Confidence Game - Christine Richard [14]
Lyss, who later would be called in to give testimony in the New York attorney general’s investigation of Gotham, was asked for his impressions of the meeting during his testimony. “I remember the Morgan Stanley analysts agreeing that this is a bad business model, the financial guarantee business,” Lyss said.
Regulators also asked Klafter what the investment bank analysts had to say after hearing Ackman’s presentation. “Something along the lines of ‘You just have to have confidence in them because if you don’t have confidence in them then the whole business doesn’t work; the model doesn’t work,’” Klafter recalled.
Ackman updated his investors after hearing back from Schroeder, who had called Jay Brown to check out Ackman’s insights. Schroeder called “to tell me that she had spoken to MBIA, had verified a number of our assertions, and had lost confidence in management after hearing the company’s answers to her questions,” Ackman wrote in an e-mail dated November 14, 2002. “She also believes that the entire guarantee industry is at risk of failure because she believes the company’s practices are widespread.”
Schroeder can’t recall telling Ackman that she had lost confidence in management. “It sounds self-serving,” she says. The business of bond insurance was another matter, she says. “It was a kind of Mad Hatter world. The ‘rating agencies’ had the power to decide whether this business model was viable or not. It didn’t matter if they were 50 times or 2,000 times leveraged.”
A few days later, on November 14, 2002, Morgan Stanley released a report warning MBIA investors about Ackman. “There is potential for additional headline risk in the near-term, given one investor’s bearish play on the company’s stock and its credit,” wrote Saqi and Schroeder, citing the Wall Street Journal article on Gotham. It’s possible Gotham may be preparing a research report on MBIA, which, for the near term, casts “a cloud over MBIA’s stock price as well as other stocks in the space.”
Ackman remained upbeat. He was convinced Schroeder would issue a negative report on MBIA. “I got the sense from Alice that she does not want to ‘scoop’ us,” Ackman wrote to investors after the Morgan Stanley report was released. “That said, I think she wants to be a close second.”
ACKMAN’S UNWILLINGNESS TO mince words was evident long before he came to Wall Street. “He’s not a critical guy, but he has a point of view,” says Michael Grossman, a friend of Ackman’s from high school. The two grew up in the prosperous suburb of Chappaqua, New York, with the children of executives from IBM and Wall Street. “There was a lot of type A in the mix. It was an affluent, competitive place,” Grossman recalls.
Grossman describes Ackman as a “force of nature” at the Horace Greeley High School, where he graduated fourth in his class in 1984. Tall, with prematurely gray hair, Ackman stood out. “When Bill came into a room, you knew he was there.” That was even before one got wind of his personality. “Bold. Sharp. Brash. Blunt,” Grossman says. “Some people loved him, some found him abrasive.” Grossman gave Ackman the epithet that appeared in his high school yearbook: “A closed mouth gathers no foot.”
The sentiment sprung partly from Grossman’s frustration with Ackman as a partner on the tennis team. “If there were a film of us playing tennis, it would show him talking and me ignoring him,” says Grossman. “He’d say to me, ‘You just missed a forehand volley into the net.’ He’d reprimand himself, too, if he missed a shot. He would talk to me literally after every point. He paid compliments, too, even to himself.”
Ackman doesn’t remember being an annoying tennis partner, though he recalls that the pair made it to the New York state quarterfinals.
Years later, watching Ackman play out his very public and vocal battle with MBIA, Grossman recognized the teenager who refused to keep his opinions to himself. “He says what he thinks. He has always said what he thinks. There’s not