Confidence Game - Christine Richard [82]
In an e-mail to regulators, Bill Ackman wrote that he believed MBIA’s pattern of writedowns on the Caulis Negris bonds was suspect. “It’s illustrative to follow this last sentence into the future,” Ackman wrote, including excerpts from MBIA’s 2004 filings. “This transaction (Caulis Negris) matures in 2008 and has an outstanding balance of $118 million, or $81 million net of existing loss reserves of approximately $37 million,” the company disclosed. The next quarter, reserves jumped by $2 million to $39 million and the amount due on the bonds fell by $2 million to $79 million. Three months later, the reserves climbed by another $5 million to $44 million while the amount due dropped by exactly the same amount to $74 million.
The outstanding amount of Caulis Negris bonds remained unchanged, but each quarter the value of the bonds declined by additions to reserves. MBIA appeared to be making no collections on the tax liens.
“It appears MBIA is simply straight-lining the hit to earnings between now and when the Caulis Negris bonds mature in 2008,” Ackman concluded.
I thought it would make an interesting story. But the only way to know whether the company was writing down assets it already knew to be worthless was to look at the properties on which it held tax liens. That seemed like an impossible task because Caulis Negris had purchased thousands of tax liens from municipalities in multiple states.
Then MBIA’s chief financial officer gave away a clue that made it possible. During MBIA’s first-quarter 2006 earnings conference call in April, Morgan Stanley analyst Ken Zerbe asked about the ongoing tax-lien losses. “You mentioned that you took additional losses related to your tax-lien portfolio,” Zerbe said. “Is there any reason why you can’t take a one-time large loss as opposed to taking small losses every quarter?”
Nicholas Ferreri, MBIA’s CFO, offered an explanation. “The bulk of the liens are in one city. Up until this point, there were other states in that transaction,” Ferreri said. He didn’t really answer Zerbe’s question, but he answered mine. The Caulis Negris properties were in Pittsburgh.
Michael Malakoff led me down a hallway crowded with file cabinets to his office overlooking Grant Street in downtown Pittsburgh. Malakoff, the class-action attorney who sued Capital Asset and later Caulis Negris on behalf of thousands of delinquent taxpayers in the city of Pittsburgh, told me there were legal problems from day one with Capital Asset’s purchase of the city’s tax liens. The city had never aggressively gone after delinquent taxpayers. It was politically untenable to throw little old ladies out on the street because they couldn’t pay their taxes. Yet Capital Asset had spent nearly $50 million to buy the right to collect overdue taxes, and it planned to be aggressive. It also had an agreement with the city allowing it to charge 18 percent interest on overdue balances. A lawsuit, Pollice v. Capital Asset, was filed in 1998, charging Capital Asset with unjust enrichment.
Malakoff dug out some filings on the case. He had added Caulis Negris to the lawsuit after MBIA transferred all the Pittsburgh tax liens to a special-purpose vehicle in August 1999. The timing was important because Caulis Negris was created only three weeks after a preliminary opinion that Pittsburgh property owners couldn’t be charged more than 10 percent interest on past-due tax bills. The value of the assets would have been very uncertain at that point, Malakoff said. It would take years for the legal issues to be worked out.
As I was leaving, Malakoff said he hoped MBIA hadn’t insured many deals like Caulis Negris. He had lots of his own money in insured municipal bonds. “I’d be terrified if I thought MBIA couldn’t meet its obligations,” Malakoff said.
Aggie Brose, a community activist in Pittsburgh for more than 25 years, told me