Confidence Game - Christine Richard [32]
Weinstein also told the investigators that any range of estimates would be wide but that Ackman had the right order of magnitude.
“Is there any reason the [Gotham report’s] estimated $5.34 billion in losses couldn’t be $3 billion just as easily? Or $8 billion?” one of the attorneys asked.
“I feel far more confident that it is $9 billion than $1 billion. None of them has a profit in them,” said Weinstein. All of the CDOs were backed by pools of corporate credits that had defaulted at a higher rate than anticipated, he explained. You have to go back to the Great Depression to see a level of corporate defaults by investment-grade companies equal to the level that occurred over the last year, he told the attorneys. In fact, eight of the 12 biggest bankruptcies in U.S. history were filed over a 13-month period ending in December 2002. They included WorldCom, Enron, Conseco, Global Crossing, United Airlines, Adelphia, Kmart, and NTL.
Ackman had not identified Deutsche Bank in his report, and the attorneys asked why.
“I told my boss that a client wanted the data, and he agreed that we would provide it but not with attribution, because that might upset MBIA,” Weinstein said. “They are one of the bank’s biggest clients.”
Lehman Brothers had even more reservations about helping Ackman with his estimate.
“I told [Ackman] we would never venture to mark to market MBIA’s CDO portfolio,” Michael Neumann, the Lehman broker who gave Ackman the idea to short MBIA, told investigators when he was called to testify in the Gotham investigation. “You really need to see the actual portfolio and see the names of the CDOs and stuff to know what the value is or to have an idea, and you’d never get to look at that.”
And there would have been another problem in coming up with an estimate, Neumann explained. “Politically, MBIA is a client of Lehman’s. There’s no way we would agree to try to take a stab at it. Even if we could, even if somebody showed it to us, we wouldn’t share it for somebody’s report: ‘Oh, yeah, it’s worth 60 or whatever.’”
Neumann said he was surprised to learn that Ackman identified Lehman as the other bank providing him with data for the report. He’d given Ackman some estimates of CDO prices, but he said he didn’t expect they’d be used to value MBIA’s portfolio. Neumann had asked a couple of credit traders to give him estimates of where they would mark various CDOs, but the response wasn’t encouraging. “Both of them rolled their eyes and said there’s just no way they could give him any information he could use. It’s too generic a question.” Eventually, though, they came up with some very rough numbers. Neumann said he jotted them down on a sticky note and called Ackman, cautioning him that the data weren’t very useful.
“Mr. Neumann, I’d like to show you what’s been marked as Neumann Exhibit 2 and ask you if you’ve ever seen it before,” the attorney said, Neumann looked over the document.
“This is an e-mail that I sent to him that, quite frankly, I forgot I sent,” Neumann replied.
“This was not part of the Lehman production” to comply with the subpoena, the attorney said, noting for the record that the document was a November 12, 2002, e-mail. “Do you know why?”
“I didn’t have a copy of this e-mail on my computer,” Neumann said.
Among the thousands of documents Ackman produced in response to the subpoena from the New York attorney general was an e-mail he received from Neumann at 1:43 p.m. on November 12, 2002, that included a table of Lehman’s estimated values for CDOs ranging from 30 cents on the dollar to 97 cents on the dollar.
It seems no one on Wall Street wanted to call attention to MBIA’s losses.
APPARENTLY, MBIA ITSELF was having trouble valuing its CDO portfolio. When the company held its conference call to discuss fourth-quarter 2002 earnings on February 4, 2003, it reported a surprise $82 million writedown on its CDO guarantees.