Confidence Game - Christine Richard [120]
MBIA and Ambac credit-default swaps were moving 50 to 100 basis points in a day. It was one thing when the position was a small fraction of the fund’s assets, but it had become a substantial part of the portfolio as the price of the contracts had surged. Too much hinged on it.
Ackman heard him out, and then he told Namvar simply, “Don’t be weak.” There was nothing more to say.
“When the investment was successful, that’s when it was hard to sleep,” Namvar remembers.
At 3 p.m. on January 17, the day after Moody’s warned about downgrading Ambac, Ramy Saad updated the investment team again: MBIA Inc. was being quoted at 1,500 basis points and MBIA Insurance Corporation at 1,400 basis points. By the end of the day, shares of both companies had suffered their biggest drop on record. MBIA fell 38 percent, and Ambac plunged 65 percent.
Later that afternoon, Evercore Asset Management, a large Ambac shareholder, released a letter to Ambac’s board over the newswires, saying that the best approach for shareholders was to put the company into runoff: It would assume no new business and pay claims as they came due on existing policies until all the business had expired. Shareholders would fare better under a runoff scenario rather than having their holdings massively diluted through a share sale. “The company gambled its AAA rating and has now lost that bet,” chief investment officer Andrew Moloff wrote. “Attempting to buy back the AAA rating by giving away most of the company makes no sense.”
Just after 4:30 p.m. on January 17, Moody’s said it was considering a downgrade of MBIA as well as Ambac. “Today’s rating action reflects Moody’s growing concern about the potential volatility in ultimate performance of mortgage and mortgage-related CDO risks, and the corresponding implications for MBIA’s risk-adjusted capital adequacy.” MBIA shares fell another 11 percent in after-hours trading.
Even for MBIA’s staunchest supporters, this was too much.
In a report headlined: “Throwing in the Towel,” Heather Hunt, the Citigroup analyst, downgraded the shares to “hold” from “buy” and wrote, “After a stunning ride down, we are capitulating.”
The companies’ inability to understand the risk they were taking was shocking, Hunt explained. “This kind of systemic failure to assess risk has been difficult for us to believe,” Hunt confessed.
At 8:33 a.m. on January 18, Ambac announced its own capitulation. It released a short statement: Management “has determined that as a result of market conditions and other factors, including the recent actions of certain ratings agencies, raising equity capital is not an attractive option at this time.”
The announcement immediately cost Ambac its triple-A rating. At 2:25 p.m., Fitch Ratings downgraded Ambac, citing the warning it issued in December that Ambac was short of capital by $1 billion. Fitch also cut the ratings on 137,500 bonds Ambac guaranteed, including bonds of thousands of cities and states across the United States.
“This makes Ambac toxic,” Rob Haines, the CreditSights analyst, said. “The market has no tolerance for a ratings-deprived insurer.” Indeed, the Dow Jones Industrial Average closed down 700 points for the week.
The problem was going to be bigger than Ambac. “Today, the models behind so many strategies that have come to permeate contemporary finance have completely broken down,” wrote Doug Noland, the credit analyst at David W. Tice & Associates.
The Friday before the Martin Luther King holiday weekend, Ackman drafted an e-mail to the heads of the three credit-rating companies: Raymond McDaniel at Moody’s, Deven Sharma at Standard & Poor’s, and Stephen Joynt at Fitch, chiding them for not stripping the bond insurers of their top ratings.
He ended the letter with a very long rhetorical question about MBIA: “Does a company deserve your highest triple-A rating when its stock price has declined 90 percent; when it has cut its dividend; is scrambling to raise capital; completed a partial financing