Confidence Game - Christine Richard [134]
ON FEBRUARY 5, Fitch Ratings put MBIA’s triple-A rating under review, less than a month after affirming the rating with a stable outlook. Paul Hilal, a senior member of the Pershing Square investment team, sent Ackman an e-mail about it. “This strikes me as the first time a rating agency has made the important intellectual leap that the inherent fragility of the bond insurer business model disqualifies [it] from a triple-A rating,” Hilal wrote. He attached a quote from the release: “A material increase in claim payments would be inconsistent with triple-A-ratings standards for financial guarantors and could potentially call into question the appropriateness of triple-A ratings for those affected companies, regardless of their ultimate capital levels.”
On February 6, UBS’s Jackman, clearly alarmed, e-mailed Shulman: The firm’s holdings of auction-rate securities now totaled $11 billion. The program was no longer sustainable. “We need solutions or we are going to be left buried with below-market securities and no options,” Jackman told him. “D-Day will come soon.”
MBIA was doing everything it could to keep that day from arriving. On February 8, the company sold $1 billion of stock to shore up its triple-A rating. Warburg Pincus bought $300 million of the shares, further increasing its stake in the company. MBIA had now raised $2.5 billion of capital since November when the rating companies first said they were reviewing the capital levels of the bond insurers. “MBIA bought itself some time,” Peter Plaut, an analyst at hedge fund Sanno Point Capital Management in New York, told Bloomberg News.
Wall Street may have been convinced the company was entitled to more time, but Warren Buffett wasn’t. On February 12, 2008, Buffett made an early morning appearance on CNBC to broadcast Berkshire Hathaway’s proposal to reinsure MBIA, Ambac, and FGIC’s municipal bond businesses. Berkshire Hathaway would take over the guarantees, but Buffett wanted to be paid one and a half times what the companies had originally charged for the insurance. Buffett would walk away with virtually the entire municipal bond-insurance business.
Buffett had no intention of bidding for the bond insurers’ structured finance business, the guarantees on CDOs and other bonds backed by mortgages and credit-card receivables. “How deep that problem is with the CDOs and the other things they’ve done,” Buffett said, “we can’t figure out.”
If a bond insurer accepted his offer, it would be given 30 days to back out. If the firm could find a better option, Buffett would release it from the contract for a breakup fee of 1.5 percent of the premium. Either way, “the world would know that the municipal bond-insurance problem was behind it,” said Buffett.
“It would be a great deal for Berkshire Hathaway,” said CreditSights’ Rob Haines. “It would be a terrible deal for the bond insurers. If one of them were to accept this deal, it would be like raising a white flag.” Yet the stocks rallied—even the dollar rallied—on word of Buffett’s offer. But no one took him up on it.
Buffett made his offer on a Tuesday morning. By Wednesday afternoon, the entire auction-rate market was collapsing. “On February 13, without advance notice to its customers, UBS ceased supporting its auction-rate program, leaving hundreds of customers stuck with securities they couldn’t sell. The bankers at UBS could take comfort from the fact that at least they were not alone. Eighty percent of all auctions failed that day.
Banks such as Goldman Sachs Group and Citigroup let more than 100 of their auctions