Confidence Game - Christine Richard [13]
When Ackman returned to the office that afternoon, he received a call from the NYSID asking him to come back the next day to give his presentation to a wider group of regulators. “We believe that our analysis was taken seriously and is being considered at the highest levels of the insurance department,” Ackman wrote in a November 10 e-mail to his hedge fund investors.
Ackman told them that he’d obtained an estimate of where the CDOs MBIA had guaranteed were trading. “Late last week, we received bid, offer, and mid-market prices from Deutsche Bank on MBIA’s CDO and synthetic CDO portfolio balances, which were disclosed in detail for the first time,” Ackman wrote. “The mid-market prices indicate that MBIA has a mark-to-market loss of $5.4 billion in its portfolio as of August 31, 2002,” Ackman wrote. “The company, however, has shown only an extremely modest loss on this portfolio in its filings.”
Ackman was also determined to get Morgan Stanley analyst Alice Schroeder on his side. Voted the top insurance analyst two years running by Institutional Investor magazine, Schroeder, author of The Snowball: Warren Buffett and the Business of Life (Bantam, 2008), was known as Buffett’s favorite analyst. Buffett once described her as the only Wall Street analyst whose work he bothered to read. The dinner she hosted at Berkshire Hathaway’s annual meetings was the ticket of the year for fans of Buffett, who made an appearance to speak to Schroeder’s guests.
“While ‘turning’ a bullish analyst is going to be difficult, we can be pretty convincing and it’s therefore worth the energy,” Ackman wrote in the November 10 e-mail message to investors in Gotham Credit Partners. He left Schroeder a voice-mail message asking for a meeting to discuss his views on MBIA. But her return voice message was not encouraging: “I have no interest in being part of a market-manipulation scheme.”
Undaunted, Ackman called Byron Wien, then Morgan Stanley’s well-known stock market strategist, asking Wien to vouch for Ackman’s credibility to Schroeder. Schroeder says her willingness to meet with Ackman was not the result of a call from Wien but followed from the advice of a Morgan Stanley lawyer. She recalls Ackman mentioning that New York Attorney General Eliot Spitzer, who had recently announced a settlement with the major investment banks over conflicted Wall Street research, would “take an interest in an analyst who willfully overlooked important information about a company” when assigning a rating to the stock. “We were ignoring him at our peril” was the idea that Ackman wanted to convey, Schroeder says.
Morgan Stanley’s lawyer advised Schroeder to meet with Ackman, to have others present, and to document the meeting. It was important that the analysts not appear to be downgrading a stock because they were pressured to do so, Schroeder says. “We will meet with you,” Schroeder answered Ackman in an e-mail. She added, “Our main concern is not MBIA but rather the implications of what you’re saying for the credit markets as whole.”
The meeting was held on November 12 at Morgan Stanley’s office, with Schroeder, Vinay Saqi, the lead analyst on MBIA, and members of Morgan Stanley’s structured finance team attending. Ackman brought along Gotham analyst Greg Lyss and general counsel David Klafter.
“Bill came in bearing an armload of stuff, talking a hundred miles an hour,” Schroeder says. “There was the obvious part, that [MBIA was] overleveraged, and we agreed with that.” But there was a list of other issues, “a many-headed