Confidence Game - Christine Richard [66]
“Even more troubling is that the company may have made this transition without informing shareholders, regulators, auditors, creditors, or even the rating agencies,” Heitmeyer continued. “In fact, it appears that senior management may have gone to great lengths to conceal and disguise its exposure to Capital Asset and the tax lien industry as a whole.”
Lehman Brothers had been lending Capital Asset hundreds of millions of dollars so it could purchase tax liens, Heitmeyer explained. The loan, which gave Lehman a claim on Capital Assets’ tax-lien portfolio, was called a “warehouse line of credit,” and it provided short-term financing for the tax liens until they could be bundled together and financed for the long term through the sale of asset-backed bonds. It appeared to be a relatively low-risk way for Lehman to lend money because the bank could always sell the assets to recover on its loan.
As added protection, Lehman asked MBIA to absorb the first losses on the warehouse line in the event the tax certificates fell in value before they could be securitized. Starting in 1997, Lehman had gradually increased the percentage of losses it expected MBIA to cover. Eventually, Lehman became so concerned about the value of the tax certificates that it demanded to be fully paid back on the warehouse line by the end of 1998.
“Throughout MBIA’s required disclosure documents, no mention is made regarding this unique, substantial, and deteriorating relationship with Capital Asset and Lehman,” Heitmeyer said in his letter to Brown.
Brown wrote back to Heitmeyer, saying he would look into the matter, but it was the last Heitmeyer heard from MBIA.
When I called MBIA to ask about Heitmeyer’s letter, MBIA press director Michael Ballinger told me that the company had looked into Heitmeyer’s allegations years earlier and found nothing of substance. Furthermore, Heitmeyer was a disgruntled former business partner whose accusations should be taken in that context. As always, Ballinger insisted “this is not new news.”
When I called Heitmeyer back, he dropped a bombshell. “If you don’t believe me,” Heitmeyer said, “watch the videotape.”
The videotape of Capital Asset’s September 24, 1998, board meeting arrived in the mail several days later. Gary Dunton, who would later become MBIA’s chief executive officer; Chris Tilley, the MBIA executive who oversaw Capital Asset; and Richard Weill, MBIA’s vice chairman, had flown in from New York for the meeting at Capital Asset’s offices in West Palm Beach, Florida. They took seats around a conference table along with Heitmeyer, several Capital Asset employees, and Matthew Poiset, an independent board member.
It was clear Capital Asset was careening toward a crisis. Lehman Brothers had informed MBIA it was pulling the warehouse line of credit at the end of the year. There was no way the tax liens could be converted into cash in time to repay Lehman. Tempers flared.
During a break in the meeting, Poiset stopped Tilley as he was leaving the room. He wanted to know if Tilley could explain the obvious tension between Heitmeyer and the MBIA executives.
“Is the tape recorder still running?” Tilley asked. They checked the recorder in the center of the table and saw that it was off. What they didn’t realize was that everything taking place in the room was being picked up on a closed-circuit camera.
“We’re losing our shirts. That’s what’s going on,” Tilley said with exasperation.
Dunton laid it out in more detail: MBIA had lent Capital Asset nearly $100 million in subordinated debt to fund its tax-lien portfolio; it had guaranteed the first 25 percent of losses on Lehman’s $400 million line of credit; and it had insured more than $250 million of bonds backed by Capital Asset liens.
“So you’ve got close to $500 million of exposure to them,” Poiset said with astonishment.
“So if you think we don’t have the best interests of the company in mind,” Dunton snapped, “you are sorely mistaken.”
When the meeting resumed and the tape recorder was turned