Confidence Game - Christine Richard [46]
The questioning concluded shortly after. Berkowitz was not called back.
The investigation was turning up nothing.
Chapter Eight
Crimes and Cockroaches
MBIA might just be the biggest business generator on Wall Street. No one wants me to be right on MBIA.
—BILL ACKMAN, JUNE 2003, UNDER OATH
WHEN BILL ACKMAN RETURNED to 120 Broadway to give testimony in the New York attorney general’s investigation of Gotham Partners in June 2003, the focus shifted from MBIA to the Federal Agricultural Mortgage Corporation (Farmer Mac). Ackman had written critical research reports on both MBIA and Farmer Mac after purchasing credit-default-swap (CDS) protection that would gain in value if perceptions about the companies’ credit worsened. The attorney general wanted to know if Gotham had intended to send a troubling signal to the market by pushing up the price of default protection on these confidence-sensitive firms.
There were similarities in Ackman’s criticism of the two companies as well. Farmer Mac and MBIA both provided financial guarantees. Both were perceived as being of the highest credit quality. Both appeared to serve a public policy function. Yet behind the scenes, MBIA and Farmer Mac were both highly leveraged and had ventured over time into riskier lines of business. In the companies’ financial statements and other disclosures, Ackman noted a tendency for management to gloss over potentially troublesome topics.
Lydie Pierre-Louis took the lead on this round of questions, and Ackman was no less eager to talk. Just as Roger Waldman did with MBIA, Pierre-Louis started a running tally of Ackman’s reasons for shorting Farmer Mac.
Ackman cited Farmer Mac’s low reserves and rising delinquencies as the first red flag he spotted. The company also was highly leveraged, largely with short-term debt, Ackman explained. Another red flag: Farmer Mac’s top executives were the beneficiaries of an excessive compensation plan, with 35 percent of the outstanding shares set aside for management. Meanwhile, Farmer Mac’s board of directors was crowded with representatives from affiliated companies, clients, and political appointees with no one representing public shareholders. “I can speak for hours on the subject,” Ackman told the attorneys, “but those are some of the general things I’ve thought about.”
Pierre-Louis tallied 12 reasons Ackman had stated for shorting the stock. “Were there others?”
“Yes. There are more. I don’t mean that to be an exhaustive list.” The company’s disclosure is misleading, Ackman said. “I read every one of their financial statements from the beginning of time until today, and when you compare them in terms of disclosure and how it changes year by year, you begin to get a sense that management is trying to create an impression that is, in my opinion, very often not the truth.”
“You’re saying their disclosure statements, which I believe are filed publicly, are inaccurate?” Pierre-Louis asked.
“They are often inaccurate and clearly misleading,” Ackman said, adding, “They have gotten materially better since [Gotham] published its report.”
Marcu called for a recess at that point, taking Ackman out into the hall. If Marcu’s hope was that Ackman would stop volunteering so many opinions, he was soon to be disappointed. When they returned, Ackman picked up where he left off: “Just to be clear, when I say their disclosure is inaccurate, I am referring not just to their public filings but also to conference calls, statements made by management, the things we address in our report.”
The attorneys decided to back up and start from the beginning, asking how Ackman first became interested in Farmer Mac. Ackman explained that a friend and hedge fund manager, Whitney Tilson, mentioned the company to him. Farmer Mac’s stock had been recommended to Tilson by Guy Spier, another investor with whom Tilson attended regular breakfast meetings at which money managers shared ideas. Tilson called Ackman and suggested he take a look at Farmer Mac. That evening Ackman