Confidence Game - Christine Richard [57]
Ackman also took satisfaction in reading the report by the Government Accountability Office (GAO) on Farmer Mac. The government watchdog’s report shared the concerns Ackman raised in his three research reports on Farmer Mac. Many of the questions that had led to hours of tense debate at the attorney general’s office were settled in a simple statement in the GAO report’s conclusion: If Farmer Mac “were to undergo stressful economic conditions, it could face substantial funding liquidity risk,” the report concluded.
There was no such feeling of closure with the MBIA position. “The more I look, the more I find,” Ackman wrote in an e-mail to Cumming. MBIA was increasing its exposure by billions of dollars every week, Ackman told him. It couldn’t be easy to find that many good risks, ones in which MBIA could price the risk below market and still make money. “All they need to do is to keep signing their name with the blessing of the rating agencies and they can refinance any broken credit and the cash just keeps pouring in,” he wrote. “It will be years before anyone knows how the deals will perform.”
“Keep going,” Cumming wrote back. “You will eventually be seen as a prophet, but hopefully not as a prophet in rags railing against the wind!”
Ackman had explored every path to get the word out about MBIA. In the process, he’d given days of testimony about it. He’d talked to colleagues, investors, friends, Wall Street analysts, insurance regulators, attorneys, and reporters. He’d attempted to engage the heads of all three credit-rating companies. He’d cornered the chief executive officer (CEO) of MBIA’s audit firm. Ackman’s wife and other family members also were frequently subjected to his latest thoughts on the company.
Of all the responses he’d gotten to his arguments and presentations, his 5-year-old daughter’s pleased him the most. “What is MBIA?” she finally asked him one night as he was reading her a bedtime story. Ackman launched into an explanation, describing MBIA as a company that wasn’t what it appeared to be and explaining how no one would stand up to it and point out the obvious. The story seemed familiar to her. “It sounds like The Emperor’s New Clothes,” she concluded.
WITH THE HELP of Roger Siefert, Ackman drafted a letter to the Securities and Exchange Commission seeking a meeting to discuss MBIA. “The potential impact of the overstated credit quality of MBIA on market participants is substantial since MBIA guarantees a total of over $800 billion of such obligations,” Ackman wrote. The exposure, he noted, is “growing by approximately $100 billion per year.” The day after he sent the letter, Ackman got a call from Walton Kinsey, an attorney at the SEC. “When can you come down?” Kinsey asked.
On February 3, 2004, Ackman and Siefert traveled to Washington. Their appearance at the SEC drew a crowd: lawyers, accountants, an insurance expert, officials from the enforcement and corporate finance divisions. They distributed their presentation, which opened with the question, “How can this AAA-rated, S&P 500, governance-award-winning company have material and undiscovered false and misleading accounting, liquidity, and solvency risks?”
Ackman explained that the credit-rating companies were MBIA’s de facto regulators, which created a serious conflict of interest. The company guaranteed 31,000 securities, almost all of which would have to be downgraded if MBIA lost its top rating. It would be a serious embarrassment for Moody’s and S&P. “We jokingly refer to MBIA as the mañana company,” Ackman had told the SEC when he’d testified, and now he had the chance to lay it all out. “Anything