Confidence Game - Christine Richard [73]
Farner had recently drafted another report. This one addressed events that followed the AHERF bankruptcy, and it had been inspired in part by a reading of Ackman’s report Is MBIA Triple-A? “This document describes the actions that we believe MBIA was willing to take to conceal another AHERF-related loss,” UPMC’s report began. The report wasn’t about the reinsurance transactions regulators were investigating but about how MBIA dodged additional losses related to AHERF.
One year after the AHERF properties in Philadelphia filed for bankruptcy in 1998—and MBIA arranged its reinsurance transac tions—AHERF’s Pittsburgh properties were teetering on the verge of collapse. Those facilities avoided bankruptcy after the Pittsburgh group’s creditors agreed to write down some of its debt and refinance the rest. Banks, including JP Morgan and PNC Bank, took a 33 percent writedown. MBIA, however, did not report any losses or writedowns.
Farner believed the bond insurer embedded its losses in the complicated refinancing transaction that took place in 1999. The refinancing of Allegheny General Hospital’s debt “represents a particularly egregious example of the claims in the Gotham Report that MBIA’s practice is to defer losses by restructuring troubled credits,” Farner wrote.
Here’s how it worked, according to the report. MBIA charged just $500,000 to insure the hospital’s new bonds even though the insurance lowered the hospital’s borrowing costs by what Farner estimated was $25 million. Bond insurance was supposed to be priced to reflect credit risk, and the hospital had below-investment-grade ratings. Farner believed that the cheap insurance policy was a disguised writedown. In fact, MBIA effectively took the same 33 percent writedown as some of the hospital’s other lenders. MBIA had originally insured $68 million of Allegheny General bonds, so a 33 percent writedown would have amounted to just about $23 million or the approximate savings from the bond insurance that was essentially given away. “We can only conclude that MBIA’s management valued the ability not to admit any additional AHERF-related losses,” the report concluded.
Ackman wanted regulators to see the document. He called Farner’s office, leaving him a voice-mail message at 9:15 a.m.: “I don’t know if you saw the Wall Street Journal today, but it says that MBIA is close to a settlement with the regulators. It could come as early as next week. We are meeting with the [Securities and Exchange Commission] tomorrow at the SEC’s request. It may be the last time that we have an opportunity to present information to the SEC. I am certainly aware of the West Penn situation, but I do not know the details as well as you do. I appreciate the fact that you want to speak with them without your being perceived as being influenced by us. I don’t think there will be any harm in having a conversation.”
Farner was traveling, so his secretary sent him a message about Ackman’s call, but before Farner could respond, Ackman called again, shortly after 10 a.m. “There are real issues out there on what MBIA did. You know better than anyone else. I don’t want to have to do this, but I will have the SEC and [the attorney general] send you a subpoena. We are at the 11th hour now, and I do not want to see MBIA get away with a crime. Let me know if you will be going voluntarily on this, or will I have to have the regulators subpoena you.”
Ackman hoped that if regulators could piece together what they knew about the AHERF reinsurance deal with Caulis Negris and the refinancing of Allegheny General Hospital’s debt, then they would see the truth about MBIA. The company had encountered serious problems in the late 1990s, and the only way it kept investors believing in its zero-loss business model was by using deceptive accounting and disclosure.
When Ackman and Farner finally spoke, Farner said he would be happy to get a subpoena. The requests for