Confidence Game - Christine Richard [149]
Then came this bombshell: Brown announced MBIA was going to keep the $900 million at the holding company rather than pass it along to the insurance company. On May 12, MBIA had said it would move the money within 10 to 30 days. Had Moody’s waited another week, MBIA surely would have downstreamed the cash. Its ability to meet the collateral calls and terminations would have been further reduced. The company almost certainly would have filed for bankruptcy.
“So, how is your business going?” Ackman’s grandmother asked as the party surveyed menus. Ackman was trying not to jump out of his chair.
ACROSS TOWN, Keefe Bruyette & Woods was holding an insurance conference. Douglas Renfield-Miller, an Ambac executive vice president, took the podium as scheduled, despite the Moody’s warning. “In the last two hours, I’ve probably had more stress than in the previous 27 years,” he told the audience. Since it was clear that Moody’s was going to cut the company’s top rating, there was no point in raising more capital. Capital was not the problem. Ambac had $2 billion more in capital than it needed to remain triple-A, Renfield-Miller said.
What many people didn’t understand, he told the crowd, was that Ambac was confronting the very stress scenario that it had been designed to weather. The company would have to pay some large claims, but it wasn’t going out of business. “The current crisis validates the business model, validates it in the way that it has never been validated before,” Renfield-Miller said. Investors with uninsured mortgage securities were going to lose hundreds of millions of dollars. Those with Ambac-insured paper would never miss a payment, he told the crowd.
Some in the audience were skeptical. In November, Ambac said it would pay no claims; now, just a few months later, it anticipated more than a billion dollars in claims? What if the company misjudged again? Wasn’t it possible Ambac could file for bankruptcy?
Sure, there was a stress case that wiped out Ambac’s capital, but it occurred, Renfield-Miller told the audience, in a “Mad Max scenario,” a point at which “you’ve got people running around on trucks with guns.”
BACK AT THE Palm Court, the plates were cleared. Then the waiters appeared with a cake. Everyone sang “Happy Birthday,” and Ackman’s grandmother blew out the candles. He was on his way back to the office.
Back on Wall Street, the recriminations continued to fly. “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, an insurance analyst with William Blair, wrote in a research report published after the Moody’s announcement. “The impairment of the franchises and the public mockery of the business model and the integrity of the rating agencies have been so severe it is difficult for us to see Moody’s ever reinstating a triple-A rating for either company once this seal has been broken.”
The next day, June 5, 2008, Standard & Poor’s beat Moody’s to the punch and downgraded both MBIA and Ambac to double-A. In one fell swoop, a trillion dollars of debt lost its triple-A rating.
Chapter Twenty-Five
The Nuclear Threat
There’s not likely to be a man left standing in the bond-insurance industry. This thing is over already; the market just doesn’t know it yet.
—BILL ACKMAN, JUNE 2008
WHEN STANDARD & POOR’S (S&P) downgraded MBIA and Ambac to double-A on June 5, 2008, the world didn’t end, the stock market didn’t crash, the dollar didn’t collapse. In fact, MBIA’s share price rose a few cents. After all, confidence had been unraveling for more than a year. There had been plenty of warning. Still, it was the end of an era in the bond market. Rob Haines, the bond insurance analyst at CreditSights, summed it up this way: “For those of us who follow the monoline industry, last week was akin