Confidence Game - Christine Richard [52]
“You want to take another break?” one of the SEC attorneys asked.
“It will take me literally two minutes,” Ackman replied.
After lunch, the SEC attorneys turned on the air conditioning before questioning continued. Ackman described his frustration in trying to get answers about whether MBIA’s guarantees of credit-default-swap contracts were legal, and how Fried Frank attorney Bonnie Steingart canceled her appearance at the New York State Insurance Department because partners in the firm’s structured finance group didn’t want to be in an adverse position with MBIA. He explained that Gotham tried numerous firms but had no luck finding an attorney willing to take on the issue. “We called around and we got the same answer pretty much everywhere,” Ackman recalled.
During the second day of questioning, the SEC attorneys became less confrontational. They even sought Ackman’s opinion on a few topics, including the credit-default-swap market.
“The problem with the credit-default-swap market,” Ackman said, “is that banks often have more information than their counterparties. That means they’re shifting risk to someone who knows less about the risk than they do.” But when Gotham made an investment—including one in the credit-default-swap market—“we want to know more than anyone in the world can know based on the public information,” Ackman explained. “And usually, by the way, most people don’t read the stuff anyway,” Ackman added. “So you’ve got a huge edge just by reading, right? And then if you really dig into something, you can really know more than the market.”
Ackman had even surprised himself with the extent of his MBIA research. It wasn’t until the law firm Covington & Burling sent him a photocopying bill to comply with the attorney general’s subpoena that Ackman realized he’d read and marked up 140,000 pages of documents on MBIA, including financial statements, notes, and securitization reports.
He was determined not to let all that research to go waste. At any opening, Ackman tried to hammer at the importance of the issues he’d raised in the MBIA report.
The SEC might find it interesting, Ackman offered, that when he had talked to Alice Schroeder at Morgan Stanley she had told him that a rating-company downgrade of MBIA would have a significant impact on the capital markets.
“What does that mean?” one of the SEC attorneys asked. “A significant impact on the capital markets? What are you referring to?”
“Well, imagine a highly levered institution that for regulatory-capital purposes needs to hold only a small amount of capital against its triple-A exposures. What if people wake up one day and find out that MBIA is not really a triple-A-rated company and, in fact, it is insolvent,” Ackman said. “That institution might have to put up more capital to meet its regulatory requirements, which could cause problems for them.”
It was not a topic regulators were interested in pursuing on a June afternoon in 2003. But five years later, downgrades of bond insurers would create gaping holes in the balance sheets of financial institutions around the world.
During his testimony, Ackman kept returning to the issues he’d raised in the MBIA report. MBIA was an important topic for the SEC, he argued.
“In my experience looking at companies, where there is one cockroach, there are more. And I found plenty of cockroaches,” Ackman insisted.
“I didn’t find anything that was fraud . . . you know, where I found some fraudulent . . .” Ackman stammered for the first time in hours of testimony. “It was all aggressive accounting, disclosure.”
He continued haltingly: “I just wanted . . . I don’t want it to come out later. I just want you to know everything I know . . . about everything.”
Ackman tried to engage the investigators in a discussion about the credit-rating companies. Given that the SEC was already looking at rating-company conflicts of interest, it ought to consider the glaring conflicts of interest created