Confidence Game - Christine Richard [53]
“Yes. We might want to talk about that on another day,” one of the attorneys said.
The investigation found nothing, yet it touched on just about every issue that would come back to haunt the financial system: too much leverage, too much trust in the triple-A rating, too little skepticism about credit-rating companies, and an unreasonable amount of complexity. Ackman revealed in his testimony that a company prohibited from writing CDS contracts was nonetheless writing billions of dollars of them. Regulators seemed to simply ignore the information. Hours spent debating the vagaries of MBIA’s asset-backed commercial paper program failed to stir questions about the standards of a market deemed one of the safest places in the world to invest. The asset-backed commercial paper market collapsed in the summer of 2007, marking the beginning of the financial crisis.
Regulators never appeared to resolve why Ackman and MBIA could be so far apart on their estimates of the company’s CDO losses. The next time serious questions were raised about super-senior CDO values, it was too late. By late 2007, confidence in one financial institution after another cratered on fears they weren’t admitting the full extent of their losses, including those on massive portfolios of super-senior CDOs.
“Anything else before we end for the day?” the other attorney asked.
Ackman seized his chance. “It is worth remembering,” Ackman said, “that every Wall Street firm does a huge amount of business with the bond insurers, including MBIA, Ambac, and FSA. Frankly, the fixed-income markets are what have saved investment-banking profits, because the IPO [initial public offering] market is basically gone. That means MBIA might just be the biggest business generator on Wall Street,” Ackman added. “No one wants me to be right on MBIA.”
The SEC attorneys told Ackman they’d be happy to hear his concerns about MBIA if he wanted to come back at a later date.
Of course, he wanted to come back, Ackman told his attorney, Stein. Ackman wanted the opportunity to make his case to the SEC that he was right and that MBIA would fail.
Stein didn’t see it that way. “Drop it and go home,” he told Ackman.
Chapter Nine
Turning the Tables
There is a saying from the Lakota Indians which goes: “You will be known forever by the tracks you leave behind.”
—DAVID ELLIOTT, FORMER CHIEF EXECUTIVE OFFICER OF MBIA
BY LATE SUMMER 2003, the New York attorney general’s investigation of Gotham Partners went silent. Aaron Marcu, Gotham’s outside counsel, had rejected the offer of a civil settlement with the attorney general’s office earlier in the summer. “You just don’t have it right. He’s done nothing wrong,” Marcu told Roger Waldman in Eliot Spitzer’s office. Marcu offered to come in and review the report line by line with Waldman to show that Gotham had sources to support every assertion. Waldman never responded to Marcu’s offer.
The attorney general’s office typically doesn’t announce when it is ending an investigation, leaving a lingering uncertainty in the minds of those investigated. “The classic advice you get from attorneys is to stay out of regulators’ sight,” says an individual who was involved in the Gotham investigation. The idea is to let some time pass and hope the regulators forget about you. “Going back into the den had to have been against any sane attorney’s advice.”
In fact, Marcu did advise Bill Ackman to let it be. “Twenty-five, maybe thirty times,” Marcu remembers.
But Ackman was determined to get back in front of both the Securities and Exchange Commission (SEC) and the attorneys in Spitzer’s office. To bolster his case, he set out to find a well-regarded accountant to support his arguments and lessen the skepticism he had encountered