Confidence Game - Christine Richard [54]
Ackman decided Siefert was the right choice after he read a report Siefert worked on as part of a team of court-appointed examiners in the bankruptcy of Spiegel, a Chicago-based mail-order company. Ackman found it to be a brilliant piece of forensic accounting and research that described how a 100-year-old company collapsed under the weight of subprime lending.
Under the heading of “accounting irregularities,” the examiner’s report described how Spiegel covered up its surging delinquency rates on its credit cards. A borrower who was six months delinquent on a $1,000 credit-card bill could be considered current again just by making one minimum payment. The company initially disclosed this unusual accounting treatment but later stopped mentioning it in its filings. The omission had a material impact on how investors viewed the performance of the loans, according to the examiner’s report. Eventually the company stopped filing financial statements with the SEC altogether, and later it collapsed.
That MBIA had insured $840 million of bonds backed by Spiegel credit-card receivables piqued Ackman’s interest all the more in the report.
Siefert clearly understood the complex world of securitization and how companies could use it to play games and hide underlying weaknesses. But he was reluctant to take the assignment with Ackman. He’d never done work for a short seller before. Besides, there wasn’t much upside to taking on MBIA.
“MBIA is a powerful company, a scary company,” Siefert remembers. “I wasn’t sure I wanted to be in an adversarial position with [it].”
But Ackman persisted. “Spend 40 hours looking through the information [about MBIA],” Ackman told Siefert. “If at the end of the week you don’t want to go forward, I’ll pay you and we’ll part friends.”
Siefert agreed. He and another accountant with the firm, David Brain, arrived at Gotham’s offices for the one-week review. Ackman had set up four folding tables piled with MBIA documents. In short order, Siefert was hooked.
The first issue that caught Siefert’s attention was the company’s reserving. Siefert had audited small-town savings-and-loan (S&L) associations early in his career. These institutions mostly made local mortgage loans, often with mortgage insurance attached. As a result, the S&Ls had a history of almost zero losses, and they reserved as if they expected the future to look much like the past. Then the industry was deregulated, and the S&Ls moved into riskier commercial finance. When Siefert said they needed to start reserving more, management would invariably insist, “But we’ve never taken losses.” MBIA’s situation was reminiscent of that of the S&Ls. The company was moving into a fundamentally different type of business by guaranteeing structured finance, yet it insisted on seeing its future as an extension of its past.
Something else caught his eye: MBIA’s accounting treatment of its largest loss—the result of the 1998 bankruptcy filing by the Allegheny Health, Education, and Research Foundation (AHERF). MBIA did not take a loss in the third quarter of 1998 to reflect the expected claim; instead it bought reinsurance after the bankruptcy filing to offset the loss. The reinsurance contracts magically erased the loss. “My first reaction was, ‘This really smells,’” Siefert remembers. “They’re willing to do anything to protect the triple-A rating.”
I HAD TRIED TO FOLLOW up on some of the issues in the Gotham report earlier in the year but had no luck. MBIA declined to comment. Ackman didn’t return my calls. After reading about Gotham in the newspapers, I assumed charges were pending against Ackman.
Then I was assigned to do a story on MBIA in the fall of 2003. Jim Lebenthal, an MBIA director