Confidence Game - Christine Richard [154]
Dinallo, the son of a Hollywood script writer who penned episodes of The Six Million Dollar Man, kept a collection of superhero action figures and comic books on a shelf in corner of the conference room. And in the summer of 2008, every day seemed to bring another opportunity to save the world.
At the end of July, Dinallo had just managed to pull XL Capital Assurance back from the brink. The threatened collapse of the company was reverberating across the insurance sector. The bond insurer had been spun off from XL Capital Ltd., a catastrophe reinsurer based in Bermuda, which protected other insurance companies against losses in the event of hurricanes and other natural disasters. XL Capital Ltd. was on the hook to cover some of its former unit’s CDO and subprime losses. The stock market was punishing the catastrophe reinsurer over the uncertainty created by this obligation. Other insurance companies were worried about the coverage they had purchased from XL Capital Ltd.
Negotiations took place over several tension-filled weeks at the offices of Fried, Frank, Harris, Shriver & Jacobson, where lawyers from more than two dozen banks, two insurance companies, and the insurance department hashed out a plan to disentangle the bond insurer, its former owner, and scores of bank counterparties. The meetings, held simultaneously in a series of conference rooms, lasted late into the evening. Hampton Finer, the deputy superintendent of the insurance department, recalls weeks of raised voices and boxes of cold pizza. The lawyers were up against a tight deadline; XL Capital Assurance needed to file its first-half regulatory statements before the end of July to show that it was solvent.
Finally, on July 28, Dinallo announced an agreement. XL Capital Ltd. would pay $1.78 billion to its former bond-insurance unit, and Merrill Lynch would tear up $3.7 billion of contracts on CDOs in exchange for a $500 million payment, saving the company from insolvency. “This agreement gives a light at the end of the tunnel,” Dinallo said during a conference call with reporters. “Even a distressed bond insurer can be brought out of a dire situation.”
Late that afternoon, Dinallo was back on the phone. This time it was a conference call with 40 of bond insurer CIFG’s counterparties.
JUST AFTER 11 P.M. ON AUGUST 7, 2008, Mick McGuire was finishing a review of MBIA’s second-quarter earnings statement. Pershing Square had issued press releases with questions for MBIA management ahead of MBIA’s last two earnings conference calls. McGuire assumed they would do the same this time and was in the process of drawing up a list. There were questions on the fairness of bond insurers canceling CDS contracts. Questions about MBIA’s off-balance-sheet debt and when it came due. Questions about the effect on MBIA of its reinsurers being downgraded. “I believe those are probably the issues worth calling out,” McGuire e-mailed to Ackman. “I can think of others, but I would guess that other investors might also already be focusing on them.”
At 11:50 p.m., Ackman wrote back: “Perhaps we do nothing.”
The most obvious question in Ackman’s mind was whether MBIA was insolvent. This time, Ackman was going to leave it up to investors and equity analysts to ask the questions.
The next morning, the stock was rallying as the conference call got under way. The news for investors was mixed: New business had completely dried up, but unlike other financial firms, including Ambac and Fannie Mae, MBIA didn’t increase its projections for losses during the quarter.
Ackman listened in on the call from his house in upstate New York, where he was setting up for Pershing Square’s annual staff party. The office was closed for the day, and all the employees—the investment team, the traders, the accountants, and the administrative assistants—were on their way upstate to spend the day sitting by the pool, barbequing,