By Amanda Cantrell
Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff
By Christine S. Richard
John Wiley & Sons, Inc.
$27.95
Bill Ackman's short position in the Municipal Bond Insurance Association may go down in history as one of the great Cassandra trades of the credit crisis. Like Cassandra—who, according to Greek mythology, made dire predictions that were always accurate but universally ignored—Ackman's warnings went unheeded for years.
Unlike Cassandra, he eventually got closure—but not without enduring years of scrutiny, regulatory investigations and performance losses.
Ackman, the founder of activist hedge fund Pershing Square Capital Management, released a negative research report on MBIA in 2002 at his first hedge fund firm, Gotham Partners. He soon learned that attacking a triple-A-rated company—especially one that could threaten the stability of the entire financial system if its rating were downgraded—would be costly. Far from being hailed as a whistle-blower, Ackman was nearly run out of town on a rail. But as Christine S. Richard reveals in her exhaustive and compelling account of Ackman's war against MBIA, "Confidence Game," nothing could have dissuaded Ackman from his campaign against the company. MBIA had become not just a trade for Ackman, but a personal obsession that seemed to take over every aspect of his life.
"Little known outside of Wall Street, MBIA made hundreds of millions of dollars a year selling its triple-A credit rating," Richard writes. "At the same time, it boasted to analysts and investors that it insured bonds on which it saw no chance of loss."
Ackman's original report, "Is MBIA Triple-A?" alleged that MBIA's business was far more risky than its rating portrayed. His campaign eventually spread beyond MBIA. Ackman called into question the legitimacy of the entire municipal bond insurance market, publicly attacked the ratings agencies for rubber-stamping MBIA with a triple-A rating and railed against the regulators for failing to investigate the industry.
Both the Securities and Exchange Commission and the New York Attorney General's Office investigated Gotham Partners, at the behest of MBIA. But the firm was eventually exonerated, though it took years to get formal closure from the SEC. Meanwhile, the firm and Ackman were the subjects of several unflattering newspaper articles that portrayed Gotham as a potential market manipulator. Ackman endured years of losses as MBIA's stock price cruised ever higher before the big crash of 2008.
As Richard explains, Ackman's fervor may have detracted from the seriousness of his argument at times. "When you write long letters, people think you are crazy," one investor noted. Ackman stayed up all night reading reports and sending e-mails, and he bombarded investors, regulators and even people he met at parties with torrents of information. Ackman brought his intensity even to leisure pursuits. On a fly-fishing trip, one friend of Ackman's described him as being "so technical and inquisitive he drove everyone crazy."
Ackman's chutzpah sometimes horrified his colleagues and the attorneys who represented him. He sent an e-mail to former SEC chairman Christopher Cox, accusing him and the other four SEC commissioners of enforcement failures.
As a reporter at Bloomberg, Richard did her own digging into MBIA, turning up failing municipal projects and abandoned properties backed by MBIA debt, including crack houses in Pittsburgh and a jail in Oklahoma. MBIA even seemed to acknowledge its own recklessness, setting up an entity to siphon off bad investments and brazenly calling it "Caulis Negris," a possible mistranslation of a Latin phrase for "black hole." The markets shrugged off the concerns Richard raised in her articles, and she was accused of being in the pocket of short sellers. But she and Ackman were vindicated, and the trade eventually netted Ackman $1 billion. As he put it at a recent Bloomberg conference, "MBIA was a very complex company and a very simple short story."