Confidence Game - Christine Richard [101]
When the Pershing Square group got back to the office, others at the fund were eager to hear how things went. “Everybody would pile into Bill’s office for a recounting of events,” McGuire remembers. It was more than an investment-team event. Everyone was eager to hear about it: the investor-relations group, the traders, the tech guys, the assistants. “People appreciated the position, its significance to the firm and to Bill personally.”
“It was an incredible meeting,” Ackman told the group. Regulators were going to see that MBIA shouldn’t be taking any more money out of its insurance unit because policyholders are in jeopardy. “They’re toast,” Ackman concluded of MBIA.
From the outside, Ackman was the ultimate skeptic, the guy who didn’t believe in the most trusted company on Wall Street. Around the office, however, he could be seen as hopelessly idealistic for believing he would be able to convince the world he was right about the bond insurers. After every meeting it was as if the same regulators and credit-rating company analysts, who hadn’t acted yet despite years of presentations, finally got it. Scott Ferguson, with the investment team, was much more the in-house skeptic.
“Really? What did they say?” Ferguson asked.
“They’re regulators,” Ackman told him, “so, of course, they can’t really say anything.”
Eventually, one of Ackman’s phrases for describing the success of his MBIA meetings was adopted around the office as shorthand for Ackman’s optimism. “Bill’s meeting? Ten out of ten?” “Yep. Ten out of ten.”
MBIA HAD SCHEDULED a conference call for the next day, August 2, to allay concerns about its CDO and subprime exposure. MBIA management put in place a new protocol for the call. All questions were required to be submitted in advance by e-mail. Mick McGuire, figuring questions from Pershing Square wouldn’t make the cut, messaged Jordan Cahn, on the credit-default-swap desk at Morgan Stanley, with some thoughts.
“The company, and much of the analyst community, speaks to the idea that the MBIA guarantees attach at super-senior levels of the capital structure and have a large cushion below them, making it highly unlikely that they suffer a loss,” McGuire wrote. “Yet it appears to me that every one of their high-grade CDOs has subprime exposure that exceeds the cushion protecting MBIA. If the subprime collateral is A-rated or lower and losses reach 15 percent, then the collateral is worthless and MBIA will begin to incur losses on its guarantees.
“The Holy Grail question relates to cumulative losses,” McGuire continued. “What would the cumulative losses within the 2006 subprime universe need to be for MBIA to incur a loss in its CDO portfolio?”
The company received hundreds of questions in advance of the call, Greg Diamond, the head of investor relations, told listeners as the call got under way. Diamond warned listeners to try to keep up with the slides because the presentation provided some “challenging and detailed information.”
“Bottom line, there may be downgrades in this portfolio as a result of the unprecedented housing crunch,” said Chuck Chaplin, MBIA’s chief financial officer, “but our subprime-mortgage exposure does not appear to pose a threat to the company’s balance sheet.”
At some point in the long queue of questions, McGuire’s got asked: “What would be the cumulative losses within the subprime universe needed for MBIA to incur a loss in its direct and CDO portfolio?”
The question elicited a long response but not an answer. If 100 percent of the collateral rated A and below defaulted with no recovery, “certainly the CDOs of high-grade mezzanine collateral would be materially impacted,