Confidence Game - Christine Richard [138]
“Gentlemen, Please No Tank Tops or Muscle Shirts,” read a sign in the window at the nearly deserted G&S Restaurant in Linthicum Heights, Maryland. Ackman and Katzovicz asked the driver to join them, but he stayed in the car, probably already a bit anxious about how long it would take to get all the way up to New York in the pouring rain, Katzovicz suspected. Or perhaps he dreaded the prospect of having to listen to any more talk about bond insurance.
The specialties of the house were crab cakes and fried seafood, not ideal choices for Katzovicz, who keeps kosher, or for Ackman, who consults weekly with a nutritionist and had convinced Katzovicz he needed to do the same. Still, the dinner felt like a celebration. After five frustrating years, the world had come to see the hidden risks of bond insurance. The truth had exploded into the market. Ackman had been able to report to his investors in his year-end letter that the MBIA position—after years of costing the fund—was by far its biggest winner for 2007. He had been formally exonerated by the SEC. And today Ackman had been called as an expert to testify about the bond-insurance business before a congressional committee. Even Eliot Spitzer had been forced to admit that Ackman had predicted the problems.
“Still,” Katzovicz remembers, “it was a pathetic Valentine’s Day dinner.”
Chapter Twenty-Three
Bailout
It is as if Barney Fife, television’s [deputy] Sheriff of Mayberry in the Andy Griffith Show, promised to bring law and order to the entire country.
—BILL GROSS, CHIEF INVESTMENT OFFICER OF PIMCO, FEBRUARY 2008
IN THE DAYS AFTER the congressional hearings, Eliot Spitzer’s ultimatum hung over the credit markets. He’d given the bond insurers five days to come up with billions of dollars of capital. Many shared Spitzer’s sense of urgency. Congress wanted the auction-rate crisis solved before half of all the hospitals, school districts, museums, and sewer authorities in the country were bankrupted by rising debt costs.
Then, just five days after the hearings, MBIA announced it was making big changes. The company reenlisted Jay Brown as its chief executive officer (CEO) and chairman of the board. Brown, who had taken the reins at MBIA after the bankruptcy of the Allegheny Health, Education, and Research Foundation (AHERF) and managed the company’s strategy for exiting the tax-lien business, returned to address another crisis.
Brown announced that MBIA might split itself into two insurance companies—one that backed municipal bonds and one that backed structured finance securities. To preserve cash, it would cut its dividend; to build up capital, it would stop insuring any structured finance deals for six months. Brown assured shareholders that there was hope for the company’s triple-A rating. Although other bond insurers had failed to raise capital, MBIA had obtained $2.6 billion. If the rating companies wanted more capital, then MBIA would raise it, Brown said.
Brown’s compensation was tied to the company share price, as it was during his previous tenure. He owned 618,456 shares when he rejoined the company. Under his new incentive plan Brown was eligible to receive an additional 1,634,000 shares. Brown sold part of his extensive car collection, which included Ferraris, Porsches, and BMWs, to buy 359,000 more shares with his own funds. If Brown could get the stock price back up to $70, his stake in the company would be worth more than $180 million. An executive-compensation expert put the value of Dunton’s estimated severance package at $11 million, according to an article in the New York Times.
Brown also wasted no time before confronting Bill Ackman. “Many of you have asked me in the past few days whether there is something personal between us,” Brown wrote in a public letter to shareholders. In fact, Brown wrote, he and Ackman were similar: both were “passionate in our beliefs” and “persistent in overcoming all obstacles.” But, Brown told investors, he led a regulated financial institution