Confidence Game - Christine Richard [76]
Rafael Mayer, an early investor in Pershing Square, says that Ackman’s drive to bring people around to his way of thinking can backfire. His impatience can make people feel a bit used, and his thoroughness can be seen as obsession, Mayer says.
“Look at Markopolos,” Mayer says, referring to Harry Markopolos, the fund manager who tried for 10 years to warn the Securities and Exchange Commission in detailed letters and e-mails about Bernie Madoff’s Ponzi scheme. “Unfortunately, if you write long letters, people think you are crazy,” Mayer says.
Even Ackman’s friends poked fun at his relentless pursuit of MBIA. For his 40th birthday, Ackman’s wife Karen threw him a party, inviting more than 100 family members and friends to the Blue Hill at Stone Barns restaurant in upstate New York. Former Gotham colleagues David Berkowitz and David Klafter composed a song in Ackman’s honor set to the tune of the 1936 hit “The Way You Look Tonight.” The song—hitting as it did on Ackman’s well-known self-assurance—elicited laughter and applause from the crowd.
For those of Ackman’s investors who heard the song, some of the spoof lyrics would prove prescient. These were good times for investors—the Dow Jones Industrial Average was flirting with 11,000, and the rise in property prices seemed unstoppable. But the good times wouldn’t last forever. “Some day, when we’re awfully low, when the world is cold,” Klafter and Berkowitz sang, “we will get a glow just thinking of you, and the way that you were right.”
Chapter Thirteen
The Insurance Charade
If it is true that municipal bond defaults are made improbable by implicit (and explicit) state guarantees, then what we have is a whole industry that serves essentially no function other than to transfer money from the pockets of the public to the pockets of management and shareholders.
—RAFAEL MAYER, INVESTOR, FALL 2006
WHEN HURRICANE KATRINA slammed into the Gulf Coast in the summer of 2005, it raised some uncomfortable questions about bond insurance. For years, bond insurers thrived on the unspoken understanding that municipalities did not file claims. Yet it seemed possible that vast numbers of municipalities could default after Katrina blew through. Eight months after the devastating storm, half the citizens and businesses had yet to return to some ravaged towns and neighborhoods. Municipalities in Louisiana hit by the worst of the hurricane had issued $9.1 billion of debt, and $6.4 billion of that debt was insured, mostly by MBIA and Financial Guaranty Insurance Company, a competing bond insurer.
Yet during MBIA’s conference call to discuss first-quarter 2006 earnings, Nick Ferreri, MBIA’s chief financial officer, told listeners that the company had not set aside reserves to cover claims related to the hurricane.
One analyst followed up, asking if municipalities had begun to tap reserve funds to meet their bond payments. Doing so would be an early indication that a municipality might have trouble meeting future bond payments.
“There are definitely transactions down there that we have insured, and the reserve funds have been hit,” Ferreri said. “Clearly, the area is still under a lot of stress, and we are still looking at those credits with a lot of caution. But we will have to see how that’s going to work through. But certainly at this point in time we can’t make any calls about what’s going to happen down there.”
The analyst asked Ferreri to disclose the par value of the bonds issued