Confidence Game - Christine Richard [25]
—ALICE SCHROEDER, E-MAIL TO BILL ACKMAN, 2003
EVEN BEFORE IT STARTED, Bill Ackman and his partner, David Berkowitz, knew that 2003 was going to be a tough year. After a decade of building Gotham Partners, the pair faced months of liquidating a fund, selling assets, and returning money to investors. Their only active investment would be the credit-default-swap (CDS) contracts on MBIA held by the Gotham Credit Partners funds.
“While you can consider your investment in Gotham Credit Partners to be a hedge against a bear market or other economic collapse, our goal here is to make you money no matter what the general state of the economy or market,” Ackman wrote in an e-mail to investors in late December 2002. Investors in the funds included Leucadia National Corporation; Jack Nash and Leon Levy, who founded the highly successful Odyssey Partners hedge fund; Ezra Merkin, the managing partner of hedge fund Gabriel Capital; Marco Kheirallah, a founder of Banco UBS Pactual in Rio de Janeiro; T2 Partners, Whitney Tilson’s hedge fund; and Ackman’s father, Larry.
Gotham had taken down its Web site, but during the first week of January, Ackman talked to David Klafter, Gotham’s general counsel, about reactivating it so that the fund’s reports on Federal Agricultural Mortgage Corporation (Farmer Mac), Pre-Paid Legal, and MBIA could be made publicly available again. Klafter worked on a new disclaimer that included a laundry list of reasons the firm might change its investment position without explanation or notice. The tone was defiant: “Gotham has First Amendment rights to comment and express opinions on topics of public importance, including MBIA’s and Farmer Mac’s credit quality and related topics.” But the disclaimer was never used because the Web site wouldn’t be activated. Events were about to take a turn for the worse.
On January 8, 2003, a front-page article by Henny Sender in the Wall Street Journal’s Money and Investing section chronicled the decision by Gotham Partners to wind down its main funds. The article was a fall-from-grace story. It began with a description of Ackman addressing a group of students at Harvard Business School several months earlier on how to start a hedge fund, and it quipped he might return to lecture on how to close a fund. It described how Ackman and Berkowitz were trapped by a strategy of illiquid investments including Gotham Golf. They were described as “publicity hungry,” and the research reports on MBIA, Farmer Mac, and Pre-Paid Legal were depicted as attempts to salvage disappointing returns. Gotham’s demise, the article concluded, highlighted the perils of hedge fund investing.
Ackman’s criticism of MBIA was now completely eclipsed by Gotham’s own problems. “The MBIA story was incredibly complicated to convey in a newspaper article,” Klafter recalls. “An easier story was about the hotshots who stumbled.”
The morning the article ran, Ackman received an e-mail from Morgan Stanley analyst Alice Schroeder: “On the issue of Gotham itself, I had no idea of anything going on internally, but it has no impact on my opinion of your research, which stands on its own. Anyone intelligent will feel the same, although not everyone is intelligent.”
Schroeder continued: “I won’t tell you not to be paranoid, because paranoia may serve you well, but here, I would have to say, you are, in effect, in the restaurant business, where you spend a lot of time in the kitchen; therefore, you have to be prepared for some heat.”
“We are not dropping the ball on MBIA,” Ackman wrote back. “They have worked hard to do this to us, and they have succeeded. Some day the facts will make it our turn.”
It would be years before that day would come. After the markets closed on January 8, 2003, the news agency Reuters ran a story saying New York Attorney General Eliot Spitzer was looking into Gotham’s activities, citing a source familiar with the matter. Michael J. Burry,