Confidence Game - Christine Richard [49]
When Marcu jumped in with a suggestion, Pierre-Louis snapped at him, reminding Marcu not to make statements that could be seen as leading his client. Marcu couldn’t let that one pass. “Perhaps you have noticed that Mr. Ackman does not follow my instructions much of the time,” Marcu said. “It’s below 1 percent; it’s perhaps below zero percent.”
“If my lawyer would be quiet, I would give my answer,” Ackman said.
Pierre-Louis wanted to know about a type of financial guarantee Farmer Mac offered called a “long-term stand-by purchase commitment.” Ackman had criticized the guarantee, saying it carried “the greatest risk with the least adequate compensation” of all of Farmer Mac’s lines of business. Under the program, Farmer Mac promised to buy individual farm loans out of a pool of loans designated by a bank. The arrangement allowed the bank to hold loans on its balance sheet while transferring the future risk of default to Farmer Mac.
These obligations have a risk similar to CDOs, Ackman said. Midwestern farm banks have the same incentive as Wall Street firms to transfer their worst assets to someone else. The loans Farmer Mac is obligated to buy aren’t newly issued loans, Ackman explained, but ones that have been around long enough for banks to figure out whether they’re at risk of going bad. Banks then make the questionable loans subject to the Farmer Mac stand-by purchase commitment and can “put” or sell their loans to Farmer Mac at any time, not just if the loans default.
If the banks get nervous about Farmer Mac’s financial position, Ackman said, they might exercise their put options en masse rather than risk losing the protection if Farmer Mac fails. That would leave Farmer Mac with the obligation to fund the purchase of a huge portfolio of loans in a short period of time. Without the resources to buy and hold the loans, Farmer Mac might be forced to sell the loans in a short period of time, leading to likely losses. “It wouldn’t take much of a discount to wipe out Farmer Mac’s equity,” Ackman said. “That’s how risk turns into catastrophe.”
Also disturbing and worth noting, Ackman said, was that the program transferred risk from the Farm Credit Banks to Farmer Mac, even though the banks carry 10 times more capital than Farmer Mac. It isn’t even clear that regulators approved Farmer Mac’s expansion into this type of guarantee, Ackman said.
In one particularly prickly encounter, Waldman asked about Ackman’s statement that Farmer Mac was not able to sell mortgage-backed securities. “If you’re so sure that Farmer Mac has not sold securities to investors, then what about the prospectuses filed with the SEC?”
“I would love to see them,” Ackman said.
“You did not see them when you did your research for your report?”
“Absolutely not. Where are they filed with the SEC? I would love to see them.”
“Mr. Ackman . . . ” Waldman interrupted.
“I know. You guys ask the questions.”
“We ask . . . ”
“I’m sorry,” said Ackman. “I apologize.”
“They were, in fact, filed with the SEC, Mr. Ackman, and those three prospectuses are available to the public, and the fact that you did not find them . . . ”
Ackman cut Waldman off, finishing his sentence for him. “Is a crime?”
“Let’s take a break,” Waldman suggested. When they returned, Ackman broached the issue again, with less emotion. “With respect to the comments I just made, my question is if, in fact, there were three such sales and if, in fact, the prospectuses were filed and I didn’t see them, is it a crime? I know you don’t necessarily have to answer me, but I am just curious,” Ackman said.
“Your curiosity is noted,” Waldman said. They moved on to other matters.
ALTHOUGH REGULATORS didn’t appear to be finding the criminal acts they were looking for, it was a stressful