Confidence Game - Christine Richard [97]
It was hard to be optimistic about what lay ahead. “As recently as February, there were people saying, ‘Oh, in the spring buying season, the housing market’s going to come back,’” Weaver told listeners on the call. “But standing here, right now, on the precipice of July, all of those numbers support a very bearish view.”
AT AROUND 4:30 p.m. on July 4, 2007, Ackman arrived back in New York on the shuttle from Boston. “Please take a look at MBIA’s CDO disclosure. Worse than we expected,” Ackman e-mailed Mick McGuire. The previous day, MBIA had posted a document on its Web site detailing its CDO and subprime exposures. It was part of an effort by all of the bond insurers to quiet critics by providing more information on what they had guaranteed.
“I haven’t had a chance to access it myself yet, but I saw the release,” answered McGuire, who was on his way back from Los Angeles. “By ‘worse,’ I’m assuming you mean even more exposure, or more risky exposures, than we had estimated?”
“Yes. They give detail on the other collateral in multisector,” Ackman responded. “It is mostly subprime and CDOs.”
Two days later, Ackman and McGuire met with Heather Hunt from Citigroup. At the end of the meeting, she told them she remained convinced that the bond insurers were insulated from problems in the subprime market. Management’s case that the industry was going to dodge this bullet was convincing, she said.
She wasn’t alone in her optimism. But several days later, the ground began to shift in the credit markets. On July 10, 2007, Standard & Poor’s said it might cut the ratings on $12 billion of subprime mortgage-backed debt, a total of 612 separate bond issues. S&P was also reviewing the “global universe” of CDOs that contained subprime mortgages for possible downgrades. Most of the bonds were in the triple-B range, though some had ratings as high as double A.
News of the sweeping downgrades spooked the market, sending the yield on the 10-year Treasury bond tumbling as investors sought the security of government debt. “I’d like to know. Why now?” Steven Eisman, a portfolio manager at Frontpoint Partners in New York, asked during an S&P conference call later that day to discuss the downgrades. “The news has been out on subprime now for many, many months. The delinquencies have been a disaster for many, many months. The ratings have been called into question for many, many months. I’d like to know why you’re making this move today instead of many months ago.”
McGuire followed up with Citigroup’s Hunt that day in an e-mail. The S&P announcements raised further concerns for MBIA, he insisted.
“Biggest point”: S&P said there were indications that losses on securities created in 2006 could hit the 11 percent to 14 percent range, McGuire wrote. “In a world where losses reach this level, all the BBB paper in the (CDO) would be wiped out and much if not all of the A tranche would also be done. This has dire implications for not just mezzanine CDOs but also high-grade CDOs.” Mezzanine CDOs are backed by securities rated A and below whereas high-grade CDOs are backed by securities rated A and higher.
McGuire suggested Hunt ask MBIA management the following question: “What levels would cumulative losses in the subprime market have to reach before MBIA would expect to have to pay a claim? I believe that the answer to this question would be well below the 11 percent to 14 percent range that S&P now thinks is possible,” McGuire wrote.
Later that day, the dominoes continued to fall. Moody’s cut ratings on $5.2 billion of subprime mortgage-backed debt. The downgrades were concentrated on bonds issued by companies including Washington Mutual’s Long Beach Mortgage, General Electric’s WMC Mortgage, New Century Financial Corporation, and Fremont General Corporation.
The next day, July 11, 2007, Moody’s said it might cut ratings on $5 billion of CDOs backed by subprime, a total of 184 debt issues.