Confidence Game - Christine Richard [114]
The conversation turned to the risk Moody’s itself faced by keeping the bond insurers triple-A rated. Einhorn told the analysts that leaving the triple-A rating on bond insurers was destroying the company’s credibility and its franchise. “Full disclosure: I am short Moody’s,” he told the group.
The meeting, not exactly warm up to that point, became even more tense. “There was a tangible change in people’s physical posture and facial expressions. Answers became terse, one-word answers,” McGuire says. The meeting wrapped up quickly.
“Investors who bought triple-rated structured products thought they were buying safety but instead bought disaster,” Einhorn would tell the audience at an investment conference in May 2009 when he made his short position public. “If your product is a stamp of approval and your highest rating is a curse to those that receive it and shunned by those who are supposed to use it, you have problems.”
After the December 2007 meeting, Ackman, Einhorn, and McGuire headed for the nearby Roc Restaurant in Tribeca. “That was a great meeting,” Ackman said as they took their seats.
Einhorn wasn’t so sure. “I need to figure out how Bill does meetings,” Einhorn joked, adding, “I always feel like those kinds of meetings are a waste of time.”
Not Ackman. “Bill was optimistic every time,” McGuire remembers.
MBIA HAD SOME REASON to be optimistic as well. On December 10, 2007, private-equity firm Warburg Pincus announced it would invest as much as $1 billion in the bond insurer. The firm would buy $500 million of common stock at $31 a share and support an additional public offering of shares by spending as much as $500 million to support the offering if interest was weak. The stock jumped 13 percent on the news, closing at $33.95. Credit-default-swap (CDS) rates narrowed almost 100 basis points, cutting the annual cost of insurance on $10 million of debt by $100,000 a year. It was a resounding victory for MBIA.
Ackman didn’t share Warburg’s confidence, telling the Wall Street Journal, “I generally think that Warburg Pincus is a very smart private-equity firm, but I don’t think they understand what they just bought. It’s likely that they’ll lose their entire investment.”
Ackman’s efforts to explain this comment further to David Coulter and Kewsong Lee, who were spearheading the Warburg investment in MBIA, were rebuffed. One Pershing Square investor who had contacts within Warburg came back to Ackman with this message from Coulter and Lee: “We have made a firmwide decision not to speak with the shorts.”
One of MBIA’s largest investors had another message for Ackman. During an interview on CNBC in late December 2007, Marty Whitman, the 83-year-old chairman of Third Avenue Management LLC, was asked whether Ackman’s criticism of MBIA had caused him to rethink his 10 percent stake in the company. “Mr. Ackman,” Whitman replied with a smirk, “is a slick salesman who doesn’t know much about insurance.”
Ackman had tried to talk to Whitman several years earlier when he attended a presentation Whitman gave at Columbia University. After the talk, students pressed around the famous value investor to shake his hand. Ackman squeezed through the crowd and introduced himself, saying he was hoping to speak with Whitman about one of his largest holdings, MBIA Inc. Ackman explained that he had a very different view of the company. “Give me a call, and we’ll talk about it,” Whitman told him, as the students looked on.
But Ackman’s follow-up call was met with an icy reception. He started off by mentioning that his father had had a brokerage account with Whitman for years.
“Yes. I know your father,” Whitman said.
Ackman moved on to the topic of MBIA but wasn’t given time to say much. “It would be a waste of my time to talk to you,” Whitman replied and slammed down the phone.
THREE DAYS AFTER the Warburg Pincus announcement, Pershing Square held an advisory board meeting. Marty Peretz, editor-in-chief of the New Republic and a member of Pershing Square