Confidence Game - Christine Richard [47]
“If you go to the company’s cash flow statement, it’s a fairly extraordinary thing, which I had never seen before. Looking down the line items, you see that they borrowed $150 billion or so” over the course of one quarter, Ackman said. “It’s a huge number relative to their balance sheet. What they’re really doing is just recycling approximately every seven days their commercial paper.” This constant reliance on rolling over short-term debt meant Farmer Mac had to be able to remarket half a trillion dollars of debt over the course of a year. This requires the market’s absolute trust, Ackman explained, yet the company didn’t even have a credit rating.
There was also the matter of management’s disclosure about delinquent loans. The definition of a delinquent loan kept changing over time so that it became narrower, and consequently there were fewer to report, Ackman said. For instance, loans that were “in the process of collection” were at one point no longer considered delinquent. “I thought that was, candidly, an absurd concept,” Ackman told the investigators.
After reading the financial statements, Ackman felt that the company was trying to create an impression for the reader that things were better than they really were. “This was the first stock I shorted in a very long time, but it was glaring, I thought,” Ackman said.
“This is the most incredible opportunity I’ve ever seen,” Tilson remembers Ackman saying, when they spoke again about Farmer Mac. Tilson told him he worried the stock might be trading at a steep multiple to earnings, but Ackman cut him off, clarifying the kind of bet he had in mind: “Not as a long, as a short!”
Ackman, Tilson, and Guy Spier decided to dig deeper. They took the train to Washington to meet with Farmer Mac executives, including chief executive officer Henry Edelman.
Pierre-Louis asked Ackman to describe his meeting. “What questions did you ask the chief executive officer and the chief financial officer during the meeting?”
Ackman recalled asking why the company hadn’t sold any securities backed by farm mortgages. One of Farmer Mac’s mandates was to create a secondary market for farm mortgages, the way Fannie Mae and Freddie Mac created a market for home mortgages by financing them through the bond market. “I asked, ‘Is it because you have not been able to sell [the securities] in the market? Is it because you can no longer sell them at a profit?’”
“What was their answer?” Pierre-Louis asked.
“‘Absolutely not!’” Ackman remembered both executives saying. “I remember it so well because they stood up in unison as they said it,” he told her.
LATER THAT SUMMER, Whitney Tilson also was summoned to 120 Broadway to give his version of events. The Wall Street Journal had detailed Tilson’s activities prominently in its January article about hedge funds ganging up on MBIA and Farmer Mac. It described how he attended the meeting at Farmer Mac, participated along with Ackman in a Farmer Mac conference call, and posted negative commentary on MBIA on a Web site.
Tilson began his July 29, 2003, testimony by describing his career history, which included Harvard Business School and stints working for nonprofits, including the Initiative for a Competitive Inner City and Teach for America.
Lead attorneys Marc Minor and Charles Caliendo then turned to Tilson’s interest in Farmer Mac.
The tone of the questions soon became hostile.
“Is this group of friends that you referred to also known as ‘the posse’?”
“That is my wife’s name for us, yes.”
“It has obviously caught on if it is your wife’s name.”
“She referred to it that way, and I thought it was cute, and I called it ‘the posse.’ Some other guys said ‘Don’t call it the posse.’ There was quite a dispute over the name, the proper name or the appropriate name.”
“Do you know or do you recall if MBIA was presented at a posse meeting as well?”
“I don’t think it ever was.”
“Do you know if Allied was presented at a posse meeting?”
“I don’t believe