Confidence Game - Christine Richard [65]
One of the Moody’s analysts stopped him there. If the bond insurer were threatened with a downgrade, then it could go out and raise more capital, he said. Ackman disagreed. The need for capital would undermine management’s and the business model’s credibility, Ackman said. No one would want to put money into a company that had just proven its business model was broken, he added.
“Well, there’s no way they could survive a downgrade,” one of the Moody’s analysts said.
“Wait a second. You don’t mean that,” said Moody’s chief credit officer Mahoney.
“How can a company that would go out of business if it lost its triple-A rating be triple-A rated?” Ackman asked Mahoney.
Mahoney agreed that it couldn’t. “That would make no sense,” he said. “We wouldn’t rate a company triple-A that couldn’t withstand a downgrade.”
“It was a little victory, and there weren’t many victories with Moody’s,” Bernstein says. Siefert remembers the comment, too. It was a moment when he thought someone at Moody’s saw the huge paradox of a company being triple-A rated even though the only thing that stood between the company and its collapse was a triple-A rating.
And maintaining that triple-A rating was only going to get harder. Ackman noted that MBIA faced a nearly impossible task of increasing its earnings and guarantees without venturing into riskier lines of business. In fact, the company had already stumbled. That’s why MBIA engaged in the AHERF transaction and others that helped it bury losses. “Management integrity has been compromised to uphold the ‘no-loss illusion,’” he said.
Chapter Eleven
The Black Hole
We’re losing our shirts. That’s what’s going on.
—CHRISTOPHER TILLEY, MBIA EXECUTIVE, 1998
IN THE SPRING OF 2005, as the Securities and Exchange Commission (SEC) and the New York attorney general’s office were investigating MBIA’s handling of its largest loss, Bill Ackman had moved on to the company’s second-largest loss.
What made this loss particularly intriguing was that the bonds had been issued not by a municipality or a Wall Street firm, but by an MBIA-owned company called Capital Asset Research Management. The firm purchased past-due tax bills from cities and counties at a discount and then tried to collect on the debts. These tax certificates also gave holders the right to collect interest and penalties and, if the debt went unpaid, to foreclose on the property. The plan had been for Capital Asset to purchase tax liens and use them as collateral to back bonds. MBIA would then insure the bonds.
But Capital Asset ran into problems. In late 1998, MBIA bought out the company’s founder and part-owner Richard Heitmeyer. MBIA said it saw great prospects for Capital Asset, but less than a year later MBIA took a $102 million charge to write down its stake in the tax lien company and exit the business. Capital Asset sold three bond issues backed by tax liens and guaranteed by MBIA before the business was shuttered. By the spring of 2005, MBIA’s insurance unit had set aside $100 million to pay expected claims on those bonds.
Ackman had obtained a copy of a letter Heitmeyer wrote to MBIA’s chief executive officer (CEO) Jay Brown in 1999. Ackman suggested I call Heitmeyer. When I did, he was eager to tell his story about Capital Asset and faxed me the letter.
“I thought we should open the lines of communication directly between the two of us,” Heitmeyer wrote in the August 1999 letter. “Unfortunately, your president’s latest announcements that the losses attributable to Capital Asset are ‘one-time’ in nature and ‘represent management’s best estimate of its cost of exiting the business’ are at best inaccurate and more than likely could be construed as deliberately misleading.
“The troubling aspect of this situation,” the letter continued, “is not the sheer magnitude of risk for MBIA—albeit a significant sum—but the fact that MBIA’s management appears to have