Confidence Game - Christine Richard [146]
Before Dinallo could complete his testimony—a description of how New York officials had been working to help the industry raise capital—Representative Paul Kanjorski (D-Pennsylvania) interrupted him with some news: “The governor of New York announced his resignation.” If Dinallo was going to bully the banks into helping to fix the bond-insurer problem, he was going to have to do it alone.
THE BANKS, HOWEVER, HAD big problems of their own. On Sunday, March 16, JPMorgan announced it would buy Bear Stearns for $236 million, or $2 a share, saving the firm from collapse. JPMorgan’s purchase of Bear Stearns was conditioned on the Federal Reserve System assuming losses on $30 billion of Bear’s assets after JPMorgan absorbed the first $1 billion of losses.
Although the collapse of Bear Stearns took the attention off the bond insurers, it also turned up the attention on short sellers, particularly those who placed their bets using credit-default swaps (CDSs). Shortly after the collapse, the Securities and Exchange Commission was reported to be looking into the possibility that rumor mongering might have driven Bear Stearns to the brink.
Purchasing CDS contracts on a company was “the ultimate bear bet, and the incentive of CDS holders to accentuate the negative, particularly to the financial press, is almost irresistible,” wrote Barron’s columnist Jonathan Laing. Laing, who had written negative articles on MBIA in the past, now described how Ackman’s “poison-pen campaign against MBIA and Ambac” was driving the collapse in confidence in the companies.
Ackman wasn’t the only one with concerns. On April 4, 2008, Fitch became the first credit-rating company to strip MBIA of its top rating, cutting the company to double-A. The move had been widely expected following MBIA’s request that Fitch no longer rate it.
And the bad news just kept coming. When Ambac announced earnings on April 23, 2008, the company said its problems had expanded beyond collateralized-debt obligations, and it would take $1 billion of losses on home-equity loans. James Fotheringham at Goldman Sachs wrote in a research note headlined “Slippery Slope”: “We forecast $11.8 billion in total pretax losses for Ambac and $12.6 billion for MBIA.” Goldman was now predicting a worse outcome than the Open Source Model.
Credit-default-swap spreads on MBIA’s and Ambac’s holding companies increased on the news, jumping back above 1,000 basis points, or $1 million per annum, to buy protection on $10 million of the companies’ debt.
THE BATTLE BETWEEN Ackman and MBIA had become less of a public spectacle during the spring of 2008, but it continued behind the scenes. During the hearings in Washington, MBIA’s Chief Financial Officer Chuck Chaplin testified that the $1 billion that the company raised in its February stock sale was part of the insurance unit’s total claims-paying resources.
Meanwhile, Jay Brown had described the $1 billion as part of the holding company’s liquidity war chest in a March 10 letter he wrote to shareholders explaining why CDS contracts on MBIA reflected an irrational fear of default. “Someone buying one-year credit protection on MBIA Inc. is betting that the $1.6 billion in cash and short-term investments currently held by MBIA Inc. will not be sufficient to cover its $80 million of interest expense,” Brown wrote.
The statements prompted Ackman to write to the Securities and Exchange Commission: “MBIA has made false statements to Congress and the public about its claims-paying resources.” The company should be required to correct its disclosure, Ackman added. It just wasn’t possible for the money to be in both places.
“S&P and Moody’s are being a bit disingenuous by affirming