Confidence Game - Christine Richard [155]
“Having lost our AAA ratings, it will be several quarters before we have a true sense of what exactly our company will look like in the future,” Brown told listeners. “The good news is the business models are functioning exactly as we designed them to under this type of stress.”
Part way through the question-and-answer session, Greg Diamond, the head of investor relations, read an anonymously submitted question. It was about the company’s views on Dinallo’s letter to the Financial Times: “Given your very vocal opponent who has put out several presentations and press releases containing precisely the type of allegations that Dinallo suggests are illegal under the law, does MBIA intend to file a lawsuit against Pershing Square for disparagement and for losses that Mr. Ackman created for the company’s shareholders?”
Brown took that question. “MBIA agrees that statements made by certain short sellers may have, in fact, violated New York insurance law, and we plan on cooperating with any investigation or action brought by the New York state insurance department or any other regulator who may wish to investigate these activities.”
He noted further, “MBIA is assessing all of its options and will take such actions as it determines are in the best interest of its shareholders, including any litigation that may be necessary if we believe that’s in the best interest of our shareholders.”
As the headlines hit the newswires, Pershing Square began receiving phone calls and e-mails from investors. A member of the investor-relations team e-mailed Ackman, asking if he was concerned about the threat of a lawsuit. “I think a lawsuit is very unlikely, but if so, it would be helpful to us because we get access to their books and records. As a result, the probability of their doing so is very low.”
The Pershing party continued. As the group gathered around the Ackmans’ pool, the mood was upbeat. Ackman manned the barbeque. His children played in the pool. The humidity had been building all day, and now flickers of lightning appeared on the horizon. Suddenly, thunder rumbled surprisingly close by, and the group retreated into the house.
LATE THAT AFTERNOON, ACA Financial Guaranty announced after months of negotiations that it had finally reached a deal with its bank counterparties. The bond insurer would tear up credit-default-swap contracts protecting $65 billion of CDOs and other structured finance securities against default. In exchange, ACA would pay the banks just 3 cents for every dollar of the $9 billion they owed.
David LeMay, a partner at Chadbourne & Parke, which represented ACA’s 29 bank counterparties, explained that no one bank could demand to be paid without triggering the same demand from the entire group. “There were 29 nuclear powers, any one of whom pushes the button and the game is over,” said LeMay.
Wall Street had trumpeted the CDS market as the ultimate hedge. What could be better than a contract that allowed a bank to lend money with the certainty of being paid back? But now the system’s fatal flaw had been exposed. All this risk transfer depended on extraordinarily creditworthy sellers of protection. ACA Capital, a bond insurer whose main business was to provide protection against default, had just been presented with a $9 billion bill and had only $698 million in the bank.
On that sleepy August afternoon, the event passed little noticed. The Dow Jones Industrial Average was hovering well above 11,000. Investors still believed that those in power could control the outcome: lower interest rates, raise capital, silence critics, restore confidence. Somehow, if everyone just kept hoping and pretending, the crisis could be kept at bay.
On Merrill Lynch’s final conference call held earlier that summer, chief executive officer John Thain was asked about the firm’s exposure to the bond insurers. Merrill had $20 billion of super-senior CDOs on its books, the majority hedged with counterparties, including bond insurers. Was it possible, a caller asked, that the bond insurers could survive to make