Confidence Game - Christine Richard [88]
All of Pershing Square’s other investments were analyzed by Ackman and at least one other analyst. Jonathan Bernstein, who had left the firm in 2006, had spent time on it, but MBIA had always been Ackman’s baby. No one had stepped into Bernstein’s shoes since he left the firm to go to business school, and no one wanted to. “It was complicated. It was personal,” says Ali Namvar, who joined the investment team in early 2006 from Blackstone Group, where he had met Ackman while working on the Wendy’s International transaction for Pershing Square.
The MBIA job wouldn’t be about analyzing and predicting cash flows, Namvar remembers thinking. In fact, it seemed to be turning into a letter-writing campaign more than anything else as Ackman tried to get others to see the risk he saw in MBIA. “As an analyst, it’s just not what you want to do,” Namvar says.
Perhaps the biggest drawback to the job was that no MBIA analyst was ever going to know as much about the company as Ackman, Namvar remembers. It just wasn’t possible.
“That’s why Mick is going to do the work,” Ackman said, turning to Mick McGuire. Namvar breathed a sigh of relief.
THE FOLLOWING MONDAY, January 29, 2007, MBIA formally announced the settlement. The company neither admitted nor denied any wrongdoing. The SEC and attorney general’s complaints made public the full story of the AHERF reinsurance contracts. MBIA engaged in a “fraudulent scheme” to mask the earnings effect of the default by the Allegheny Health, Education, and Research Foundation, the attorney general’s complaint said. The scheme guaranteed that the three reinsurers who covered the AHERF loss got back “every cent of their money plus a profit.” To pull off the scheme, MBIA lied to its investors, its auditors, the credit-rating companies, and its reinsurers, according to the complaint.
Without the improper use of reinsurance, MBIA would have reported its first quarterly loss ever in 1998, the complaint stated. Instead, it preserved the appearance of an unbroken track record of strong earnings. “MBIA holds itself out to the investing public as a company that does not risk significant losses on the insurance it writes,” the complaint said. “In fact, however, MBIA’s winning streak came to an end in 1998.”
These details didn’t dampen analysts’ enthusiasm for the company’s prospects. “We reiterate our ‘buy’ rating,” Bank of America analyst Tamara Kravec wrote, increasing her target for the share price to $85 from $78.
“Let the Repurchases Begin,” Merrill Lynch analyst Rob Ryan headlined his report. With the investigation behind it, MBIA was clear to restart its stock buyback program, Ryan wrote. He reiterated his “buy” rating.
“Settlement Finally Announced, Shares Benefiting from Short Squeeze,” JP Morgan told clients in a research note. “Shares have rallied about $4 since late Friday following the news alerts, which we believe has largely been driven by short covering.” The negative overhang had been removed from the stock, the report added.
During a conference call to discuss fourth-quarter earnings, MBIA chief financial adviser Chuck Chaplin explained that MBIA’s dealings with Capital Asset would be reviewed by an independent consultant as part of the settlement with regulators. “We don’t expect any further enforcement action,” Chaplin, who had replaced Nick Ferreri, reassured listeners on the call.
Geoffrey Dunn, the insurance analyst from Keefe Bruyette & Woods, asked the first question on the call. “Good morning and congratulations on getting past all that regulatory stuff,” he told Chaplin.
It appeared the coast was clear.
A few days later, MBIA’s board approved a $1 billion stock-buyback plan. The timing would depend on receiving approval from the New York State Insurance Department to take further dividends out of the insurance unit, MBIA said.
In early February 2007, Ackman attended the funeral of longtime family friend James Williams. A Michigan attorney, Williams had invested early