Confidence Game - Christine Richard [21]
In fact, Brown told the group, even he had been skeptical of the bond insurance business initially: “I took a look at the business model and said, ‘My God, how can this business model possibly work?’” Brown said. “It’s called risk selection, and our goal is to do it right all the time.”
Someone in the audience asked Brown whether the Gotham report contained factual errors. “Yes, I probably should comment about the Gotham report,” he answered. “The company plans to respond to the inaccuracies shortly,” but “let’s step back and ask, what do we have here? Well, we have a lot of old news. MBIA is very complicated. We are an insurance company, so we take on a fair degree of risk in proportion to our claims-paying ability. All insurance companies do. That’s the nature of the business.”
Then Brown asked the audience to consider whether a hedge fund should be able to take a position on a company and later benefit from publicly bashing the firm. “I don’t think it’s right; maybe it’s legal.”
Still, Brown insisted, MBIA had no objections to Ackman’s issuing research. In fact, MBIA sent the report directly to hundreds of its investors so they could read it, he said. “If you want to speak to Mr. Ackman and his associates, I’m sure he is here,” Brown said, causing a slight stir in the audience as people looked to see if Ackman would identify himself. “He probably has more to say about the company,” Brown continued. “I think it’s a very healthy situation for somebody to identify issues or potential issues about our company,” he told the group. “Just bear in mind that the goal is to make the stock fall and the credit spreads widen. It’s no more complicated than that.”
Ackman and Berkowitz returned to the office relieved. Brown didn’t sound as if he planned to sue them. Hilal remained at the conference for lunch and scrambled to grab a seat at the same table as Gary Dunton, MBIA’s president. Hilal wanted to ask Dunton about Gotham’s report, but before he got the chance, someone else at the table brought it up. “It’s surprising how few inaccuracies there were,” Dunton said of the report. Hilal leaned in closer to listen amid the clinking of silverware and the din of conversation. “It all comes down to how you think the future is going to play out,” Dunton told the group.
ACKMAN MADE SURE Moody’s Investors Service, the leading credit-rating company, received a copy of Gotham’s report. “My goal is for you to consider the seriousness of the issues we have raised, and for you to arrange a meeting with appropriate senior personnel at Moody’s, including the analysts responsible for covering the company,” Ackman wrote in an e-mail on December 11, 2002, to John Rutherfurd, Moody’s chairman and CEO. He attached the MBIA report and a copy of a speech titled “Charlie Munger on the Psychology of Human Misjudgment.”
Munger, Warren Buffett’s long-time investment partner at Berkshire Hathaway, lectured Harvard students in 1995 on the mental blocks that lead to business mistakes. Munger told the students that an inability to accept new ideas when those ideas require people to displace hard-won conclusions constituted “a superpower in error-causing.”
“The human mind is a lot like the human egg, and the human egg has a shut-off device,” Munger told the students. “When one sperm gets in, it shuts down so the next one can’t get in. The human mind has a big tendency of the same sort.” This inability to accept new ideas had stymied even the most brilliant physicists, Munger said. It literally took a new generation of thinkers who were “less brain-blocked by previous conclusions” to move the field forward.
If Rutherfurd had read the speech, then he might have noted some advice in it for Ackman as well: “If you make a