Confidence Game - Christine Richard [8]
The meeting ended abruptly. As the men filed out of the room, Ackman reached out to shake Brown’s hand. “I don’t think so,” Brown said, refusing to extend his hand.
When Ackman, Klafter, and Lyss stepped back out onto Third Avenue, Ackman’s first call was to Aaron Marcu, a lawyer with Covington & Burling, who had been advising Gotham on its research. “We left the meeting thinking we were going to be sued,” Ackman told me years later.
Ackman’s second call was to Paul Hilal, an investor in one of the Gotham Credit Partners funds and Ackman’s friend since the two were undergraduate roommates at Harvard in the late 1980s. Ackman related the high points of the brief meeting: Brown’s refusal to discuss Gotham’s report, the apparent paranoia about whether Gotham was recording the conversation, the warning, the refusal to shake hands. Years later, Brown told the Wall Street Journal that he remembered refusing to shake Ackman’s hand, though he recalled saying nothing that should have been interpreted as a threat.
Hilal had been hearing about MBIA for months. He and his girlfriend had spent a week with Ackman and his wife, Karen, at a beach house the Ackmans rented in Watch Hill, Rhode Island, during the summer of 2002. “Bill did what he always does on vacation,” Hilal says. He read financial statements. That week his reading consisted of years of MBIA quarterly filings. “Every once in a while, you’d hear Bill exclaim, ‘Oh, my God, this is such bullshit,’” Hilal recalls. “What he was reading about was another layer of hidden leverage or messed up accounting at MBIA. The tone was a combination of surprise but also glee: ‘I can’t believe it’s this good.’”
Chapter Two
The Short Seller
A closed mouth gathers no foot.
—BILL ACKMAN’S HIGH SCHOOL YEARBOOK EPITHET, 1984
BILL ACKMAN’S INTEREST in MBIA started with an interest in triple-A ratings. Earlier in 2002, he’d made a substantial sum by shorting the stock and purchasing credit-default swaps on a company called the Federal Agricultural Mortgage Corporation, better known as Farmer Mac. The company was chartered by the U.S. government to create a secondary market for farm loans, and this government connection caused investors to view Farmer Mac as a triple-A-rated company. In fact, the company never sought to obtain a credit rating because the market perceived it to be triple-A and its bonds traded like other top-rated agency bonds at very tight spreads to Treasuries.
Ackman had originally gotten the idea of looking into Farmer Mac from Whitney Tilson, who heads up the hedge fund T2 Partners and who had been friends with Ackman since they were undergraduates at Harvard in the 1980s. Tilson suggested Ackman consider buying shares in the company. When Ackman reviewed the company’s financial statements and later met with the company’s chief executive officer (CEO), he decided to short it instead. Before Ackman’s involvement, Farmer Mac was rarely mentioned outside of trade publications such as Progressive Farmer and Pork Magazine. Ackman’s research landed the company on the front page of the New York Times business section after he spoke with reporter Alison Leigh Cowan about his findings. Ackman churned out a series of reports on the company provocatively titled “Buying the Farm,” Parts I, II, and III. He didn’t mince words: “Gotham believes that the company is in precarious financial condition and could face severe financial stress.”
For months, Ackman was a thorn in Farmer Mac’s side. During one of the company’s investor conference calls, Farmer Mac executives explained that their reason for not obtaining a credit rating was that the company did not want to pay the cost. In response, Ackman offered to pay for Farmer Mac’s rating. His offer was rebuffed.
After Ackman issued his first report on the