Confidence Game - Christine Richard [85]
The Keefe Bruyette insurance analyst covering MBIA, Geoffrey Dunn, upgraded MBIA to “outperform” after attending a meeting with Neil Budnick, the president of MBIA’s insurance unit. At that meeting Budnick said that the insurance company now had $1.5 billion in excess capital. MBIA was likely to lift its moratorium on share buybacks, given this huge buildup of capital, Dunn concluded.
“Budnick or others at MBIA likely told Mr. Dunn and other investors they met with on their ‘marketing trip’ that—wink wink—the company has $1.5 billion of excess capital and is about to renew its share repurchase program (despite previous statements to the contrary) and the program will be substantially larger than originally anticipated,” Ackman wrote to the SEC.
Dunn’s report contained “remarkably specific” estimates about how many shares MBIA might buy back, Ackman pointed out. Dunn had expected MBIA to purchase about 4 million shares in 2007. Now he thought the company would move ahead despite the status of the investigation, buying 10 million shares. That was 3 million to 4 million shares per quarter through 2008, which would return approximately $2 billion to shareholders over the following two years.
Ackman suggested the SEC look into the matter because if what he suspected was true, the company had used inside information to prop up its share price. “It is inappropriate and illegal in my understanding of the law for the company to selectively disclose material information to analysts and certain favored shareholders without simultaneously providing it to all investors,” Ackman wrote.
He also pointed out that the positive research couldn’t have been more timely for MBIA executives. MBIA chairman Jay Brown and CEO Gary Dunton had compensation arrangements under which millions of dollars of options and restricted stock would vest if MBIA’s share price traded above $70 for 10 days. The scenario was worth $24 million to Brown and $10 million to Dunton. Brown would lose restricted shares valued at about $2.5 million if the $70 target was not hit by December 31, 2006. The compensation arrangement, Ackman wrote, “obviously creates an incentive to push the stock price up over the next two weeks.” The day my story about MBIA’s tax lien exposure in Pittsburgh ran on Bloomberg News, MBIA’s share price ended a dollar shy of the $70 target.
I spoke with Dunn after the article ran and asked him why he thought the stock was up. He wouldn’t discuss his research or send me a copy of the report, though he told me his theory about why the article failed to stir negative sentiment on the company: “Everyone knows you’re in the pocket of short sellers,” Dunn told me. “That’s why they ignore what you write.”
Brown stood to make or lose millions on a small move in the stock price, yet Dunn focused on phantom payouts to reporters. Though I never received any compensation from short sellers, I did win a $250 prize from the National Association of Real Estate Editors for the article.
In late 2009, Ackman continued to stand behind his comments to the SEC. When I called Dunn for this book, he refused to speak with me about this or any topic. Budnick, who left the company several months after the story ran, did not return a call seeking comment on the marketing meeting. By late 2009, the SEC had no public record of any action regarding Dunn or Budnick. The reason the stock price went up that day remains unknown.
Citigroup analyst Heather Hunt summed up the prevailing view when she wrote on MBIA shortly after the Pittsburgh article appeared. “Although unfavorable articles provide a forum for short sellers’ debate about the AAA rating, rating agencies continue to defend it.”
Over the next several years, the market would find out that MBIA executives weren’t the only ones who used securitization to transfer questionable assets. David Boberski, an executive director at UBS Investment