Confidence Game - Christine Richard [100]
“I have lost confidence in the SEC,” Ackman replied.
When Ackman met again with the SEC later that summer, he lost his temper and told the government attorneys, “This company will implode, it will take the global capital markets with it, and you could have prevented it.”
Chapter Seventeen
Apocalypse Now
Super-senior CDOs: “The greatest triumph of illusion in twentieth century finance.”
—JANET TAVAKOLI,
STRUCTURED FINANCE AND COLLATERALIZED DEBT OBLIGATIONS (JOHN WILEY & SONS, 2008)
OUTSIDE PERSHING SQUARE’S offices on Seventh Avenue in Manhattan, Bill Ackman, Pershing analyst Mick McGuire, and Roy Katzovicz, the firm’s chief legal officer, piled into a taxi. All three were wearing suits on a hot and sticky first day of August for a 9:30 a.m. meeting with New York State Insurance Superintendent Eric Dinallo.
They were running late after the usual last-minute debate over cutting pages from the presentation. “For every page of one of Bill’s presentations, you can be sure there were two or three that were cut,” McGuire remembers. “If it was up to Bill, every presentation would be an eight-hour seminar.” Katzovicz carried a box filled with copies of their latest presentation: “Bond Insurers: The Next S&L Crisis?”
After a few minutes, the taxi slowed in the crawl of rush hour traffic. “We shouldn’t have taken a taxi,” Ackman fretted. As they reached Houston Street, Ackman insisted they get out and take the subway: “It will be faster.” The subway left them several blocks from the insurance department on Beaver Street in lower Manhattan, and they closed the remaining distance at a high-speed walk in muggy Manhattan heat, Katzovicz struggling with the box of presentations. The pace was nothing unusual for Ackman. “Bill walks faster than anyone I know,” McGuire says.
Dinallo had been appointed to the top insurance post by New York Governor Eliot Spitzer in January 2007. A New York University- educated lawyer, Dinallo worked under Spitzer during his crusading days as the state’s attorney general. Dinallo masterminded the use of the Martin Act to go after Wall Street fraud and stood on the podium along with his boss at press conferences when Spitzer announced settlements with some of the country’s largest financial institutions. Since taking up his post at the insurance department, Dinallo had already pushed through a long-stalled insurance settlement to cover the September 11, 2001, destruction of the World Trade Center. On that hot August morning, new problems were looming.
The group took seats around a conference table and Ackman delivered the “Who’s Holding the Bag?” presentation he had given at the Ira Sohn Investment Conference in May. He described how the incentives to securitize and sell mortgages created enormous moral hazard in the mortgage market, how faulty structures allowed billions of dollars of doomed securities to be built out of the riskiest parts of bonds, and how small losses on $100 billion portfolios of collateralized-debt obligations (CDOs) could wipe out a bond insurer’s entire capital base.
He also reviewed other issues specific to the insurance department’s role in overseeing the bond insurers, such as how bond insurers were engaging in prohibited credit-default swaps (CDSs) and how MBIA’s growing fixed-income arbitrage business amounted to a disguised dividend from its regulated insurance subsidiary. Ackman argued that Dinallo couldn’t stand by and allow the credit-rating companies to usurp the department’s role as the de facto regulator of bond insurers. The ABX index referencing triple-B-rated subprime mortgage bonds indicated investors expected to recover just 65 cents on the dollar for those bonds before the credit-rating companies began to downgrade the debt, he said. Wait for the rating companies to “regulate” the market and it will be too late.
Ackman made the case that the insurance department should stop dividends