Confidence Game - Christine Richard [2]
Big names have dominated the headlines during the credit crisis. Bear Stearns was the first major financial institution to collapse. American International Group required a $180 billion government rescue, a larger commitment in inflation-adjusted dollars than the Marshall Plan that rebuilt Europe after World War II. Lehman Brothers was the financial failure felt around the world.
Before all of this happened, another crisis played out. Little known outside of Wall Street, MBIA made hundreds of millions of dollars a year selling its triple-A credit rating. At the same time, it boasted to analysts and investors that it insured bonds on which it saw no chance of loss.
In the lobby of MBIA’s headquarters in Armonk, New York, visitors were greeted by a large photo of sunlight pouring through trees. The image is one you might expect to see on an inspirational greeting card—the sunlight, a symbol of some higher power. “We help our clients achieve their financial goals by providing AAA credit protection,” read the message alongside the photo. The sanctity of MBIA and the permanence of its triple-A credit rating were articles of faith on Wall Street.
Brash, blunt, almost neurotically persistent, Ackman was the perfect foil to the bond insurance business. Even among his friends and colleagues, Ackman is known for being a font of not-always-welcome forthrightness. He will tell people straight out that their hairstyle is unflattering or they ought to consult with his nutritionist about losing some weight. Ask him about his candor, and he says he gives people honest advice and that’s a rare thing in this world.
The first time I spoke with Ackman was December 9, 2002, the day he issued his report on MBIA. “The more I looked, the more I found,” he told me, and he just kept finding more. We spoke about MBIA and bond insurance on and off for more than five years.
Persistence had its price. Eventually, nearly every analyst who covered the company refused to take my calls. But MBIA was intriguing. I found the line that summed up the intrigue and contradiction of MBIA in a presentation Ackman made to Moody’s Investors Service: “Management integrity has been compromised to uphold the ‘no-loss’ illusion.” Someday, I thought, this conflict over a triple-A-rated company that was not as safe as it appeared would make a great story, one that might prove bigger than Ackman and MBIA.
How was it that MBIA could write insurance on hundreds of billions of dollars of debt and yet tell its investors that it guaranteed only bonds on which it expected to pay no claims? In an article for Bloomberg Markets magazine called “The Insurance Charade,” Darrell Preston and I exposed part of the secret by looking into various public projects that weren’t supposed to be obligations of the taxpayer. Yet when the insured bonds issued to finance these projects threatened to default, taxpayers were called on to cover the losses. MBIA had a nearly perfect track record in the municipal bond market because it wasn’t the real insurer of the debt: Taxpayers were.
So what would eventually shatter this no-loss illusion? Bond insurers expanded into the structured finance market, the epicenter of Wall Street innovation. In this market, where all types of loans and securities were bundled into new securities, the game was not rigged in MBIA’s favor.
In writing Confidence Game, I was able to draw from a wealth of source material that is contemporaneous with the events described in the book. Ackman gave me a CD-ROM containing every e-mail he had written or received that mentioned