Confidence Game - Christine Richard [151]
Both the bond insurers and the credit-rating companies had “misled the investing public by ignoring and not disclosing CDS mark-to-market termination risk in determining the ratings for bond insurers,” Ackman said.
Ackman had a second bombshell to drop that evening. Financial Security Assurance (FSA) and Assured Guaranty still had triple-A ratings with a stable outlook. The fact that two of seven bond insurers still had credibility gave the industry a glimmer of hope. Bonds—even structured finance bonds—could be insured if a company was careful enough. As municipalities shunned the other bond insurers, FSA and Assured had seen business surge in recent months.
“The market has not woken up to FSA,” cautioned Ackman. “FSA is AAA stable, but don’t look too closely.” FSA had steered clear of guaranteeing CDOs backed by mortgages, but it insured billions of securities backed by home-equity and Alt-A loans. It was under-reserving against those losses, Ackman said. The insurer also had a problem with its investment-management business. Like MBIA, FSA issued billions of dollars of guaranteed-interest contracts (GICs) for municipalities. The proceeds were invested in subprime securities, which had tumbled in value, leaving FSA’s asset-management business with assets valued at $16.2 billion and liabilities of $20.4 billion. Ackman predicted that Dexia, FSA’s European parent company, wouldn’t support FSA. The capital hole was too deep.
Summing up his view of the bond-insurance business, Ackman told the audience, “There’s not likely to be a man left standing” in the industry. “This thing is over already; the market just doesn’t know it yet.”
The next morning, risk premiums on FSA credit-default-swap contracts surged. That same day, Dexia announced it was providing a $5 billion credit line to help FSA. The commitment “is a reaction to the attack of Pershing,” chief financial officer Xavier de Walque told Bloomberg News. The move was intended “to avoid any doubt and to stop any speculation.”
On June 19, the day after Ackman’s presentation, Moody’s followed through on its threat to strip MBIA and Ambac of their triple-A ratings. MBIA was cut further than Ambac, all the way down to single-A, a rating at which MBIA was obliged to post collateral and terminate guaranteed-investment contracts.
Ackman was certain MBIA’s holding company would have to file for bankruptcy. Its asset-management unit had left it with a gaping hole in its balance sheet that probably couldn’t be filled even with the $900 million Brown had decided to keep at the holding company.
Meanwhile, the insurance unit was insolvent under one of two New York state tests of solvency, in which case the company’s CDS counterparties could force it to terminate contracts and absorb billions more in losses.
On June 27, Ackman wrote to MBIA’s board of directors, including Kewsong Lee and David Coulter from Warburg Pincus, telling them that they should seek advice about the solvency of MBIA Inc. and MBIA Insurance Corporation. He followed up a few days later with an e-mail, which he made public: “You don’t, of course, have to rely on our analysis in determining MBIA’s solvency, but we caution you in relying solely on management’s statements or financial statements prepared by management,” Ackman wrote. Even if the companies were not insolvent but were approaching insolvency, directors had expanded fiduciary duties. They had to assure that shareholders were not favored over creditors and that one class of creditor wasn’t favored over another.
“Don’t take our word, but do yourself a favor,” Ackman wrote. “I encourage you to hire