Confidence Game - Christine Richard [136]
If banks couldn’t come up with a solution, then the state of New York might force a split of the bond insurers, a so-called good bank- bad bank solution that would protect the municipal bond holders. “Time is short,” Spitzer stressed. Pressed by committee members about his own time frame for taking action to protect bondholders, he answered, “Three to five days.”
A Republican congressman reminded Spitzer of his decision to investigate Ackman over his criticism of MBIA. Spitzer acknowledged that Ackman had accurately predicted the problems with the insurers, but as attorney general he had moved on from investigating Ackman to looking into the company’s practices. “What we found, after an exhaustive inquiry, was that there was risk that was within the tolerable balance of business behavior,” Spitzer said.
After Spitzer’s testimony, the committee recessed to take a vote on the house floor. Members were gone for hours.
Ackman paced the hall, speaking briefly with Michael Callen, the interim chief executive officer (CEO) of Ambac, who joked about suing him. He also spoke with Laura Unger, a former commissioner with the Securities and Exchange Commission (SEC) and an Ambac board member, who appeared unaware of who Ackman was, telling him she believed the industry was the “victim of a huge overreaction.” Just a few feet away, Chuck Chaplin, MBIA’s chief financial officer, stood waiting to testify on behalf of MBIA, but he and Ackman did not speak.
At one point, Ackman found himself sitting with New York State Insurance Superintendent Eric Dinallo in one of the anterooms along the corridor, exchanging pleasantries. A few minutes later, Dinallo was interviewed on CNBC.
“Mr. Ackman does have to worry about speaking accurately in the marketplace where he holds a tremendous amount of short positions,” Dinallo said. “There is an insurance law called 2604 that says you cannot without a factual basis disparage insurance companies because you can cause a run on the solvency. Mr. Ackman performs an important function, but he should be sure that whatever he says is based in fact.”
When the hearings reconvened, most members of the committee failed to return. As Ackman took his seat, he got a message from Marco Kheirallah, the Pershing investor at Pactual in Rio de Janeiro: “I am watching the testimony. Has anyone there realized that FGIC has just been downgraded, 6 notches on the insurance sub, 8 notches (to junk!!!!) for the holding company and that they are in charge of 18 percent of the municipal market?” The stock market dropped 175 points.
Congressman Paul Kanjorski (D-Pennsylvania), who chairs the Capital Markets subcommittee, called Eric Dinallo to speak next.
“I think we’re in a very volatile situation, and things that we should do and can do should be done as quickly as possible and as cleanly as possible,” Kanjorski told him, citing the FGIC downgrade. “I’ve been trying, Congressman,” Dinallo said explaining how the New York State Insurance Department had been working to help bond insurers raise capital. “I’ll take the brass cup anywhere.”
The bond insurers’ comments at the hearing contrasted with the sense of urgency shown by the insurance department. Chaplin reminded the committee that MBIA continued to be rated triple-A by all three credit-rating companies. The company also had drawn an $800 million investment from Warburg Pincus after an in-depth review.
“Self-interested parties have gone to substantial efforts to undermine the market confidence that is critical to MBIA’s business,” Chaplin said. “Their efforts have included raising questions about MBIA’s capitalization, the losses it will likely sustain, its liquidity position, the legality of its operations, and the viability of its business model.” Short sellers had “used the media to create noise around MBIA’s solvency and ratings; written letters to regulators and rating agencies, seeking action against MBIA; and held meetings with investors with the intent, the company believes, to dissuade them from purchasing MBIA’s debt or equity,