Confidence Game - Christine Richard [139]
Even as Brown described for investors his plan to save MBIA’s triple-A rating, Ackman was shopping around another idea. The plan he had sketched out for Spitzer at the diner was now a 14-page PowerPoint presentation, which Ackman presented to Eric Dinallo, the New York state insurance superintendent, and Robert Steel, undersecretary for domestic finance at the Treasury department. He also discussed it with officials at the White House Council of Economic Advisors and the Federal Deposit Insurance Corporation.
The day after Brown returned to the helm at MBIA, Ackman made his plan public. He proposed that the insurance company be split in two, with the municipal insurance company becoming a direct subsidiary of the structured finance insurer, which in turn would be a direct subsidiary of the holding company. Dividends would pass up the chain, starting with the municipal insurer. Those dividends would be paid only if each company’s board of directors was sure the company could maintain its triple-A rating.
MBIA responded quickly, releasing a statement that called the plan “a continuation of Mr. Ackman’s campaign to profit from his short positions and credit-default swaps in the bond-insurance industry.” The structure was no more than “an attempt to find some way to make true his predictions that the holding companies are or will soon become insolvent,” Brown said. “Mr. Ackman should let the officials charged with regulating the industry do their jobs, instead of continuing a relentless media-driven campaign fueled only by personal financial gain.”
Dinallo’s office did not express enthusiasm. “Our concern with the Ackman plan is that it would split the company, and the structured side could be substantially downgraded, which would be bad for the banks,” said David Neustadt, a spokesman for the New York State Insurance Department. “Our preference is a plan that keeps an AAA rating.”
For that the New York State Insurance Department was going to need some help from Wall Street.
BEFORE THE BOND insurance crisis, New York State Insurance Superintendent Eric Dinallo had been a regular at the Marshall Club. The attorney enjoyed dropping in to the hundred-year-old chess club for impromptu matches and organized tournaments. After graduating from the New York University School of Law, Dinallo chose his apartment for its proximity to the club, which is located in a townhouse on a quiet, tree-lined street in the West Village. Now, in the wake of the Valentine’s Day congressional hearings, he was preoccupied with a much bigger game.
The banks, which had billions to lose if the bond insurers were downgraded, were the only hope for getting more capital into the ailing companies. But their relationships with the bond insurers were complex. Many of the banks were relying on bond insurers’ triple-A guarantees to support the value of billions of dollars of CDOs they held on their balance sheets. Yet a number of banks had purchased credit-default swaps on the bond insurers themselves, in effect hedging their hedges. “Some were more short than long” the bond insurers, Dinallo explains. In other words, they might come out ahead if the bond insurers failed.
Trying to come to an agreement between the banks and the bond insurers “was the most complicated 3-D chess game you can imagine,” Dinallo says. While the game dragged on, confidence in financial markets was faltering.
The most immediate problem was Ambac, the second biggest bond insurer.
On Friday, February 22, with New York disappearing under a blanket of snow and the stock market sinking toward a close, details of the game began to emerge. Charlie Gasparino, the CNBC on-air