Confidence Game - Christine Richard [61]
For six days, Ackman and White, a philosophy graduate from the University of North Carolina at Chapel Hill, talked and fished. White explained technical details to Ackman about fly selection, casting the line, and luring the fish. Meanwhile, Ackman spotted the next member of Pershing Square’s investment team.
“At the end of his stay, he asked me—no, he told me—I should come to New York and work for him,” White says. It wasn’t uncommon for guides to be offered jobs by visiting executives and entrepreneurs. Camaraderie was easily kindled while fishing. “But usually you could just tell it wasn’t sincere,” White recalls. This time it was. Several months later, White returned home to North Carolina and found a box had arrived from New York in his absence. It was from Ackman and filled with books: Graham and Dodd’s Security Analysis, Peter Lynch’s One Up on Wall Street, Benjamin Graham’s Intelligent Investor, Lawrence Cunningham’s The Essays of Warren Buffett, and Thornton O’glove’s Quality of Earnings.
These were Ackman’s favorite books on investing, and he wanted White to read them all. Ackman made his reputation on Wall Street as an activist investor, a high-profile role that requires a knack for showmanship. But those who know Ackman well say he is an analyst at heart.
“He is the smartest analyst I’ve ever met,” says Rafael Mayer, managing director of Khronos LLC, a family office and fund of funds investor, and a friend of Ackman’s. “He looks at something and he just decomposes it.”
That process began with questions, lots of questions, including the one Ackman had badgered White with so many times while they were fishing: “Why?” It was also the question Ackman had tried to answer when he looked at the MBIA reinsurance transaction now being investigated by regulators. “Most investors have no clear conception of how companies can report earnings that are partially illusory; to them, numbers are numbers,” O’glove wrote in his 1987 book. Meaningful analysis requires one to understand the quality of earnings numbers, he stressed. And the reason so few investors do this kind of work, he added, is that “such research is usually negative. Most investors would rather kill the messenger than think about the message.”
SEVERAL WEEKS AFTER he returned from South America, Ackman, along with Marty Peretz, and Eliot Spitzer were huddled around a small table in the attorney general’s office, eating pressed turkey sandwiches. Peretz had arranged the lunch meeting. Ackman wanted to point Spitzer toward the important issues at MBIA, including its use of bogus reinsurance in 1998.
This was an important transaction. It showed how MBIA could not tolerate the perception that it sometimes made mistakes. In fact, Ackman insisted, the bankruptcy filing of the Allegheny Health, Education, and Research Foundation (AHERF) threatened MBIA’s zero-loss business model. As the hospital cracked under the weight of too much debt, its management raided charitable endowments it controlled for cash and propped up earnings by understating the amount of uncollectible hospital bills it carried on its books. In July 1998, when the city or any other government entity failed to come to its rescue, AHERF’s Philadelphia subsidiaries filed for bankruptcy protection.
“We did not understand that while most hospitals are essential, not all hospitals are essential,” Jay Brown had explained to Ackman in August 2002. MBIA’s guarantee of hundreds of millions of dollars of hospital bonds had been a miscalculation, and it came back to bite the bond insurer at the worst possible time.
Russia had recently defaulted on more than $30 billion of debt and severed the ruble’s link to the U.S. dollar. Asia’s year-old currency crisis was morphing into political and social chaos in Indonesia and Malaysia. Long Term Capital Management, a hedge fund run by a team of Nobel Prize-winning mathematicians, was