Confidence Game - Christine Richard [64]
Despite the investigation, the New York State Insurance Department allowed MBIA to take special dividends out of its insurance unit for the first time in its history. The dividends were approved in both the fourth quarter of 2004 and the first quarter of 2005. MBIA used the cash to buy back shares, helping to boost its share price. A few days after the announcement that it had received a second round of subpoenas, MBIA issued a press release saying it had purchased more than 3.4 million shares in the first quarter and planned to continue purchasing shares whenever market conditions permitted.
Although New York State insurance regulators clearly weren’t worried about the creditworthiness of the company, the market was growing more skeptical. News of the regulatory investigation had pressured CDS spreads wider on both MBIA Inc. and its insurance unit. On April 26, it cost $55,000 a year to buy protection against a default on $10 million of MBIA debt compared with $33,000 to buy the same amount of protection on its largest competitor, Ambac Financial Group. In a letter during the last week of April, Ackman told Pershing’s investors that the fund’s short position on MBIA was its second most profitable investment during the first quarter of 2005.
The regulatory attention on MBIA generated lots of press, with articles appearing in the New York Times and the Wall Street Journal, and this time MBIA was on the defensive. Fortune magazine revisited the arguments Ackman made in his original report on MBIA. MBIA’s chief executive officer, Gary Dunton, bristled at Ackman’s criticism. “Think about what we do. We build infrastructure around the world. We enable countries to build markets. We do good. I don’t know why anyone would question the legitimacy of this business,” MBIA CEO Gary Dunton told Fortune’s Bethany McLean. “My mom says there are evil people out there,” Dunton added.
The investment weekly Barron’s wrote about MBIA after the firm received a second round of subpoenas. “MBIA projects an image of financial health and rectitude,” columnist Jonathan Laing wrote. “Woe to executives—and investors—if regulators prove it’s a facade.”
Success inspired Ackman to try again with Moody’s Investors Service. “Mr. Rutherfurd, two years ago we had an e-mail dialogue concerning a research report I wrote on MBIA,” his message began. He explained that since his last contact with Rutherfurd, the Gotham investigation had ceased, MBIA had restated six years of earnings, and the bond insurer had received more subpoenas related to issues raised in the Gotham report. “It is clear that you did not take me seriously two years ago, I guess because of all of the negative publicity,” Ackman wrote. “I would be willing to meet with you, your chief risk officer, and anyone you would like to attend such a meeting.”
He received a one-line response: “Dear Mr. Ackman, I am retiring from Moody’s and have forwarded your letter to my successor.”
But in the early summer of 2005, Chris Mahoney, Moody’s chief credit officer and vice chairman, contacted Ackman about setting up a meeting. Roger Siefert, the Kroll accountant, accompanied Ackman, along with Scott Ferguson and Jonathan Bernstein from Pershing’s investment team, to Moody’s downtown office.
“It was the first time that a third party had come in and lobbied for a rating downgrade,” says a person who attended some of Moody’s many subsequent meetings with Ackman. “It was unprecedented.” And in many ways, it was unappreciated. “He made so much noise, ran it as high up the org chart as he could. So we said, ‘Okay. Let’s just humor him,’” the person recalls.
Ackman delivered what was becoming a well-practiced monologue. He talked about MBIA’s move into insuring structured finance,