Confidence Game - Christine Richard [72]
Not everyone at Pershing Square was so convinced. Other members of the investment team weren’t as eager to talk about MBIA as they were about some of the fund’s other positions. Often, when White followed up with someone in the office about some MBIA issue Ackman had raised in a meeting, he was told, “Look, it just doesn’t matter.”
Members of the investment team believed Ackman was right about the company, but the problem was that the market just didn’t care. Unless the market reacted, Pershing Square’s investment in MBIA credit-default swaps would be a drag on performance.
By all indications, that drag was going to continue. On November 2, 2005, the Wall Street Journal reported that an MBIA settlement with regulators was expected by the end of the week. According to unnamed sources, the bond insurer would pay less than $100 million to settle the probe into its handling of losses related to the Allegheny Health, Education, and Research Foundation (AHERF), wrapping up the year-long inquiry as soon as the end of the week.
MBIA stock soared $5, or nearly 9 percent, to close the day at $62.49. It was the biggest gain for the shares in more than three years. “The real concern has been that regulators would find broader issues that would implicate current management or threaten the ratings,” Mark Lane, an analyst at William Blair & Company in Chicago, told Bloomberg News. The article “is reducing anxiety about broader issues,” he added.
Ackman’s friend Paul Hilal sent him the Wall Street Journal article in an e-mail headlined: “Ouch.”
“I don’t believe it,” Ackman shot back.
The article was titled “MBIA Nears Civil Settlements—Investors Hope the Pacts Will Silence Bearish Critics.” Though the article didn’t quote any of these hopeful investors, it did note that an unusually high percentage of MBIA’s shares had been sold short.
If the story was leaked to the Wall Street Journal to silence further negative articles, the strategy was successful. I’d been pushing my editor to let me write again on the Caulis Negris transaction. I had even proposed taking a short unpaid leave of absence so I could dig into the story without the distractions of day-to-day market reporting.
The response was not positive. The managing editor, who oversees bond coverage at Dow Jones, told me I was obsessing over a story that was too complex and didn’t interest our readers. Look at the Wall Street Journal’s article on MBIA and its pending settlement, he suggested. That story moved the stock. “That’s the kind of story you should be breaking.” My story on MBIA and its complicated Caulis Negris transaction had been completely ignored, he added.
“If taking a leave of absence to write about bond insurance is what you really want to do,” he continued, “you should think about whether Dow Jones is the right place for you.” By the end of 2005, I was thinking about a new job.
Meanwhile, the Wall Street Journal article predicting a settlement lit a fire under Ackman. He wouldn’t let regulators drop the investigation. Several months earlier, Ackman had been contacted by David Farner, an executive at the University of Pittsburgh Medical Center (UPMC). Farner had followed the AHERF situation closely throughout the 1990s because its health-care operations in Pittsburgh, including the group’s flagship facility, Allegheny General Hospital, were a direct competitor of UPMC. Long before AHERF filed for bankruptcy, Farner had seen red flags in Allegheny General Hospital’s financial statements. In a 14-page report sent to both MBIA and the credit-rating companies, Farner, a former Arthur Anderson accountant, had taken apart the hospital’s disclosure. He flagged problems with arrows and notations all through the financial statements: “Investment income included in operating revenue.” “Cash transfers to AHERF exceed $14 million.” “Statements