Confidence Game - Christine Richard [40]
“Did you entertain any doubt about your interpretation?” Waldman asked.
“I can’t recall,” Lyss said.
“What about today? Any doubts?”
“I have no doubt about what I would conclude from reading this paragraph,” Lyss said, pointing to the wording he had originally reviewed to determine whether MBIA had an obligation.
“Do you have any doubt today that there is a guarantee of commercial paper?” Waldman asked.
“I have a doubt today solely because the company said so,” Lyss explained. “However, based on this paragraph, it would lead me to believe that they have guaranteed the commercial paper.”
“You believe there is no other interpretation possible of this paragraph,” Waldman said. “Is that right?”
“Well, apparently you have a different interpretation, which means it is possible to have a different interpretation,” Lyss remarked.
Lyss and Waldman continued to debate the issue. Where did the banks’ responsibilities end and MBIA’s begin? Or did MBIA have any responsibility? Finally, Lyss summed up his views in lay terms. “I do believe that if Triple-A One Funding crapped out and they put it into bankruptcy and MBIA didn’t make good on it and those commercial paper holders were stiffed, that would have a serious impact on MBIA’s business,” Lyss said. “You can’t stiff one related entity and have it not affect the rest of your business.”
BETWEEN DAYS OF TESTIMONY, Ackman attended Berkshire Hathaway’s annual meeting with Whitney Tilson. The meeting, held in Omaha, Nebraska, has been called the Woodstock of Capitalism and generally draws more than 20,000 people. Warren Buffett and his partner, Charlie Munger, take the stage for hours to present their views on business and answer questions from the audience.
For Ackman and Tilson, attending the meeting had become a tradition. Berkshire shareholders and other investors queue up early in the morning to get a place in line at several microphones set up in the main auditorium. Ackman knew from experience that the overflow room, where investors watch the show on a large-screen TV, was his best shot at getting in a question, and Ackman had an important question he needed to ask.
When Ackman and Tilson arrived, there was no one in the overflow room, which assured Ackman of getting a turn for a question. When Buffett and Munger got around to taking questions from the overflow room, Ackman asked them to comment on the practice of insurance companies taking credit risks using credit-derivative contracts and to offer their thoughts about whether insurance companies engaged in this business should have triple-A credit ratings.
“The curse of the insurance business, as well as one of the benefits of it, is that people hand you a lot of money for writing out a little piece of paper,” Buffett said. “What you put on that paper is enormously important. The money that’s coming in, which seems so easy, can tempt you into doing very, very foolish things.”
Buffett described how GEICO took in $70,000 for a few policies and lost $93 million paying claims. Such mistakes can wipe out a lifetime of earnings—a few cents gained when you’re right and a fortune lost when you’re wrong, Buffett said.
Ackman believed that was exactly what MBIA was doing with its collateralized-debt-obligation (CDO) business. The huge decline in the value of the CDOs MBIA had insured was proof, Ackman believed, that the bond insurer was massively underpricing risk.
Jay Brown had addressed Gotham’s estimates in his letter to shareholders in the company’s annual report that spring. “There was an ‘analysis’ performed by a hedge fund which suggested that our mark was miscalculated by several billion,” Brown wrote.
Brown’s rebuttal of the Gotham estimates left Ackman aghast. “The entire adjusted net premium we collected for our entire synthetic book was under $200 million,” Brown explained. “This suggests to me that the ‘analysis’ methodology had another goal in mind.”
Ackman read it again. And again. Just because MBIA had received