Confidence Game - Christine Richard [1]
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Library of Congress Cataloging-in-Publication Data:
Richard, Christine S.
Confidence game : how a hedge fund manager called Wall Street’s bluff / Christine S. Richard.
p. cm.
Includes bibliographical references and index.
Summary: “Confidence Game tells the story how hedge fund manager Bill Ackman’s warnings regarding bond insurer MBIA’s credit rating went unheeded as Wall Street careened toward disaster”—Provided by publisher.
eISBN : 978-0-470-87330-4
1. Municipal bond insurance—History—21st century. 2. Securities industry—Credit ratings—21st century.
3. Wall Street (New York, N.Y.)—21st century. 4. Global Financial Crisis, 2008-2009. I. Title.
HG4538.52.R53 2010
368.8’7—dc
22 2010001831
For Dean
Preface
FOR NEARLY 10 YEARS, I covered the bond market as a Wall Street reporter, first at Dow Jones and later for Bloomberg News. It was a period of enormous growth and innovation in the credit markets. As the expansion peaked, Wall Street manufactured billions of dollars of debt every day, astonishing amounts of it considered triple-A or virtually risk-free. For a while, this was accomplished with true financial innovation. Later, the process was corrupted by delusion and dishonesty.
Of all the stories I covered, there was one that never seemed to go away: the battle between a company called MBIA and a hedge fund manager named Bill Ackman, who was obsessed with that company’s practices.
What is MBIA? It stands for Municipal Bond Insurance Association. For years it was the largest of a handful of extraordinarily profitable companies that together guaranteed more than $2 trillion of debt issued by entities ranging from the Cincinnati school system to a shell company in the Cayman Islands. Insurance transformed lower-rated bonds into triple-A-rated securities. Business boomed, giving MBIA some of the highest reported profit margins of any publicly traded company in the United States—even higher than Google and Microsoft.
If there was something about this business that was too good to be true, few people had any reason to point it out. Then in late 2002, Ackman, who ran a hedge fund called Gotham Partners, issued a research report titled Is MBIA Triple-A? in which he questioned just about every aspect of MBIA’s business. Before he made his views public, Ackman bet against the company by purchasing derivative contracts called credit-default swaps, which would make his fund billions of dollars if MBIA filed for bankruptcy.
Ackman’s research report was the opening shot in what became a long and bitter Wall Street feud between him and MBIA. From the start, MBIA was determined to silence Ackman’s criticism, and he was no less determined to see MBIA leveled. Ackman was investigated at MBIA’s urging by Eliot Spitzer, then New York’s attorney general, and the Securities and Exchange Commission (SEC) followed suit.
For more than five years, the hedge fund manager questioned nearly every aspect of MBIA’s business,