Confidence Game - Christine Richard [10]
The meetings, which began around 10 in the morning and ran well into the evening, started in Brown’s office. Acquaintances describe Brown as a very private person. He is also a self-made man, who sometimes told colleagues about the years he spent driving a truck before he completed college. A graduate of Northern Illinois University who had majored in statistics, Brown rose through the ranks of Fireman’s Fund Insurance, starting with the company as an actuarial trainee when he was 25, eventually becoming its CEO.
Brown later advised Xerox Corporation on the sale of its insurance unit, including Crum and Forster, a 150-year-old insurer based in Morristown, New Jersey, which had huge exposure to asbestos claims. Asbestos was the miracle building material of the 1960s and 1970s. In the 1980s, however, doctors discovered that the mineral, named after the Greek word meaning “inextinguishable,” lodged in the lungs of workers, remaining there for years and causing cancer and other fatal respiratory diseases. By the late 1990s, the insurance industry was bracing for asbestos-related workers’ compensation claims of more than $250 billion.
Brown’s ability to dispose of this toxic exposure at a profit to Xerox earned him a reputation as a dealmaker. Brown, who had served on MBIA’s board since the mid-1980s, joined MBIA as its CEO in 1999 after the company’s longtime president and CEO, David Elliott, suddenly stepped down. After assuming the top spot, Brown purchased more than $7 million of MBIA’s shares using his own money. “He is a tough, tough man who is deceptively gentle in his demeanor,” James Lebenthal, a longtime MBIA board member, said of Brown.
In his meeting with Brown at the company’s headquarters that August, Ackman took notes, jotting down Brown’s description of MBIA’s two core businesses. “Structured finance is analyzable, understandable,” Ackman noted as Brown explained the business of insuring asset-backed securities, bonds backed by everything from credit-card bills to mortgages and even other bonds.
Bankers often use the analogy of a waterfall to explain how asset-backed-securities holders are paid. Each month, payments on mortgages or credit cards flow into a trust that has issued various securities to fund the purchase of the loans. The cash is used to pay the highest-rated asset-backed-securities holders first before the overflow spills down to the next highest-rated level of securities holders and so on. Defaults on the underlying loans reduce the amount of cash available to pay securities holders. As a result, the lower down in the waterfall, the riskier the securities and the higher the yield the trust must pay to get investors to buy these junior, or subordinate, securities.
Brown explained that insuring public finance securities required a completely different approach. “It’s illogical and not analytical. It’s a moral commitment.” The federal government wouldn’t let a state go broke, Brown explained. Debt issuers below the state level, such as counties, cities, and towns, always have “someone above who can help out,” Ackman’s notes read. “When you went that last step, public finance resolves around a moral obligation,” Brown told him.
Ackman met later that day with MBIA’s chief financial officer, Neil Budnick, and the two discussed the company’s so-called “zero-loss” underwriting policy. The former Moody’s Investors Service analyst told Ackman that it was crucial that MBIA back only those bonds on which it expected to take no losses. MBIA risked losing its triple-A credit rating on losses of as little as $900 million, Budnick said. In other words, if MBIA was required to make payments on just 0.2 percent of the nearly half a trillion dollars of bonds it had insured, it risked losing its triple-A rating.
By the time Ackman met with Mark Gold, who oversaw MBIA’s structured finance business, it was nearly 7 p.m. The fund