Confidence Game - Christine Richard [24]
Gotham pulled the plug on its Web site after Morgenson’s article appeared. Less than a week later, Ackman and Berkowitz announced to investors that they were winding down their main funds. “After much deliberation and in light of recent partnership events, we have decided that it is in the interest of all partners for us to wind up the investment activities of Gotham Partners, LP, Gotham Partners III, LP, and Gotham Partners International Limited and distribute the proceeds from an orderly sale of assets pro rata to all partners.”
Ackman closed by saying, “It has been a pleasure managing Gotham for nearly 10 years through very good times and the recent difficult period.”
FOR THE GOTHAM managing partners, the years of success were fading away, replaced by a newfound notoriety. “I think the folks at Gotham are sincere about MBIA,” Alice Schroeder wrote in an e-mail message to Whitney Tilson. “However, I think an outsider might perceive them as not objective and possibly as trying to manipulate the market simply because of the aggressive way they market their ideas.”
People frequently try to convince analysts to upgrade their ratings, and it is something analysts learn to ignore, Schroeder said. She called it “unique in my career as an analyst” to be on the receiving end of a campaign to downgrade a stock. “The problem is that Gotham itself would be the prime mover for the event that makes their short call work. It is pretty obvious how that leaves them open to charges of market manipulation.”
“One of my cardinal principles is that the writer should not become part of the story,” Schroeder wrote. “No matter how outrageous I might think something is, if nothing changes after I write about it, let it be. It’s a mistake to go on a crusade. We are not saving underprivileged children or curing cancer. [Gotham Partners is] on a mission and they believe the guarantors have to be stopped before they blow up the credit markets. Fair enough. But the feeling that ‘nobody gets it but me and I’ve got to convince them’ should be a warning sign, not a call to action.”
If the idea isn’t strong enough to move the market, that’s a sign its time has not come yet, wrote Schroeder. Instead of “going around and getting in everyone’s face,” they’d be better off to let the idea “percolate.”
The credit-default-swap market showed no concern about the issues raised in the Gotham report. “MBIA is ratcheting tighter,” Mike Neumann, the CDS broker at Lehman Brothers, said in an e-mail to Ackman several weeks after the report was issued.
This narrowing of MBIA CDS spreads—an indication that the market was less nervous about MBIA—was frustrating to Ackman, Neumann later told lawyers at the New York attorney general’s office during its investigation of Gotham. The overall credit market was improving, Neumann explained, and MBIA was outperforming the market.
Ackman told Neumann he felt the market’s response was a slap in the face. The point that Ackman seemed to be missing, Neumann told the attorneys, is that the credit derivatives market “has every reason to want MBIA to be a successful, thriving company. I think Bill hadn’t factored into his analysis [the possibility] that the market would just ignore what he said, even if he was right.”
The lawyers asked Neumann to elaborate.
“If what he wrote was right, it would really create a disaster,” said Neumann. “This is not just my opinion. I’ve discussed this with many people. It would be a disaster if MBIA did default because, for example, they have a lot of municipal bonds that they insure.” Many investors holding MBIA-insured bonds are allowed to hold only triple-A-rated paper, he added.
“You’re counting on the market to just be completely 100 percent rational,” Neumann remembered telling Ackman, “but even if you’re right, the market’s not going to do what you want it to. It may turn out that only the history books tell you you’re right 10 or 20 years from now.”
Chapter Four
Backlash
I won’t tell you not to be paranoid, because paranoia may serve you well, but here, I would have