Confidence Game - Christine Richard [63]
Yet Ackman believed that the deal had created conflict behind the scenes. The company’s chief financial officer, Julliette Tehrani, left her post 10 days after the September 11, 1998, conference call to become an adviser to Elliott. Then both executives left the company a few months later and Brown stepped into the role of chairman and chief executive. Ackman found the explanation for these changes unconvincing. “I would like a little time to do various pursuits that are crazy, I realize, to most people,” Elliott told a reporter. “But I like to work outdoors—raking the leaves and mowing lawns—which I have had very little time to do.”
Now, six years later, Ackman hoped regulators would get to the bottom of the story.
“I always suspect management is trying to hide something,” O’glove wrote in the introduction to Quality of Earnings, one of the books Ackman sent Oliver White. “What is it they are trying to do cosmetically? I ask. And I start out by assuming the worst.”
ON MARCH 8, 2005, MBIA announced that it would restate its financial results for the last seven years to account for one of the AHERF reinsurance contracts as a loan. MBIA did so because, based on an internal investigation, it appeared there might have been a side agreement made by an executive at MBIA to reassume almost all of the AHERF risk that was transferred to Converium Re. The other two contracts, covering $100 million of losses, were not restated. The next day, MBIA said federal prosecutors had joined the attorney general’s office and SEC in seeking information about the reinsurance transactions.
Ackman returned to the attorney general’s office several weeks later. He had more to tell about MBIA’s disclosure, its accounting, and its derivatives business. He described the investment-management business as an abuse of its New York state-regulated insurance unit. MBIA Inc., the publicly traded holding company, sold securities that received a triple-A rating because they were guaranteed by MBIA’s regulated insurance subsidiary. MBIA Inc. then invested the funds in higher-yielding securities, pocketing the difference between its cost of funding and the return on the securities, Ackman explained. The insurance unit would not offer guarantees to other companies to engage in this business because the risk was too high, he argued. In effect, Ackman said, the transaction was a disguised dividend from the insurance company to its parent company.
The story Ackman presented was complex. He was deconstructing MBIA’s entire business, and regulators had no idea how to deal with that. Just getting everyone in the group up to speed on bond insurance was hugely time consuming, as one person involved in the MBIA investigation recalls. Insurance is mind-numbingly complicated even before one considers the municipal finance, asset-backed securities, collateralized-debt obligations, and credit-default swaps (CDSs) that made up MBIA’s business. “Ackman,” he says, “had been marinating in it.”
“He comes across as very smart, with an unusually intense affect,” explains the person who attended a number of Ackman’s presentations. “He’s leaning in, staring fixedly, talking for long periods of time. He’s bright. And he knows he’s bright.”
At his best, Ackman had a way of making others in the room feel like they were as smart as he was. At his worst, he came across as the only one smart enough to get it. Then there was the sheer volume of information he presented. “He had a tendency to throw in everything including the kitchen sink,” the person says.
ON MARCH 30, 2005, MBIA received a second round of subpoenas from the Securities and Exchange Commission and the attorney general’s office. Regulators wanted to know more about many of the issues Ackman had raised during their most recent meeting. They wanted more information on how the bond