Confidence Game - Christine Richard [36]
Waldman asked Ackman to provide details about his career history, his decision to short MBIA, his research on the company, and his meeting in Armonk with MBIA executives. He wanted to know who set up the meeting and whether Ackman represented himself as a short seller. “Before the meeting, had you established in your own mind some concerns about the company that you felt made it less attractive than the market was regarding it?” he asked.
The question opened the floodgates.
“Starting with the big picture, the company is leveraged about 140 to 1. And that was kind of a glaring number to me,” Ackman said. “It does not leave much of what we call a margin of safety. You have to be right pretty much every time if you have that degree of leverage because even a small flaw could put you out of business.” Then there was the company’s claim in its annual report that it underwrote to a so-called 99.99 percent confidence level, according to Ackman. “That struck me as unusual.”
MBIA was betting the entire company on a belief that a statistically unlikely event could not occur, Ackman said. Yet the stock market crash of 1987 was described at the time as a 27-standard-deviation event. That implies an event with a confidence level of 99.99—with 159 more 9’s after it. “It’s an unheard of kind of event,” Ackman said. But it happened.
Over the next few years, financial firms around the world would lever up their balance sheets with huge amounts of assets that had only a remote chance of defaulting. “Frankly, in the financial markets, it seems like every three or four years we have what amounts to a multi-standard-deviation event,” Ackman said.
Ackman also told Waldman that he believed that MBIA’s expansion into the credit derivatives market was risky. “One of the things I was told early on in the credit derivatives business is that I may be trading with someone who has inside information. And that’s something you need to be wary of because banks have much better access to information.”
Waldman, who was keeping a running total, told Ackman he had listed nine issues.
“I’ve thought of some more,” Ackman replied. Acquisition fees, the acceleration of premiums, changing the method of reserving. He described them all.
“Anything else?”
“I probably could go on.”
And he did.
As the day wore on, Ackman showed no inclination to shorten his answers.
Waldman wanted to know if Ackman told MBIA executives during his meetings with them whether he was short the stock.
“The company excludes people whom they believe are potentially short sellers from their conference calls. You know . . . ”
“Just answer the question, okay?” Marcu instructed Ackman.
“Do not do that again,” Waldman said to Marcu.
“Excuse me?”
“Do not interrupt an answer again.”
“Roger, I would like this examination to go forward and for us to finish sometime in my lifetime,” Marcu answered.
Ackman was eager to get the conversation rolling again. “I was saying that the company excludes people they believe may be shorting. Everyone—other than someone they know is either an owner of the stock or an analyst—is excluded from the conference calls.”
The questioning returned to Ackman’s meeting with MBIA executives in August 2002. Ackman related what Jay Brown told him about the business of insuring bonds. “He really prefers the structured finance business over the municipal finance business because the municipal business, he said, is not really a financial business. You are not really doing traditional financial analysis,” Ackman said. “He called it more of a moral commitment.”
Marcu jumped in with a question: “Were those his words?”
“Yes. That’s what he said,” Ackman replied.
“Do you remember him using those words?” Marcu asked again.
“Yes,” Ackman said. “And he said that as a result it was kind of hard to analyze.”
The investigators didn’t dwell on the issue,