Confidence Game - Christine Richard [119]
Its plan was to raise $1 billion through the sale of equity and to cut the dividend. With Ambac’s shares down 80 percent over the previous year, however, the offering would massively dilute existing shareholders. The decision had been a contentious one. Ambac’s chief executive officer (CEO), Robert Genader, had resigned. Michael Callen, an Ambac board member and former Citigroup executive, had replaced him.
“More shoes dropping at Ambac,” Kathy Shanley at Gimme Credit wrote. The company said it would take $5.4 billion in pretax mark-to-market losses on CDOs and that $1.1 billion of those markdowns reflected actual claims the company expected to pay. “In laymen’s terms, Ambac is conceding that mark-to-market losses are likely to turn into real cash losses on at least some of its exposure,” Shanley wrote.
Jim Cramer, the manic host of CNBC’s program Mad Money, launched into a tirade about Ambac earnings that afternoon, and then concluded about the bond insurers generally: “There’s only one triple-A—the guys who come and change your tire when you break down on I-95. Those guys are reliable.”
After the market closed, Moody’s dropped the hammer on Ambac, saying—just one month after it had affirmed its rating—that it was considering stripping the company of its triple-A rating.
Early the next morning, January 17, Ramy Saad, Pershing Square’s head trader, messaged the investment team with an update on the bond insurers’ CDS prices. “Brace yourself,” read the subject line. CDS contracts on MBIA Inc., the publicly traded holding company, and Ambac Financial Group were being quoted at a midprice of more than 1,200 basis points, a jump of 220 basis points since the previous afternoon. It now cost $1.2 million a year to buy protection on $10 million of MBIA debt.
There was giddiness as the Pershing Square team picked up the message.
“Woo hoo!” Erika Kreyssig, on the trading desk, e-mailed in response to the prices.
“Yooooo hoooooo!!!” Ali Namvar responded a few minutes later.
“Isn’t that the chocolate soda CBRY makes,” Scott Ferguson e-mailed, using the stock ticker for Cadbury PLC, a stock Pershing Square owned.
Timothy Barefield, the fund’s chief operating officer, jumped into the conversation, writing: “Yooo Hooo! I had it for breakfast.”
“There was elation,” Namvar remembers. “Your boss had been telling the world for years this was going to happen. Now he’s being proven right and world is wrong.”
“My God,” Paul Hilal responded when he picked up the message.
The cost of buying protection for five years on MBIA Inc. had risen nearly one hundred times over the last year. In late January 2007, when MBIA announced that it was settling the regulatory probe the cost of protection was quoted as low as 13 basis points. Now it was approaching 1,300 basis points.
The magnitude of change in MBIA CDS prices between January 2007 and January 2008 was equivalent to a $13 stock rising to $1,300.
To some members of the investment team, it seemed like insanity not to take some profits after that kind of move. But Ackman showed no indication that he planned to do that. Namvar remembers Ackman telling the investment team on a number of occasions, “We’re going to ride this into bankruptcy.” Then he’d smile and walk away. The rest of the investment team would stand there, looking at each other. Once Ackman was out of earshot someone would inevitably ask, “Is he serious?”
At one point in early 2008, when the volatility of the MBIA position was fraying everyone’s nerves, Namvar walked into Ackman’s office to have a talk with him. Namvar, who had played guitar in a rock band for five years before going to business school and landing at Blackstone Group, wasn’t involved in the day-to-day analysis of the bond insurers. He also was viewed by others on the investment team as a good intermediary, someone who could hear both sides.
“Let’s take some exposure off the table,” Namvar said, confronting the issue with Ackman