Confidence Game - Christine Richard [9]
In July 2003, after MBIA prompted the New York attorney general’s office to investigate Gotham Partners, Tilson was called to testify about Ackman’s research efforts and, in particular, about his use of the press to spread his message. “Bill spent a number of hours walking [the New York Times reporter] through Farmer Mac’s filings, the 10-K and 10-Q documents going back many years,” Tilson said about one marathon meeting with Cowan, which he also attended. Ackman spent hours showing the reporter “problems, things that he believed the company was trying to hide.” Investigators asked Tilson how long the meeting lasted. “Eight, maybe twelve hours,” he replied.
Ackman’s fund netted about $80 million on its Farmer Mac position. Shortly after his Farmer Mac win in the spring of 2002, Ackman asked Michael Neumann, a salesman on Lehman Brothers’ credit desk who had sold him the contracts on Farmer Mac, if he could think of another triple-A-rated company that might not merit its lofty rating. Neumann told Ackman he was skeptical of the bond insurers. The largest bond insurer was MBIA Inc.
Ackman called MBIA and requested the previous five years of annual reports. Later, when he began to read Jay Brown’s letter to shareholders in MBIA’s 2001 annual report, it didn’t take long for him to spot the first red flag. In the letter, Brown addressed the issue of so-called special-purpose vehicles (SPVs), which are created by companies to finance assets off of their balance sheets. The SPV purchases assets such as mortgages from a sponsor or parent company and sells debt to finance the purchase. The SPV is considered legally separate from the company that created it and is considered “bankruptcy remote,” meaning that if the parent company filed for bankruptcy, the SPV would be unlikely to be dragged into the parent company’s bankruptcy. Investors began to raise questions about the use of SPVs after Enron Corporation’s off-balance-sheet debt contributed to its collapse because the risk had not actually been transferred.
“During the past several months, there has been a fair amount of public debate on issues such as balance-sheet transparency, special-purpose vehicles, risk management, accounting conflicts, and quality of earnings,” Brown wrote in MBIA’s annual report. “As you might expect, we have spent some time staring in the mirror.” The result of this reflection, Brown told shareholders, was that investors would find expanded disclosure on the company’s approximately $8 billion of special-purpose vehicles in that year’s 10-K.
Ackman searched MBIA’s public filings and found no previous mention of the SPVs to which Brown had alluded. The apparent deception caused Ackman to look deeper. He began a research process that involved reading thousands of pages of SEC filings, conference-call transcripts, and rating-company and analysts’ reports.
What Ackman really wanted was a face-to-face meeting with MBIA executives. In August 2002, Ackman got the chance. Robert Gendelman, a friend and at that time an investment adviser at Neuberger Berman, one of the largest holders of MBIA stock, agreed to arrange a meeting.
Several days before his visit to MBIA, Ackman e-mailed a senior insurance executive who had once worked with Brown, seeking his opinion on the executive. “He is smart and top notch,” the acquaintance wrote back. And that’s important because “business is dangerous, like picking up dimes in front of a steamroller.”
Ackman and Gendelman made the short trip by car to MBIA’s headquarters an hour north of Manhattan in the leafy Westchester suburb of Armonk. Gendelman introduced Ackman