Confidence Game - Christine Richard [41]
Buffett continued: “If you’re willing to do dumb things in insurance, the world will find you. You can be in a rowboat in the middle of the Atlantic; just whisper ‘I’m willing to write this,’ and then name a dumb price. You will have brokers swimming to you—with their fins showing, incidentally,” Buffett said, laughing.
Chapter Seven
Unanswered Questions
As long as [MBIA] is triple-A rated and sailing through unnoticed, this company is fine. The moment it’s downgraded, it’s no longer fine. The business is at significant risk.
—BILL ACKMAN, MAY 2003, UNDER OATH
BETWEEN APPEARANCES AT the attorney general’s office during the early summer of 2003, Bill Ackman tried to keep the pressure on MBIA. He dialed in to the company’s second-quarter conference call, hoping to ask some questions, but the line was never opened for him. “The company did not permit anyone other than analysts to ask a question on the recent quarterly conference call,” Ackman wrote to Gotham Credit Partners investors in a May e-mail. “I did, however, receive a call yesterday from the chief financial officer, Neil Budnick, offering to answer my questions if I put them in writing.”
Ackman’s follow-up e-mail to Budnick contained 146 questions, starting with: “Why did MBIA ask the regulators to investigate Gotham Partners? Why did the company hire a PR firm and work to discredit Gotham in the media if it is truly Jay Brown’s desire that shareholders seek out even critical points of view? Doesn’t Brown realize that few others will be prepared to criticize MBIA in light of how aggressively the company has attacked Gotham?”
Ackman asked Budnick to explain Brown’s comments in MBIA’s 2002 annual report in which he dismissed Gotham’s estimates of MBIA’s collateralized-debt obligation (CDO) losses because the company had only collected $200 million in premiums. How did the fact that MBIA collected less than $200 million in premiums to guarantee these CDOs suggest to Brown that Gotham had “another goal in mind”? Ackman asked. “In my report, I stated my belief that the company had been underpricing its synthetic CDO guarantees. That the company has earned only $200 million shouldn’t have anything to do with the mark-to-market calculation in light of the company’s $45 billion or so of exposure at year-end. What am I missing?” The controversy over the market values of the CDOs could be settled if MBIA would just disclose the CDOs it guaranteed, Ackman suggested. “Would you do so? If not, why not?”
Ackman’s questions continued for pages: Why have losses been so high on a series of securities backed by tax liens? How many securities insured by itself does MBIA own in its investment portfolio? When will it consolidate the off-balance-sheet conduits such as Triple-A One Funding? Why does MBIA collect fees to administer these conduits? Why did the number of insured bonds guaranteed by MBIA and rated below investment grade double in the last few quarters?
“I will probably have a few more questions for you after I hear back,” Ackman said. Lastly, Ackman asked, “When should I expect to get a response to my questions?”
Ackman’s first answer came not from Budnick but from MBIA’s general counsel, Ram Wertheim. “I understand that you sent this e-mail at Neil’s suggestion, who, based on your conversation, was expecting a ‘few’ questions,” Wertheim wrote. It would take awhile for the company to decide whether it would answer the questions and in what format, he added.
Ackman didn’t plan to wait. He wrote to his investors that he planned to issue the list of questions in a press release. “I think this format will accomplish our goal of shining sunlight on the problem,” Ackman wrote in the May letter to Gotham Credit Partners investors. “To the extent the company does not answer our questions or gives