Confidence Game - Christine Richard [159]
The city of Los Angeles filed suit against the bond insurers, claiming they conspired to maintain a credit-rating system that required municipalities to buy insurance if they wanted a triple-A rating. “Bond insurers’ cynical use of this discriminatory credit-rating system and inexcusable failure to disclose their high-risk investments in the subprime market also violates California’s antitrust laws and common law,” city attorney Rocky Delgadillo charged.
Shane Dinneen, the Pershing Square analyst, lists three reasons why one could have known it would all end this way: “MBIA’s extreme leverage” was an obvious problem.
Then there was the way MBIA management dealt with problems—shunting them out of sight. MBIA’s handling of the Philadelphia hospital group’s bankruptcy and the collapsing value of a portfolio of tax liens were warnings that mistakes had to be covered up.
The third reason is not one you would expect from a self-described former Blackstone number cruncher. Somehow the whole thing seemed predestined, he tells me: Ackman’s real-world interactions with people read like the plotline of a novel—the tense encounter with Brown, the chance meeting with the Citigroup analyst at a funeral in Michigan, “the way the whole thing became a cornerstone of Bill’s life.”
It was as if Ackman’s bluntness—that boldness that people have called everything from constructive and informed to self-interested, insulting, and even criminal—had a purpose. “He didn’t ask other people in the room what they thought about the emperor’s clothes or if they ever wondered whether the emperor might be a bit cold,” Dinneen says. “He just pointed his finger and said ‘Naked!’ Bill was just meant to call this industry out.”
BY ASKING “IS MBIA triple-A rated?” Ackman put the focus on what turned out to be the Achilles’ heel of the financial system—the triple-A credit rating. Those three letters became the most profitable brand in the world. That Wall Street eventually would debase it is obvious in hindsight. “Analysts and managing directors are continually pitched by bankers, issuers, investors with reasonable arguments whose use can color credit judgment, sometimes improving it, other times degrading it,” Moody’s chief executive officer Raymond McDaniel told a congressional hearing in October 2008. “We drink the Kool-Aid.”
When McDaniel finished speaking, Representative Dennis Kucinich (D-Ohio) duly noted, “I would like to submit for the record from the Oxford Dictionary of American Political Slang: ‘To drink the Kool-Aid: To commit to or agree with a person, a course of action, etc.’”
The collapse in the credibility of the triple-A ratings has been astonishing. In 2007, $1.5 trillion worth of triple-A-rated structured finance securities were issued. During the 10-year period between 1999 and 2007, just 2.6 percent of structured finance securities were downgraded; that figure jumped to 35 percent during 2008 for a total of 37,213 credit-rating downgrades.
Nearly 40 percent of the downgrades were of securities that were originally rated triple-A. More than $100 billion of securities originally rated triple-A were cut during 2008 to Ca/C, the lowest rating.
Moody’s moved out of its 99 Church Street building in late 2007 and into a glass skyscraper two blocks away. The old building was razed to make way for an 80-story Four Seasons Hotel. The giant bronze frieze with its warning for Wall Street is gone. The full text of the Daniel Webster quote is as follows:
Credit: Man’s Confidence in Man
Commercial credit is the creation of modern times and belongs in its highest perfection only to the most enlightened and best-governed nations. Credit is the vital air of the system of modern commerce. It has done more, a thousand-times more, to enrich nations than all