• Choose a category
• All
• Classic-Fiction

By Root 1514 0

for the company on top of the obvious problem that it would lose the rating essential to its business. Ackman had warned Moody’s for years about the potential liquidity risk created by MBIA’s asset-management business. Through that business, MBIA offered investors guaranteed-investment contracts (GICs). These contracts were used mainly by municipalities as a place to park the proceeds of bond issues until the money was needed to pay construction and other expenses. Municipalities purchased the contracts because they were insured by MBIA Insurance Corporation and carried a top rating. Many of the contracts allowed investors to terminate their GICs or to require MBIA to post collateral against the contracts if its insurance unit was downgraded as far as single-A.

Moody’s had dismissed Ackman’s concerns in a 2006 report, saying it saw little liquidity risk involved in offering GIC contracts because the proceeds were invested in highly rated securities. Even if MBIA were downgraded and had to post collateral, it could easily sell these high-quality securities.

But over the last year it had become startlingly clear that “highquality” securities sometimes sold at far below their face value. A downgrade to single-A could require MBIA to sell billions of dollars of securities in a distressed market. That could leave a cash shortfall at the asset-management company. The holding company, which owned the GIC business, could very well end up filing for bankruptcy. In which case, Ackman would make billions of dollars for his investors.

Ackman predicted at his “Saving the Bond Insurers” presentation in November 2007 that MBIA Inc. would be out of cash by the second half of 2008. His prediction was on the verge of playing out. He was also late for lunch.

By the time Ackman reached the Plaza Hotel, he had broken out in a sweat. The rest of his family had already arrived for his grandmother’s 90th birthday party at the hotel’s Palm Court restaurant. As they entered the restaurant, soft chamber music played in the background. The restaurant, with its palm trees and stately columns, has “an ambience that is suspended in time,” according to one history of the hotel. Ackman’s thoughts, however, were racing.

He had been there only a few minutes when Ramy Saad, Pershing Square’s trader, messaged him with prices on MBIA CDS spreads: They had surged 275 basis points on the Moody’s news. Ambac’s jumped by 245 basis points.

Although Ackman believed a Moody’s downgrade sharply heightened the chances for a default, his MBIA position had to be pared back. As spreads on MBIA and Ambac debt had increased over the last 15 months, so had the percentage of Pershing Square’s assets in the investment. It was time to lock in some profits. The fund’s position in both bond insurers’ CDS contracts, particularly MBIA’s, was huge.

The spreadsheet detailing Pershing Square’s short position on MBIA was pages and pages long, listing hundreds of individual trades. It was a patchwork of bets—for $10 million, $50 million, and $100 million—with numerous counterparties and expiration dates ranging from just a few months to five years and more into the future.

“Keep selling,” Ackman messaged Saad back. The transactions that day marked the first time Ackman had sold any significant amount of MBIA exposure since he began buying protection on MBIA in 2002.

Under the Palm Court’s famous stained-glass ceiling, the birthday group had settled into enormous high-backed upholstered chairs. Ackman’s grandmother was dwarfed by the chair, and even Ackman at 6 feet 3 inches looked a bit like a kid at the grown-ups’ table. Back at Pershing Square, the investment team was intensely focused on the news. Somebody needed to go through MBIA’s financial statements and see at what level the collateral calls on the GIC contracts kicked in, Ackman messaged Mick McGuire.

Not long after the downgrade, more headlines scrolled by on Ackman’s BlackBerry, which he checked surreptitiously under the table. MBIA had responded to Moody’s, and Brown was clearly angry. The company disagreed with