Confidence Game - Christine Richard [99]
Analysts wouldn’t have been bothered about MBIA’s Capital Asset exposures because they were focused on other potential problems, including the bankruptcy of the Allegheny Health, Education, and Research Foundation, the report said. The reasoning was oddly circular. Because analysts weren’t concerned about Capital Asset, in Siffert’s view, it wasn’t necessary for MBIA to provide them with more complete information. He didn’t address whether they would have focused more on the problems at Capital Asset had they been aware of them.
Siffert’s report made particularly interesting reading while the structured finance market was in the process of unraveling. Siffert explained that the $400 million Lehman line of credit would have been deemed an immaterial obligation by analysts and credit-rating companies because “it was collateralized operating debt as opposed to unsecured debt.” In other words, the debt was backed by assets, so it didn’t present a material risk to MBIA. If need be, MBIA could have sold the assets and repaid the debt.
But what if assets backing a bond are worth far less than the outstanding debt? In the summer of 2007, investors were beginning to question the safety of trillions of dollars of asset-backed debt. Debt might be backed by assets such as subprime mortgages or 10-year-old tax liens in the city of Pittsburgh, but that didn’t mean the assets would be enough to repay the debt.
Several issues, including internal e-mails, initially raised suspicions about the Caulis Negris bond issue, Siffert wrote. These included the use of a so-called black-box conduit structure that was provided by Bear Stearns and, of course, the name, an incorrect Latin translation for “black hole.” Siffert mentioned but didn’t explain how he got comfortable with several breaches of the company’s stated underwriting guidelines. These include bypassing the underwriting committee in favor of having several MBIA executives sign off on the transaction and forgoing a review of the bonds by the credit-rating companies.
Siffert didn’t address the allegations of numerous community activists and Pittsburgh residents who said MBIA had been slow to acknowledge the true value of the liens (the issue I wrote about in a 2006 Bloomberg article). He also didn’t explain why MBIA sold the tax liens back to the city at a fraction of their carrying value. “At no time did MBIA learn that the Capital Asset securitizations contained large, inevitable losses,” Siffert stated.
I called Siffert to ask him why he didn’t discuss the Pittsburgh lien buyback or the poor quality of the underlying collateral in his report, and he refused to comment. When I pressed him for answers, he told me I was being rude, adding, “I’m not paid to talk to you.”
Richard Heitmeyer, who founded Capital Asset and had put himself forward as a whistleblower, told me Siffert never interviewed him as part of his investigation. Not getting his side of the story seemed like a glaring omission by Siffert, Heitmeyer said.
But everyone was eager to put MBIA’s problems behind it. “It’s another piece of good news for the company—and much-needed good news,” Rob Haines, an analyst with the research firm CreditSights, said of the report. Given the concerns in the credit markets about bond insurers and CDOs, a negative finding by the independent consultant “could have been disastrous,” he added.
During the last week of July, Gerald Russello, the former lead investigator