Confidence Game - Christine Richard [75]
As far as many in the market were concerned, a downgrade of MBIA remained unthinkable. When the Wall Street Journal asked James Lebenthal, chairman emeritus of municipal bond broker Lebenthal & Company and a former MBIA board member, what would happen if MBIA were to lose its top rating, he summed up the view held by many people. “You’re asking me to speculate on the divinity of the emperor,” Lebenthal said. “The emperor is divine.”
Ackman’s frustration with Moody’s boiled over at the end of 2005 when he wrote to the credit-rating company’s board of directors. “I am writing to bring to your attention two inaccurate Moody’s ratings that threaten the reputational integrity of Moody’s and potentially create personal liability for you as a director of Moody’s Inc.,” the letter began. Among those receiving the letter were Raymond McDaniel, Moody’s chief executive officer and chairman of the board; Robert Glauber, president of the National Association of Securities Dealers in Washington, DC; and Ewaldus Kist, the former chairman of ING Groep NV in Amsterdam.
Ackman explained that he was sending the letter to the board because Moody’s had failed to act on MBIA even though Pershing Square and Roger Siefert, one of the top forensic accountants in the country, had met three times with high-level Moody’s executives and analysts, providing evidence of aggressive and fraudulent accounting and “poor management character and candor.” Despite an ongoing investigation that had led to MBIA’s having to restate its results twice, he continued, Moody’s had not even placed MBIA’s ratings under review. There were many other issues that Moody’s was missing, which Ackman wanted to explain to the board.
“Moody’s Aaa rating is so powerful and credible that investors don’t do any due diligence on the underlying credit,” Ackman pointed out. These MBIA-insured obligations were piling up at a rate of about $2 billion a week, he explained. “Every day that Moody’s incorrectly maintains an Aaa rating on MBIA, these extremely risk-averse investors unwittingly buy bonds that are not deserving of Moody’s Aaa rating.”
The board declined Ackman’s offer to meet. John Goggins, Moody’s general counsel, wrote to Ackman to say that board members were not permitted to engage in discussions about individual credits. The policy was designed to avoid “even the appearance of inappropriate influence,” he wrote.
ON FEBRUARY 6, 2006, Ackman wrote to investors with the good news that they had earned 40 percent, after fees, on their investment in Pershing Square in 2005. The return would have been better without the short position on MBIA, which contributed a negative 3.3 percent to the result. “MBIA was our largest loser for the year despite news flow which would make any short seller proud,” Ackman wrote.
Wendy’s International was the fund’s biggest winner in 2005. The fast-food company’s shares surged after it agreed to a plan proposed by Ackman to spin off its Tim Hortons coffee and donut unit. Ackman’s most recent activist campaign, directed at McDonald’s, landed him on the cover of Barron’s under the headline “Meet Mr. Pressure.”
Pershing Square moved its offices from the Bowery Bank building on 42nd Street to 888 Seventh Avenue with views of Central Park, where tenants included hedge fund manager George Soros and private equity investor David Bonderman. At the end of 2005, Ackman bought a $26 million co-op in the Beresford Building overlooking Central Park.
Ackman’s success elsewhere made Jonathan Bernstein’s job all the more frustrating. As the primary analyst on MBIA, Bernstein read every article and every credit-rating company report that mentioned MBIA. He helped Ackman organize vast amounts of material for presentations to regulators and rating companies.
Despite all of Ackman’s efforts, “the court of public opinion just wasn’t ruling on MBIA,” Bernstein says.
When Bernstein met friends after work