Confidence Game - Christine Richard [43]
Reached at her office in October 2009, Steingart said it was her recollection that Ackman had retained another firm. She said Fried Frank had never represented MBIA and wouldn’t have refused to represent a party whose interests were adverse to MBIA’s “MBIA was always fair game,” she said.
It took another five years for Ackman to find a firm willing to represent him in meetings with the New York State Insurance Department.
CONVERSATIONS ABOUT REGULATING credit-default swaps had a way of getting cut short. In the 1990s, Brooksley Born, the head of the Commodity Futures Trading Commission (CFTC), suggested bringing the credit-default-swap (CDS) market under the control of the commission. The CFTC already oversaw markets for futures and options, including those written on commodities such as pork bellies and corn. But Wall Street lobbyists, with the ideological backing of Federal Reserve Chairman Alan Greenspan, put up resistance. The Commodity Futures Modernization Act of 2000—buried in an 11,000-page budget bill and never debated—was passed the night before Congress recessed for Christmas in December 2000. It exempted credit-default swaps from federal oversight and from state gambling laws.
The CDS market had another near miss with regulation, also in 2000, when bond insurers sought permission to enter the market. That would have brought the CDS business under the umbrella of state insurance regulators. Credit-default swaps were, after all, very similar to the product companies such as MBIA and Ambac already provided—a promise to cover losses if a bond defaulted. Financial Security Assurance, the bond insurer founded by Jim Lopp, asked the New York State Insurance Department to opine on whether it could enter into CDS contracts as part of its insurance business. The answer was no.
Insurance was intended to provide protection against losses, regulators ruled. Although a company’s bankruptcy filing almost certainly results in someone losing money, there is no way of knowing that the person holding a credit-default-swap contract actually suffered a loss, the regulators reasoned. So credit-default swaps weren’t regulated—not as securities or gambling or insurance—and they proliferated at an astounding pace. Bond insurers got around the prohibition by setting up shell companies such as LaCrosse. American International Group (AIG) eventually sold protection on around $500 billion of risk through the credit-default-swap market. It conducted the business through a nonregulated unit called AIG Financial Products, headquartered in London. Wall Street was happy to deal with both the bond insurers and AIG because they appeared to be among the most creditworthy counterparties in the world.
As the questions at 120 Broadway continued, Waldman wanted to know how Ackman came up with his multibillion-dollar estimate for MBIA’s mark-to-market losses on credit-default swaps. Ackman explained how the Wall Street dealers he contacted were able to provide a price range for CDOs based on the original ratings of the CDOs and the year the securities were sold, or their “vintage.”
“For anyone interested in wine, it’s kind of the same thing,” Ackman explained to the lawyers. “Let’s say the ’82 Bordeaux was a really good year and the ’92 Bordeaux is a really bad year. The same kind of thing holds true for CDOs.”
The dealers gave Ackman an indication of the bids and the offers on various types of CDOs. The spread between the bids and offers was wide, suggesting great uncertainty about the price. So Ackman took a midpoint number to come up with his estimates, he explained. MBIA had to be using its own internal model—rather than market prices—for determining the size of its losses, Ackman said.
“Can you conceive