Confidence Game - Christine Richard [70]
“In the September 11, 1998, MBIA investor conference call, which occurred only 13 days before the Capital Asset board meeting, management misleads investors not only about Capital Asset but also about the AHERF transaction,” Ackman pointed out.
During that same call—with more than 250 people listening in to get an update on MBIA’s financial condition—executives were asked about MBIA’s exposure to Capital Asset and several other businesses it had recently acquired, including any insurance guarantees extended as part of the investment.
“I would not characterize what we are doing as being aggressive,” David Elliott, MBIA’s chairman and CEO, said before handing the question off to Gary Dunton, who became CEO six years later.
Dunton laid out the numbers: MBIA had invested about $40 million in equity in the four companies that made up MuniServices, including Capital Asset. Total financing to all the companies was “something in the order of $100 million or so in financing of one type or another.” The number fell far short of the $450 million exposure that Dunton had revealed to Poiset during the board meeting only days earlier.
“On the conference call, both Dunton and then-Chairman and CEO David Elliott obfuscate and outright lie about the facts,” Ackman wrote.
If Dunton had answered the question about Capital Asset honestly, the stock would have plunged, and the rating companies likely would have put MBIA on credit watch or downgraded the credit rating, Ackman wrote. Rather than disclose its exposure, MBIA securitized it. “In the third quarter of 1999, MBIA securitized the remaining tax liens using an inflated value,” Ackman wrote. The liens “were sold in a securitization issued by an entity called ‘Caulis Negris, LLC,’ an entity named after a flawed Latin translation for ‘black hole,’ that is, a place where you might hide something that you hope no one will ever find.”
Ackman waited for the boom to fall. It didn’t.
He attempted to meet with MBIA’s audit committee to discuss Capital Asset. But the committee’s counsel rejected the offer, saying the audit committee members did not want to meet with Ackman because it could create the appearance of giving credence to his views.
“I assure you that if the audit committee is willing to meet with Pershing Square and its representatives, the only inference that will be drawn is that the audit committee is truly interested in understanding and evaluating the facts,” Stephen Fraidin, a legal adviser to Pershing Square and an investor in the fund, wrote. The audit committee proposed that Ackman meet with their lawyers and lawyers representing MBIA. But they had reached a stalemate. Ackman would not meet with MBIA attorneys, and the audit committee would not meet with a short seller.
Ackman did manage to get another meeting at Moody’s Investors Service, and he ran through a lengthy presentation on MBIA and Capital Asset. But the rating company remained silent about the issue.
Ackman grew increasingly frustrated. He sent a steady stream of e-mails to Chris Mahoney at Moody’s.
“In the rating agency congressional hearings that took place after Enron, a number of your colleagues testified to Congress about why Moody’s missed downgrading Enron,” Ackman began one late-night e-mail. “If and when MBIA blows up, and it will—it is simply a matter of time in my opinion—Moody’s representatives will again be dragged into a congressional hearing. Moody’s will not be able to say that it was unaware of what was going on at MBIA. That it was misled. It is no longer true that you don’t have the facts. You have the facts you need and you have the ability to get more than we have been able to dig up.”
“I apologize for putting you and Moody’s on the spot,” Ackman concluded. “I have simply lost patience, and it is 2 in the morning.”
Then, on August 11, 2005, the Wall Street Journal reported that Spitzer and the SEC