Confidence Game - Christine Richard [133]
The new year brought no relief to the auction-rate market. During the first week of January 2008, Jackman received an e-mail from Shulman that detailed the firm’s options for managing through the crisis. One option was to simply let auctions fail. The firm had no obligation to take on the securities. But Shulman listed one consideration if the bank didn’t prop up auctions of securities it had underwritten: “Severe reputational issue.”
There might be one way to lessen the blow to the firm if UBS did decide to walk away from the market, Shulman added. Other banks were faced with the same problem. It would be less of a blow if others walked away from the market, too. “If we do fail, be the second to fail,” Shulman wrote.
On January 9, a senior trader on the auction-rate desk at Merrill Lynch sent around an e-mail warning that bond insurers XL Capital Assurance and the Financial Guaranty Insurance Company (FGIC) were likely to lose their top ratings. “We anticipate that if that happens, there will be a wave of selling in these issues that we will be unable to support, causing the auction to fail.”
Several weeks later, on January 23, the same day that Eric Dinallo was holding a meeting with all the major banks about how to prevent a downgrade of the bond insurers, a Merrill trader sent this ominous message to colleagues: “Lehman failed five auctions yesterday. This is unprecedented.”
WHEN ELIOT SPITZER arrived at the Rigor Hill Diner in Chatham, New York, he pulled up in a black SUV, with an additional security detail following in a second black SUV. It was a Sunday in early February 2008, and the governor was on his way back from Albany. Ackman had been waiting for him in the parking lot of the restaurant, which was not far from his house in upstate New York. Both he and Spitzer were scheduled to testify at congressional hearings on the bond-insurance industry set for later in the month.
Spitzer had been struggling in the polls. Saving the bond insurers—several of which were headquartered in New York state and all of which had insured debt for the state—might win him some points with voters. Ackman had a plan for saving the bond insurers.
Spitzer’s appearance in the diner, with its blue vinyl booths, white formica-top tables, and wagon-wheel ceiling lamps, caused a brief stir. After posing for a photo with one of the diner’s patrons, Spitzer slid into a booth across from Ackman. Outside in the parking lot, Spitzer’s security guards smoked cigarettes and kept watch.
Over omelets, Ackman described how he would restructure MBIA, sketching out the structure on a piece of paper. First, the insurance company would be split in two, separating the municipal bond business from the tarred structured finance business. The municipal bond insurer would be owned by the structured finance insurer and would pass dividends to its parent company only if it was sure those payments wouldn’t jeopardize its own triple-A credit rating. The structured finance insurer would make the same assessment when deciding whether to send dividends up to its parent company, the publicly traded holding company.
Each of the two insurance companies would have an independent board of directors, made up in part of policyholders. The decision to transfer money out of the insurance companies would rest with the boards of directors. Policyholders would have an interest in keeping the money at the insurance units not just to cover claims but also to maintain the highest possible rating on their bonds, Ackman explained.
Money would be transferred only with board approval, and the board would represent the interests of the policyholders. Currently, the MBIA Insurance Corporation board