Confidence Game - Christine Richard [141]
On Tuesday afternoon, Moody’s lobbed the ball back into Wall Street’s court. The credit-rating company issued a statement saying it was going to give Ambac more time to raise capital. “Ambac is actively pursuing capital-strengthening activities that, if successful, are expected to result in the company’s meeting Moody’s current estimate of the triple-A target level,” Moody’s analyst Jack Dorer wrote.
The rating company also affirmed MBIA’s triple-A rating, though it assigned a negative outlook.
At 1:09 p.m., Jim Chanos attached the Moody’s release to an e-mail message he sent around, expressing his take on the announcement: “Delusional, but concerned.”
“MBIA AAs continue to rally,” Erika Kreyssig, one of Pershing Square’s traders, messaged Ackman, referencing the narrowing of the premiums on MBIA credit-default swaps (CDSs). Shortly after the Moody’s announcement, the rates were quoted at about 600 basis points, a drop of 115 basis points. By 7:15 p.m., when Kreyssig sent the next update, the spreads had fallen another 50 basis points to 550 basis points. It now cost $550,000 a year to protect $10 million of MBIA debt.
Peter Plaut, an analyst at hedge fund Sanno Point Capital Management in New York, put it this way: “We’ve avoided the brink.”
AS CONCERN OVER the bond insurers and their triple-A ratings built to a frenzy, Ackman, for the first time in a long time, was not part of the show. He’d gone back to Tierra del Fuego for more fly fishing, accompanied by his father, Larry Ackman; Paul Hilal; and several others, including Oliver White, the former fly-fishing instructor who had become a member of Pershing Square’s investment team. They were back at the Kau Tapen Lodge, along the Rio Grande, where giant sea trout were running from the frigid Atlantic upstream to the Andes Mountains. While New York shivered through the worst of the winter, it was summer at Kau Tapen. Ackman’s only contact with the markets and his office was through a satellite phone, and it was not reliable.
“Many men fish all their lives without realizing it’s not the fish they are after,” Thoreau wrote. There was a connection with nature, a camaraderie, a spirit of competition. At Kau Tapen, the anglers included “an attorney, a structured-finance banker, and a hedge fund manager—a type-A competitive group,” Hilal says.
The trout averaged around 12 pounds, but some were nearly 30. On the first day, Ackman caught the biggest fish and held the title for the next several days. Then Al Rankin, deputy chairman of the Federal Reserve Bank of Cleveland, caught “a monster,” says Hilal. For a while Ackman’s only concern was whether he could regain the title for catching the biggest fish.
Back in New York, Jay Brown wrote to shareholders again. He had Ackman on his mind. “If someone had purchased protection, say, in January of last year, when spreads on our five-year CDS were relatively benign, they would have paid about 40 basis points per year,” Brown explained. That meant someone could have bought protection on $7.5 billion of MBIA debt for about $30 million in annual fees. Huge swings in the price of that protection over the last year meant that this hypothetical person would have gained and lost massive fortunes.
“On paper, the value of the trade peaked north of $2.6 billion” and had lost about half its value since, Brown wrote. “The reality is that for the guys who play in this $45-trillion zero-sum game, $30 million is chump change. It’s also why, given the amount of money that can be made here, people will go to no ends insisting the company will be broke in mere weeks.”
FOR NOW, ALL EYES WERE ON Ambac and whether Wall Street could organize a bailout. To Bill Gross, who runs one of the world’s biggest bond funds at Pacific Investment Management Company, the premise was absurd. “Rescuing the monolines is not a long-term solution,” Gross wrote in the Financial Times. Bond insurance was a flawed idea that had helped to get the U.S. economy into the current mess. “Overly generous triple-A ratings” on securities and on bond insurers created