Confidence Game - Christine Richard [152]
MBIA lashed back at Ackman, saying “the e-mail and its public release were yet another irresponsible attempt to undermine confidence in MBIA.”
Copies of the letter sent to Warburg Pincus were returned to Ackman unopened.
ON JULY 15, 2008, Roy Katzovicz sat in his apartment, waiting for Ackman to appear on CNBC’s Squawk Box. The show’s producers had been badgering Ackman for several months to come on the show to talk about the bond insurers. Katzovicz had repeatedly expressed his views on how TV and complicated financial ideas don’t mix. In his most recent e-mail to Ackman on the topic, Katzovicz said simply: “TV = Bad.”
But Ackman couldn’t be dissuaded from making the appearance. He had a plan for recapitalizing Fannie Mae and Freddie Mac, the giant government-chartered mortgage companies, which many investors feared were now insolvent. Ackman also had a short position in Fannie Mae’s stock and in both government-sponsored enterprises’ subordinated debt, which would rise in value if Ackman’s plan was implemented.
Ackman told the anchors on CNBC that it would be a mistake for the government to put equity into Fannie Mae and Freddie Mac. The companies needed to be recapitalized, and taxpayers shouldn’t be the ones to do it, he argued.
The two companies had all the capital they needed, Ackman said. It was just in the wrong form. They had too much debt and not enough equity. The company could be recapitalized by wiping out the equity holders, giving the junior debt holders warrants and giving the senior debt holders equity in the company.
Anchor Becky Quick asked Ackman when he had come up with this idea and when he had taken his short positions on the securities.
“I woke up on Thursday morning with an idea,” Ackman said. “The more I thought about it, the more logical I thought it was and that it would be implemented.”
Ackman made no apologies for his view that the company’s equity holders should be wiped out and that he should be able to profit from it. “Investors made a bet and allowed the institution to become too levered over time,” Ackman said.
Later that day, the Securities and Exchange Commission (SEC) announced a plan to clamp down on those shorting the shares of Fannie Mae, Freddie Mac, and a number of other financial firms. Short sellers had become—in the eyes of many people, including government officials—the enemies in a battle to stabilize the financial system.
That stability remained elusive, however. A week later, on July 22, 2008, Moody’s warned it might cut FSA’s and Assured Guaranty’s triple-A ratings. Shares of FSA’s parent, Dexia SA, plummeted 16 percent to 8.06 euros in early trading. Assured shares plunged 40 percent, or $7.43, to $11.32.
Shortly after the announcement, Moody’s held a conference call to discuss the state of bond-insurance ratings. Investors were furious. There was not a single triple-A-rated bond insurer that hadn’t lost its top rating or been threatened with a loss of the rating. When the call was opened to questions, the first caller wondered just how devastating the meltdown of bond insurers’ credit ratings had been to Moody’s credibility. The caller jumped in with his own answer: “The metaphor of Frankenstein’s monster comes to mind, with the guarantor in the title role—escaped from the lab and running loose in the rating-agency village!”
MEANWHILE, IT WAS NOT just Katzovicz who wished Ackman would stay off CNBC. “I’ve been reflecting on your high-profile strategy concerning Fannie Mae and Freddie Mac,” one of Ackman’s investors wrote to him shortly after his appearance on CNBC. While Ackman’s “exposé” on MBIA had benefited all Pershing Square’s investors, he was now creating a “perception that a self-interested short seller is attempting to meddle in public affairs,” the investor wrote.
To make his point, he quoted James de Rothschild