Confidence Game - Christine Richard [58]
Ackman and Siefert took turns presenting their argument.
“There were audible gasps,” Siefert remembers, when he told the group that he estimated that MBIA was under-reserved by more than $6 billion. How can that be right? the SEC lawyers demanded. The company had taken only $300 million of losses in 30 years of business. The idea that it needed to shore up reserves against losses by $6 billion was absurd.
Yet it easily could have been more than that. The $6 billion estimate was just a sliver—1.1 percent—of the company’s outstanding guarantees, Siefert pointed out. The model was dangerous. The track record was deceptive, he told them.
Incentives, however, pushed management to take more risk. Despite the long-term nature of MBIA’s guarantees—which meant it would be years before investors knew whether MBIA was reserving enough—the company had structured its executive compensation in a way that encouraged management to push the stock price higher in the short term. Jay Brown’s compensation agreement called for stock options and restricted stock to vest if MBIA’s stock price traded above $60 for 10 consecutive days. Just a few days before Ackman and Siefert’s presentation to the SEC, the target was hit, an event worth more than $30 million to Brown.
Ackman and Siefert described for regulators the 1998 reinsurance transaction that allowed MBIA to avoid reporting a loss after AHERF filed for bankruptcy. It was deceptive, they argued. The accounting was wrong.
“How can you guys sit here and tell us that it was audited wrong?” one of the SEC lawyers asked Ackman and Siefert.
Either the auditors overlooked something or MBIA hadn’t disclosed everything about the deal, Ackman responded.
“Who was the company’s auditor?” another official wanted to know.
“PriceWaterhouseCoopers.”
“Let’s move on,” someone else suggested.
The presentation lasted about five hours, running through lunch and well into the afternoon. Ackman left the SEC feeling optimistic.
ONCE BACK IN NEW YORK, Ackman continued to sell off the assets in Gotham’s main funds. Ackman also worked out a deal with David Berkowitz to assume nearly full ownership of Gotham Partners Management Company, the entity overseeing the liquidation. It was not a particularly valuable asset, bringing in a fee of just 1 percent of the fund’s steadily dwindling assets, which was not enough to cover the wind-down costs.
The former partners struck a deal. Berkowitz agreed to accept a Gibson acoustic guitar, which originally cost about $1,000, in exchange for his stake in the management company. “He got a bargain,” Ackman remembers.
And he didn’t have to deal with Carl Icahn.
On April 16, 2004, Hallwood Realty Partners announced that it would be merging with another company and that the shareholders would be bought out for $137.91 a share, a substantial premium to the $80 per share Carl Icahn had paid Ackman. It looked to Ackman like the “schmuck insurance” was going to pay off.
Ackman called Icahn to congratulate him on the deal and to find out when Icahn would wire him $5 million, the amount Ackman believed his investors were entitled to under the schmuck insurance contract. Icahn told Ackman he was not getting anything because, in Icahn’s opinion, the transaction didn’t qualify as a sale.
Then the issue of MBIA came up. After Ackman had pitched Icahn on the idea of shorting the bond insurer, MBIA’s shares had risen to around $62 from $36. Icahn later disclosed that he lost $70 million shorting companies, including MBIA, when he released marketing materials in early 2005 for a hedge fund called Icahn Partners.
According to Ackman, Icahn said that not only was he not going to pay him on Hallwood but also he was going to sue him over his losses on MBIA.
Icahn denies the assertion. “I pulled his ass out of the fire with Hallwood,” Icahn says. “Instead of saying thank you, he sues me,” Icahn remembers. “And then