Confidence Game - Christine Richard [153]
Others echoed the criticism of Ackman’s high profile role. Marty Whitman, MBIA’s second-largest shareholder and a holder of nearly $200 million of the surplus notes sold earlier that year to save the triple-A rating, dedicated a long section of his letter to investors in the summer of 2008 to discussing Ackman. “William Ackman appears to be disingenuous when he writes and talks about saving MBIA’s policyholders,” Whitman said. “Why does he care about policyholders? Ackman’s objective is to drive down the market price of MBIA securities.”
Whitman continued: “Bear raiders seem to tend very much to engage in nefarious activities, whether legal or not.” Until the SEC began to investigate some of this activity, short sellers were free to say or write whatever they liked, Whitman said. “There is no apparent downside for being a loose cannon.”
WHILE ACKMAN WAS DETERMINED to show that the bond insurers were insolvent, Eric Dinallo at the New York State Insurance Department was doing everything in his power to prevent a regulatory takeover of the companies.
On July 31, he wrote to the Financial Times: “Rumors that can destroy the stock price of banks and investment banks have been the focus of the media and have now attracted the attention of regulators.” Insurance companies are also vulnerable, he wrote.
New York state law provides for “civil and criminal sanctions for spreading false rumors or making statements ‘untrue in fact’ about an insurance company’s solvency,” he warned. “Recently, some individuals have asserted that some of the bond insurers are insolvent—a far more serious, far-reaching, and risky allegation than claims that the insurer’s holding company stock is overvalued,” he added, without naming names. “Rumor mongering and inaccurately disparaging insurance-company solvency cross a line,” Dinallo concluded.
Several months earlier, Dinallo had worked the phones with Eliot Spitzer to convince the banks to participate in Ambac’s equity offering and save its triple-A rating. Now, as confidence in both the bond insurers and the banks continued to collapse, raising more capital wasn’t possible.
If the bond insurers couldn’t find outside investors willing to put up more capital, then the only alternative was for them to reduce their expected claims. That meant convincing the banks to tear up CDS contracts on the worst of the CDOs. Under these agreements, known as commutations, the banks accept a fraction of the payment they expected to receive had they waited for the CDOs to default. The agreements allowed banks to trade a potentially larger but uncertain payment in the future (after all, the bond insurer might run through all its capital) for a smaller but certain payment today.
Among the first deals announced was one between Ambac and Citigroup over an unnamed CDO. Ambac paid Citigroup $850 million in exchange for tearing up a CDS contract on a $1.4 billion CDO. During a conference call shortly after the deal was announced, a caller asked David Wallis, Ambac’s chief risk officer, what the projected payout on the CDO would have been without the commutation. “Pretty damn close to $1.4 billion,” Wallis replied.
Dinallo says he chose not to play the role of inflexible regulator. “We could have slammed down the gate, not allowed any money to leave the insurance companies,” Dinallo tells me as we sit in his office in early 2009. The result would have been an immediate collapse of the company’s shares on the expectation that the holding companies would file for bankruptcy. That may have been what Ackman wanted, but there were important people who believed it was absolutely necessary to do more. Among them were officials at the Federal Reserve who told Dinallo that they were getting calls from foreign