Confidence Game - Christine Richard [74]
A SETTLEMENT WAS PROVING elusive, too. When MBIA announced third-quarter earnings on November 8, 2005, there was no news about a resolution. Instead, the company took a $75 million charge to account for its best estimate of what it expected eventually to pay in order to settle the regulatory investigation. MBIA had managed to “beat the numbers,” coming in below the $100 million amount leaked to the Wall Street Journal.
MBIA slipped in another bit of news. Although it had previously said that only one of the three AHERF reinsurance contracts needed to be restated as a loan, it now acknowledged that all three contracts were loans, not insurance.
“Can you tell us what changed with respect to the other two reinsurers on AHERF that required you to restate earnings?” asked Ken Zerbe, the bond-insurance analyst from Morgan Stanley, during the MBIA’s earnings call. “I thought these were—these other two—were true risk arrangements.”
“I don’t want to be too specific in terms of the regulatory matters,” replied Nicholas Ferreri, MBIA’s chief financial officer. “But going through the investigative process and going through all of the risk transfer requirements . . . and based on all of the information that has come through, it’s appropriate at this time to correct and restate the financials on those contracts.” MBIA had managed to turn the settlement into old news without actually coming to an agreement with regulators.
By the end of 2005, it seemed clear that Spitzer’s office had lost interest in everything except the AHERF transaction. It fit nicely into Spitzer’s high-profile pursuit of insurance giant American International Group (AIG) and his headline-grabbing takedown of the company’s CEO, Maurice “Hank” Greenberg. Spitzer showed that AIG used “insurance” contracts to make itself appear financially stronger while also entering into reinsurance arrangements with others, such as Brightpoint and PNC, to help them conceal losses.
Ackman’s other issues with MBIA weren’t as easy to pin down. “There was a lot of interesting stuff,” one person involved in the investigation recalls. “But it was a swamp, a morass.” Regulators couldn’t rely on Ackman’s accusations and analysis, he explains. Everything had to be checked out.
Still, Ackman pushed on. He and Jonathan Bernstein, the Pershing Square analyst assigned to cover MBIA, made frequent trips to Moody’s offices. For the most part, the meetings were professional and cordial, but things got a bit emotional on one occasion, Bernstein remembers. Ackman had been telling Moody’s analysts that he felt MBIA management had responded disingenuously to some of his criticisms in a posting on the company’s Web site.
One of the Moody’s analysts jumped in: “Wouldn’t any company defend itself if short sellers were making statements like this?”
“These are people who challenged my reputation,” Ackman said. “Do you understand what it’s like to have a company try to destroy you? To see your children’s friends shy away from them because their parents read lies about you in the Wall Street Journal?” Ackman was visibly angry.
“Let’s take a break,” Ackman said and walked out of the room.
Bernstein remembers it as his least favorite moment. It was detrimental when their arguments were seen as personally motivated. And they were up against enough resentment already, Bernstein felt. “They (the Moody’s analysts) were there because Bill had complained to their boss’s boss’s boss,” Bernstein says.
One Moody’s executive who attended a number of the meetings with Ackman recalls his reaction to the hedge fund manager. “He was persuasive, organized. He came off as a bit crazy.” And, yes, he agreed, “it seemed like a personal crusade.” Ackman, he felt, “was emotionally vested and obviously financially vested.” That was always a big issue: the