Confidence Game - Christine Richard [121]
THE NEXT MORNING, New York State Insurance Superintendent Eric Dinallo was skiing in the Berkshires with his family for the Martin Luther King weekend when the incoming phone calls began. He heard from Vikram Pandit, CEO of Citigroup; David Coulter at Warburg Pincus; Michael Callen, the new chief executive officer at Ambac; and Timothy Geithner, the president of the Federal Reserve Bank in New York.
Fitch had already stripped one insurer of its triple-A rating. Something needed to be done before the downgrades went any further. The people Dinallo talked to clearly had been making many other calls—to the Securities and Exchange Commission, the Treasury, the Fed. “Who’s on top of this problem?” they demanded to know. “Is anyone managing this?”
Initially, Dinallo tried to juggle the calls without leaving the ski slopes, but the cell-phone reception was bad. With the wind blowing, it was impossible to hear everything the callers were saying. He took a second room at the Patriot Suites Hotel in Pittsfield, Massachusetts, which became his office for the next two days.
As he learned more, he realized that the only way to solve the bond-insurance problem was to get Wall Street involved. On Monday—Martin Luther King Day—he headed back to the office.
It was a cold, quiet morning in lower Manhattan with the markets closed for the holiday. Dinallo made his way downtown to the New York State Insurance Department’s offices on Beaver Street. It was going to take several days to set up a meeting with executives at the major banks. But Dinallo had arranged to meet with someone else that day—Ajit Jain, the head of reinsurance for Berkshire Hathaway. Dinallo had called Jain back in November to see if he could talk Berkshire into getting into the bond-insurance business in New York state. The plans were expedited, and Berkshire Hathaway was already writing policies.
Now Dinallo had another proposal for Jain. Would Buffett be willing to take over the municipal books of the three biggest bond insurers? It might not be possible to stave off downgrades of the bond insurers’ triple-A ratings. Dinallo needed an alternative plan to prevent hundreds of billions of dollars of bonds from losing their top ratings.
Shortly after the meeting, Jain drafted a letter to advisers of the three bond-insurance companies, offering to take over all of their municipal bond guarantees in exchange for premiums equal to one and a half times the original premiums. The transaction “will help stabilize the currently unstable marketplace conditions for the municipal business,” Jain wrote in a letter to MBIA’s advisers, Lazard Frères & Company, dated February 7, 2008. “In that sense, this approach also has the appeal of serving the greater public good, not an unimportant consideration for us, both as a matter of principle and as a company with a vested interest in national economic conditions.”
When markets reopened after the long holiday weekend, the mood was grim. At 8:50 a.m., Pershing Square trader Ramy Saad passed along CDS prices to Ackman. Financial Guaranty Insurance Company (FGIC) spreads had risen by 140 basis points. XL Capital CDS spreads were wider by 120 basis points. Ambac was up 100 basis points over Friday’s levels. Saad also passed along a note on the MBIA surplus notes: “Seeing buyers of the surplus note today . . . $74/bid now.” The quote indicated that traders would buy the notes at 74 cents on the dollar, a 26 percent discount off the original price.
Dinallo spent the morning on the phone with the credit-rating companies to get an idea of what had to be done. How much capital did he need to extract from the banks to satisfy the credit-rating companies that