Confidence Game - Christine Richard [60]
Peretz’s appeal stirred a response at the SEC, which asked Ackman to return to Washington on September 8, 2004. Ackman, Siefert, and Brain flew down to present their concerns again. As the day ended, Ackman remembers Kinsey asking, “If you had to give us one thing, one thing that’s black and white, one thing that you could take before a judge and that he would understand, what would that be?”
“AHERF,” Ackman said without hesitating. “It’s buying insurance after your house burns down.”
The day after their return appearance at the SEC, Siefert got a call from the SEC. They wanted to meet with the two accountants again, this time without Ackman. “They might have thought we were suffering from Patty Hearst syndrome,” Siefert jokes, referring to the kidnapped newspaper heiress’s apparent loyalty to her captors and willingness to break the law for them. Essentially, the SEC wanted to know whether the forensic accountants would tell the same story without Ackman present. They did.
ON NOVEMBER 18, 2004, MBIA announced that it had received subpoenas from the SEC and the New York attorney general’s office. Within a few days, MBIA clarified that regulators wanted to know more about the AHERF reinsurance deal. In all the hours of testimony Ackman gave at the attorney general’s office and at the SEC, he was asked almost nothing about his statement in the Gotham report that the AHERF transaction “was a loss-deferral, earnings-smoothing device.” It appeared to Ackman that the regulators’ questions largely came from MBIA. Ackman took the absence of questions about AHERF to mean that the subject was not something the company wanted the attorney general’s office or the SEC delving into. Rereading the 1998 annual report, Ackman noticed MBIA’s carefully worded discussion of the AHERF transaction, which gave the impression that MBIA was prepared for AHERF’s bankruptcy filing.
“Though we had not experienced a major loss in nearly a quarter century of operation, our years of testing worst-case scenarios paid off,” David Elliott, MBIA’s CEO and chairman at the time of the AHERF loss, wrote in his letter to shareholders. “When a large issuer whose debt we insured filed for bankruptcy protection, reinsurance mitigated any impact on our earnings.” Elliott was rewriting the company’s history to make sure it didn’t undermine the no-loss business model.
At the end of the 1998 letter, Elliott told shareholders that he was retiring, handing off the company to Jay Brown, a longtime board member, with the satisfaction and peace of mind of knowing MBIA was in good health. Ackman had underlined the next sentence: “There is a saying from the Lakota Indians which goes: ‘You will be known forever by the tracks you leave behind.’”
Those tracks showed that MBIA had veered from the business of zero-loss underwriting and then strayed even further in trying to cover it up.
Chapter Ten
Scrutiny
MBIA projects an image of financial health and rectitude. Woe to executives—and investors—if regulators prove it’s a facade.
—JONATHAN LAING, BARRON’S, APRIL 2005
TWO YEARS AFTER BILL ACKMAN wrote to his investors that he would wind down Gotham Partners, he was signing up many of those same investors in a new fund. Leucadia National Corporation had agreed to let Ackman take on outside investors a year ahead of schedule. The Leucadia-only fund had returned 29 percent over the first three quarters of 2004. Many of Ackman’s previous investors were eager to sign on again.
When the newly opened fund began operations on January 1, 2005, Ackman was far from Wall Street, angling for giant sea trout at a fishing lodge in Tierra del Fuego, at the southernmost tip of South America. He had bid for the stay at the Kau Tapen Lodge along the Rio Grande at a charity auction. The trip was a chance to celebrate the successful launch of his fund and to kick back—except that Ackman isn’t very good at kicking back.
“He’s so technical and inquisitive that he drove everyone crazy,” remembers