Confidence Game - Christine Richard [87]
After more than two years, the regulatory cloud was about to lift. The stock surged in heavy volume in the final hour of trading after Bloomberg News reported the upcoming announcement. “We would view settlement as a huge relief,” Citigroup analyst Heather Hunt wrote in a research note to clients. “Expect short covering to drive up stock near term.” MBIA was, after all, the third-most-shorted stock in the Standard & Poor’s (S&P) 500 Index, she reminded investors.
After reading the news, Bill Ackman walked over to the firm’s trading desk to check prices on MBIA shares and credit default swaps (CDSs). For more than two years, Ackman had been waiting for regulators to take sweeping actions on MBIA. He had spent hours at the SEC and attorney general’s office describing what he believed were multiple offenses. It was not supposed to end this way, with a slap on the wrist for the AHERF transaction.
Yet Ackman wasn’t looking to close out the position. He wanted to short more stock and buy more credit protection on MBIA.
The investment team’s offices faced the trading desk, and through the glass partitions members of the team watched in amazement. Phones were put down. Eyebrows were raised. Within a few minutes, the team was standing around the trading desk, trying to figure out what on earth Ackman was thinking. Scott Ferguson, the first analyst to join Pershing, took the lead. He and Ackman had been sparring over the MBIA position for years. It was a loser for Pershing among a field of winners, and it had absorbed huge amounts of Ackman’s time and attention.
“Are you sure about this?” Ferguson asked Ackman.
“Yes,” Ackman insisted. There was no more upside in the stock, Ackman said. The shares were fully valued even under the flawed models used by Wall Street analysts. The only reason for the stock rise was that everyone believed the short sellers would be forced to cover. He was not going to cover.
As Ackman tried to move closer to the trading desk, Ferguson physically restrained him, as if he were “an alcoholic reaching for a bottle,” Ackman remembers.
“We need to think about this,” Ferguson insisted. The stock was up nearly $3 on the news of the settlement.
“This is the highest price it will ever trade,” Ackman insisted.
He also wanted to buy more CDSs. The premium on 5-year MBIA CDS contracts was 16 basis points, indicating that for $16,000 per annum, Ackman could buy protection against default on $10 million of debt. He had never seen the price that low. There was just no downside. It didn’t really matter if regulators had decided to let MBIA off easily. The company was overleveraged, and eventually that would take it down.
Mick McGuire, another Pershing analyst, remembers fearing that the MBIA short position was suffering from “investment analysis creep.” “First it was AHERF, Capital Asset, then Katrina. Was the reason for MBIA’s demise going to keep changing to support the idea of being short?” McGuire wondered.
No one doubted that MBIA was vulnerable, remembers Paul Hilal, Ackman’s longtime friend who joined Pershing Square’s investment team a year earlier. It wasn’t a matter of if but when the stock price would fall, Hilal says. But would MBIA blow up in a reasonable time frame? Did it make sense to keep putting money into a position if there was no catalyst? For years, the investment team had watched Ackman put his faith in the regulatory investigation. The regulators seemed to get it. After every meeting with the SEC, Ackman had been optimistic. Clearly, they didn’t get it. So, why add to the position now?
“Is Bill Ahab? Is he in denial?” Hilal recalls wondering, in a comparison of Ackman to the obsessed and doomed captain in Moby Dick. “We were operating on faith and out of respect for the guy. No one else had done the work on MBIA.”
That was about to change.
“This is why someone else is going to do the