Confidence Game - Christine Richard [144]
“People think something’s going on because the print went up so high,” Joseph Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey, told Bloomberg News. “It doesn’t look like it’s a keypunch error since it was such a large block.”
The stock was up. That’s what mattered. On March 7, 2008, Ambac executives, insurance regulators, and investment bankers breathed a collective sigh of relief over the salvation of Ambac’s triple-A rating.
But events were already conspiring to unwind that bit of confidence. That afternoon, a New York Times reporter contacted Spitzer about an outfit called the Emperor’s Club.
That weekend, Spitzer huddled with aides and warned them about what to expect. The following Monday, at around 2 p.m., the story hit the New York Times’s Web site: Spitzer had been linked to a New York- based prostitution ring.
The story was picked up immediately by CNN and CNBC, which broadcast the sketchy details into trading rooms around the world. The man who had hectored and prosecuted Wall Street for its moral failings had been caught in the tawdriest of scandals. It was shocking, though not exactly market-moving, information.
Then traders began to put the pieces together. The New York governor had played an unprecedented role in corralling the banks into backing an equity issue for Ambac. It seemed almost certain that without Spitzer’s prompting, Ambac would have lost its triple-A rating. What if the bond insurers required more help in the future? There was at least one way to trade the news of Spitzer’s downfall, and that was to sell the bond insurers. By the end of the day, Ambac shares erased all of Friday’s late trading gains and ended the day down 23 percent. MBIA shares lost 10 percent.
Relief had been short lived.
Chapter Twenty-Four
Judgment Day
Irrespective of Moody’s debatable incompetence, we believe the downgrades of Ambac and MBIA would officially mark the end of Ambac’s and MBIA’s more than 30-year franchises without any hope for revival.
—MARK LANE, WILLIAM BLAIR, JUNE 2008
JUST TWO DAYS after the scandalous news about New York Governor Eliot Spitzer hit, New York State Insurance Department Superintendent Eric Dinallo was back in Washington. Barney Frank, the chairman of the House Finance Committee, was holding hearings on the municipal credit-rating scale. Richard Blumenthal, the Connecticut attorney general who had launched an investigation into the dual scale after meeting with Ackman, also was scheduled to appear.
Municipal bond insurance was in for scathing criticism. Frank opened the hearings by explaining why municipalities almost never defaulted on their debt. “Here is the point: No state—no state legislators, no governor—can allow any one of its municipalities to default, because then every other municipality would pay through the nose.”
When a municipality came under financial stress, workers were laid off, services were cut, and snow didn’t get shoveled, but debts got paid. “If any one municipality falters, every municipality in that state would pay,” Frank said. “And there isn’t a state governor or legislator in the country who doesn’t understand that, and that’s why the state guarantee is such a good one.”
So why, Frank asked, isn’t that implied guarantee reflected in the municipal rating? The question cast doubt on the business practices of both the bond insurers and the rating companies. “To me,” said Michael Capuano, a Democrat from Massachusetts, “this is nothing more than legalized extortion.”
Richard Blumenthal told the committee that the dual-rating scale benefited the bond insurers, who sold their top ratings to municipalities. Bond-insurance fees were in fact “a secret tax” imposed by Wall Street. “Our findings so far are very, very deeply troubling,” Blumenthal said. The investigation had turned up “a concerted effort among supposed competitors to maintain the