my thesis that this country needs much better corporate management.

One of your most visible shareholder activist plays this year has been Yahoo!, whose shares have lost more than half their value since Jan. 1. What's you assessment of the situation there?

I'm on the board, and I certainly like some of the board members. They really take seriously what is happening and what should be done there, but 1 dont think some on the board are correct in their views. I've said this before: Yahoo! should make a deal with Microsoft [MSFT] as far as selling its search capability.

You're talking about selling the search capability, but not the entire company?

Right. Microsoft has said publicly that they are not interested in buying the whole company, and I believe them. But they are interested in doing a deal on search, and we should pursue that.

What would the future be for Yahoo! without search?

They would still be one of the top content companies; they are very good at that Yahoo! would still have the search capability. So when you go to Yahoo!, you could still use the search function, but Microsoft would handle it Microsoft can afford to fight Google [GOOG] better than Yahoo! can. That is, Microsoft has the resources to put in the billions of dollars on the technology for search it may take over the next decade.

What do you think of the recent departure of Jerry Yang, Yahoo!'s chief executive?

I like Jerry. He is a charismatic guy, but let the past be the past. [lcahn bought about $67 million in YHOO shares late last week, according to Securities and Exchange Commission filings, raising his stake to around 5.4%.]

Let's move to another of your recent targets, Time Warner. That worked out well for you. You pushed to have the company broken up. That didn't happen, but a big share buyback helped boost the stock price.

It worked out well, financially. I think it turned out that we were correct in what we wanted to do, and Time Warner is sort of doing it Sometimes, it takes a few years for ideas to be accepted. Sometimes they never are. We sold most of our stock in the company, and so we did well.

Motorola, which you've also targeted, has had a disappointing stock performance in recent years. You've gotten representation on the board. What's your assessment so far?

The new co-CEO, Sanjay Jha, is working hard to correct the situation, and the other co-CEO, Greg Brown, is working hard to cut costs. I've always thought that Motorola is a great company.

In terms of your performance this year, where have you done well and where haven't you done so well?

Obviously, very few hedge funds are happy with their performance this year. However, we have haven't used much leverage and we have billions of cash. Senior debt is selling at. Depression levels, and with the credit markets drying, up, there undoubtedly will be bankruptcies, which is an area we know well. There are-and will be-great opportunities in these areas.

Is the hedge fund getting redemptions?

Every fund manager is getting redemptions. There is no question that we have had redemptions. You are going to see a secular change in the hedge-fund industry.

In what way?

There are a lot of hedge funds that wont be around in a year or two. That's obvious. A lot of these hedge funds are getting redemptions, and a lot of these funds have claw-back provisions, so for the next two, three years, the managers are not going to make much money from fees. I dont know if a number of them are going to want to stay around. But we are here to stay.

Where do private-equity funds go from here?

One of the positive things that private equity did was to put some good managers into these companies. It cleans them up, and they benefit But there's also the terrible risk of this tremendous leverage that is going on. And that's one of the reasons all this debt is coming in too, because right now the perfect storm is against private equity-or at least the private equity model as we know it

Thanks, Carl.