Ackman’s bet was spectacularly contrarian. He was wagering on the collapse of a company [MBIA] that the rating companies had awarded their highest AAA rating and that everyone else was counting on.
...Ackman told the receptionist [at MBIA] they were there for the meeting with [CEO] Jay Brown. She pointed Ackman toward a closed conference room door just behind the reception desk. Opening it, he found Brown seated at a conference table with a dozen other men. The conversation in the room came to an abrupt halt.
“I’m Bill Ackman. I’m here to--”
“Wrong meeting,” one man said as he jumped up to close the door. Ackman returned to the reception area, convinced he’d just interrupted a tired and frazzled-looking Brown in a meeting with his crisis-management team. The Gotham group was shown to another conference room and told to wait.
Fifteen minutes later, Brown joined them with MBIA’s general counsel, Ram Wertheim, whose first question to the Gotham group was whether it planned to record the meeting. Ackman told him no, then asked Wertheim whether he and Brown planned on recording. They did not, Wertheim said.
Brown got to the point. He had been in the insurance industry for years, and no one had ever questioned his reputation, Ackman remembers Brown saying.
‘Friends in High Places’
“No one has ever gone to my regulators without my permission.”
Ackman asked Brown whether he disputed any of the assertions Ackman had made about MBIA. Brown was aware of the issues in Ackman’s report from questions he had received from a Wall Street equity analyst with whom Ackman had shared his findings.
“This isn’t about the facts; it’s about process,” Ackman recalls Brown saying. “You’re a young guy, early in your career. You should think long and hard before issuing the report. We are the largest guarantor of New York state and New York City bonds. In fact, we’re the largest guarantor of municipal debt in the country. Let’s put it this way: We have friends in high places.”
In a follow-up letter to Ackman after the meeting, Wertheim reminded Gotham what was at stake.
“MBIA is a regulated insurance company that operates in a regulated environment and acts in a fiduciary capacity for the benefit of our many constituencies. ... MBIA’s credibility and reputation in the market, and its AAA ratings, are critical to our continued ability to service these constituencies.”
In the meeting, Brown compared Gotham to Enron Corp., which had been accused of manipulating the California electricity market. Was Gotham seeking to manipulate perceptions about a regulated insurance company by taking positions in the unregulated CDS market? Brown also asked Ackman how long Gotham planned to hold its CDS position on MBIA.
Ackman explained that for the hedge fund to make money on its CDS position, it was going to have to be correct in its criticism of MBIA. Ackman told Brown that the CDS market was not liquid enough for Gotham to easily trade in and out of such a huge position.
Wertheim asked to see a copy of Gotham’s report before it was published so MBIA could check Gotham’s facts. Ackman countered that it was considered inappropriate for analysts to give advance copies of research reports to companies but again offered to discuss any findings at the meeting.
The meeting ended abruptly. As the men filed out of the room, Ackman reached out to shake Brown’s hand.
“I don’t think so,” Brown said, refusing to extend his hand.
When hedge fund manager David Einhorn told an audience of investors in 2002 that he recommended shorting Allied, the SEC investigated him before they bothered to probe the company. The lukewarm probe the SEC wound up doing didn’t even include a visit to Allied headquarters two blocks from the SEC. Ultimately, the SEC’s documents on Allied were mysteriously deleted from the agency’s computers, the new Kotz report says.
In a classic SEC farce, the agency has acknowledged the shorts’ important role in balancing the boundless swamp of financial hype by slapping new curbs on them on Feb. 24.
No less an expert on white-collar crime than onetime jailbird Sam Antar, whose Web page says he masterminded “one of the largest securities frauds of its time” when he was chief financial officer of Crazy Eddie Inc. in the 1980s, says the way to counter market hype is to make it easier to research short- sale ideas and sue fraudsters. And trust me, Antar should know.
“There is nothing worse for a criminal to deal with than an adversary with a profit motive,” he told me in a telephone interview.
Bloggers are doing their part to fill in where the regulators fail, too. Blogger Barry Ritholtz said on June 3, 2008, that it was time to sell Lehman Brothers at $30.61. Less than four months later, and after interminable carrying on by Lehman and others about short sellers telling unfair tales, the firm filed for bankruptcy.