Confidence Game - Christine Richard [55]
That’s not to say that there wasn’t a benefit to bond insurance, MBIA’s supporters insisted. By insuring a bond and stamping the triple-A credit rating on it, companies such as MBIA and Ambac turned the security into a kind of commodity that could be easily traded. No one needed to understand the credit fundamentals of a water-and-sewer authority in rural Ohio if the debt was insured. Hy Grossman, the legendary Standard & Poor’s municipal bond analyst who made the fateful decision to suspend New York City’s rating in 1975, once told a colleague, “The minute a bond is insured, it loses its identity.”
What MBIA provided was not so much insurance, the argument went, but it was in the business of marketing triple-A ratings. To talk about the company experiencing material losses was to be naive about the real nature of the business.
When I asked an insurance analyst whether he thought the credit-rating companies would ever rethink MBIA’s top rating, he was skeptical. “For Moody’s or [Standard & Poor’s] to put a bond insurer on negative watch (indicating a rating cut was being considered) could have extremely negative ramifications” for the entire bond-insurance business, said David Merkel with Hovde Capital Advisors in Washington, DC. “It’s a bit of a confidence game.”
The last time I had tried calling Ackman, back in January 2003, he wasn’t talking to the press. When I called him again in the fall of 2003, he appeared to be on the offensive again. We met at his office, and he reviewed his arguments on the company. He told me he believed the Gotham investigation had concluded without finding that he had done anything wrong, but he couldn’t be sure. For that reason, he didn’t want to be quoted on MBIA, but he was happy to talk about it.
I asked him if he’d read about Student Finance Corporation, a company that securitized student loans made by truck-driving schools. Not surprisingly, he had.
MBIA insured hundreds of millions of dollars of the company’s bonds. The program was successful for a while, then suddenly the loans were defaulting at a 70 percent rate. Student Finance Corporation filed for bankruptcy, leaving MBIA and another insurance company called Royal Indemnity Corporation to battle over who would pay off the bondholders.
How could the company expect to maintain zero losses while insuring bonds backed by loans on which 7 out of 10 borrowers defaulted? MBIA insisted that even though the deal had gone wrong, its insurance unit ultimately wouldn’t suffer a loss. This was part of a broader view in the credit markets that bad lending could somehow be free from negative consequences. The deal was one of many that made reporting on MBIA such a fascinating intellectual challenge.
Ackman and I had found some common ground, and we began a conversation that continued for more than five years.
Years later, Ackman would court the press again. But for a long while he kept a low profile. This was not surprising. The general perception on Wall Street and among financial reporters was that he had tried to destabilize confidence in MBIA and that charges were pending against him.
The company encouraged that view. Whenever I called MBIA, press director Michael Ballinger immediately labeled my questions “short sellers’ questions.”
“That was in the Gotham report, no?” Ballinger would say. Then he’d remind me that the report and its author were under investigation. Because Ackman had covered just about every aspect of MBIA’s business in the report, there wasn’t much one could ask MBIA that the company considered fair game.
This line of defense only increased my interest in scrutinizing MBIA further. It was a version of the company’s mantra that there was never “new news.” “A marked enjoyment can be found in identifying self-serving belief and contrived nonsense,” economist