Confidence Game - Christine Richard [129]
EARLY ON THE MORNING of January 31, 2008, Pershing Square’s investment team met for breakfast at a restaurant a few blocks from the office to review the questions it planned to submit to MBIA in advance of its conference call to discuss fourth-quarter results later that day.
In the Open Source letter to regulators, Ackman had chided MBIA for announcing it would only take questions in writing. Pershing Square planned to release its questions publicly, ahead of the call, Ackman explained in the letter. “If the company chooses not to answer these questions, its silence will speak for itself.”
In the taxi on his way to the restaurant, Mick McGuire read through the company’s earnings release and pulled out a quote to send to the others: “MBIA’s below-investment-grade net par exposure includes $10.6 billion of home-equity lines of credit and closed-end second [residential mortgage-backed securities] and multisector CDOs of high grade CDOs.” The safety of the securities MBIA had insured was deteriorating rapidly.
When Pershing Square published its questions in a press release shortly before the 11 a.m. call, the Yahoo Finance message board came to life: “Company is going to respond to Ackman’s presentation.They will put this snake oil salesman to shame.” “Ackman’s questions should be ignored!” “Ackman and party should be booked under homeland security for financial terrorism, trying to bring the country down.”
The company’s executives came out swinging as soon as the call began at 11 a.m.
“We clearly acknowledge that we are taking the microphone, as it were, out of the hands of those inclined to ask questions of us,” Greg Diamond, MBIA’s head of investor relations, said. “Many of these people have effectively become adversaries of our company, our employees, our clients, and our business relationships. Many of them have demonstrated no problems finding media outlets to proselytize their messages against our company. We see no reason to provide them with another forum to do so.”
That said, they were going to answer lots of questions. They had received 282 of them via e-mail, including Ackman’s. “The first question was submitted by the likes of Bill Ackman at Pershing Square: How much cash is at the holding company?” Diamond began. “Ackman at Pershing Square: Can MBIA be forced into bankruptcy?”
Asked about the Open Source Model, Mitch Sonkin, who oversaw the firm’s insured portfolio, called it “a black box.” “The extreme assumptions in the model produced the desired effect of a sensational headline loss number for the firms evaluated. All of the analytical work was done by an anonymous so-called global bank that doesn’t wish to be identified with the work and which is disclaimed by the author, who says that he can’t vouch for the accuracy or the completeness of the analysis,” Chaplin added.
MBIA’s chief executive officer Gary Dunton told the callers that the company had raised $2 billion in five weeks, and although MBIA expected to pay significant claims, “no serious analyst expects that we will have $7 billion of economic losses on our portfolio.” The only conclusion that could be drawn about the 80 percent drop in the company’s share price, he said, was that “the market has overreacted” and that “fear mongering and intentional distortions of facts about our business have been pumped into the market by self-interested parties.”
Dunton pointed out that MBIA had achieved a significant milestone during the quarter; MBIA’s outstanding guarantees on debt and debt-service payments had breached the $1 trillion mark.
Dunton offered a mea culpa, saying bad underwriting decisions “have tested the Richter scale in the formerly unshakable world of the financial-guarantee industry.” He was also reflective: MBIA needed to be “more assertive in countering misinformation about our business,” and it needed to be “more open and transparent to the market.” He was personal: “It’s very difficult seeing the reputation of the company that you love come under fire.” And oddly sentimental: “The very first deal that we insured