Confidence Game - Christine Richard [113]
When I first reported on how this system was costing taxpayers billions of dollars a year, it generated little interest. Then one evening, after a presentation at UBS, I rode the elevator down with Katzovicz. He mentioned the article in passing and wondered if there was a way to see just how much higher rated a municipality would be if it were judged on the same default risk criteria as MBIA. I explained that Moody’s had included a “map” in its research report, showing, for example, that water and sewer authorities could be ranked more than five levels higher under the undisclosed scale. “There’s a map!” Katzovicz announced with enthusiasm in the crowded elevator, causing a few people to turn and look at us. Now Ackman and Katzovicz were making sure everyone knew about it.
As Ackman and Katzovicz packed up after the presentation in Idaho, Katzovicz remembers one of Wasden’s deputies telling them that people who bring issues to the attorney general’s attention often end up incriminating themselves. That didn’t happen to Ackman, but the hedge fund manager didn’t hear back from Wasden either.
Ackman and Katzovicz had better luck in Connecticut. During the first week of December, they drove up to Stamford to meet with Richard Blumenthal, the state’s attorney general. Blumenthal already was investigating the credit-rating companies and their failure to alert investors to the risks of subprime mortgage-backed securities. He took an immediate interest in the idea that the rating companies had two sets of books that they used to rate municipal bonds.
“The first thing [Ackman] told us is that he stood to benefit,” Blumenthal remembers. “He was outraged. It was almost a personal crusade with him.” Blumenthal had learned early in his career as a prosecutor working on drug cases for the U.S. attorney’s office that “a lot of times people are going to have self-interest in what they’re alleging is fact. Your information doesn’t usually come from choir boys,” Blumenthal says. That’s why it had to be checked out, and, according to Blumenthal, in Ackman’s case the provided information proved very useful and accurate.
Ackman was far from the only investor to make money on the collapse of the financial system, Blumenthal says. Many people made money betting against financial firms, but they did it without ever going public, he says, describing the conventional wisdom: “‘Why should I be the bearer of bad news? Why should I have everyone at the country club or the commuter train or the downtown eating club upset with me? It’s the old boys’ network, and they won’t let me in on deals. I know this is going to come crashing down. Why warn the world?’” Ackman adopted a different tactic, Blumenthal says.
Ackman and Katzovicz were getting some traction in Washington as well. Ackman had written to Massachusetts congressman Barney Frank, reminding him that the bond insurers’ situation had continued to deteriorate since Ackman and Frank met in June. Based on estimates of the values of collateralized-debt obligations (CDOs), “the capital of nearly all of the bond insurers has been materially impaired or eliminated,” Ackman wrote in an October 2007 letter to Frank. “As a result, the risk of insolvency is a real and present danger.” Frank had written back several weeks later to say he expected to hold hearings on the bond-insurance industry in 2008.
The meetings continued at a frenetic pace throughout December 2007. Ackman and Mick McGuire met with Moody’s Investors Service analysts, including Stan Rouyer and Jack Dorer. This time, hedge fund manager David Einhorn, who had been shorting MBIA and comparing notes with Ackman on the company for several years, came along.
Ackman did most of the talking, telling the analysts that while they dithered over MBIA’s rating, the market had already decided MBIA’s and Ambac’s insurance units were no longer triple-A rated. Reassurances from the management of the bond-insurance companies that CDO losses were only mark-to-market losses just didn’t make sense, Ackman told Moody’s. “Either