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Amendment to PSPA is coming…..
‘We believe recap is the eventuality regardless of courts outcome” -Ackman
Doesn’t sound at all like good faith & fair dealing to me.
Jim Parrott’s few emails unsealed so far out of 21k docs still sealed…..
No principal is written down no matter what the quartely payment is. Dividend is variable, set at w hatever profit for quarter is, eliminating ability to pay down principal (so they can"t repay their debt and escape as it were).
Team Tsy,
You guys did a remarkable job on the PSPAs this week. You delivered on a policy change of enormous importance that's actually being recognized as such by the outside world (or the reasonable parts anyway), and as a credit to the Secretary and the President. It was a very high risk exercise, which could have gone sideways on us any number of ways, but it didn't- great great work.
must say that this caught me by surprise. we're not reducing their dividend but including in it every dime these guys make going forward and ensuring that they can't
recapitalize.
we've closed off possibility that they every go (pretend) private again and sped up the clock on the wind-down of their portfolio, all while increasing the stability of the market by removing concern that these guys run out of support before we have a place to which to transition.
all the investors will get this very quickly.
Memorandum Opinion, Contempt Trial, 2/22/99
This two-week contempt trial has certainly proved that the court’s trust in the Justice Department was misplaced. The federal government here did not just stub its toe. It abused the rights of the plaintiffs to obtain these trust documents, and it engaged in a shocking pattern of deception of the court. I have never seen more egregious misconduct by the federal government.
Memorandum Opinion, 12/21/99
The United States’ mismanagement of the IIM trust is far more inexcusable than garden-variety trust mismanagement of a typical donative trust. For the beneficiaries of this trust did not voluntarily choose to have their lands taken from them; they did not willingly relinquish pervasive control of their money to the United States. The United States imposed this trust on the Indian people. As the government concedes, the purpose of the IIM trust was to deprive plaintiffs’ ancestors of their native lands and rid the nation of their tribal identity.
https://www.motherjones.com/politics/2005/09/contempt-court-blistering-eloquence-judge-royce-c-lamberth/
Judge Royce C. Lamberth of Federal District Court said: ''It is clear that the decisions here were made at the highest levels of Government, and the Government itself is -- and should be -- accountable when its officials run amok. There were no rogue lawyers here misleading this court.''
Rather, Judge Lamberth said, ''the executive branch of the Government, working in tandem, was dishonest with this court, and the Government must now face the consequences of its misconduct.''
The Administration's efforts to correct the misstatements were feeble and belated, the judge said.
“It seems that some Government officials never learn that the cover-up can be worse than the underlying conduct. Most shocking to this court, and deeply disappointing, is that the Department of Justice would participate in such conduct.''
After concluding that the Administration had acted in bad faith, Judge Lamberth declared, ''This type of conduct is reprehensible, and the Government must be held accountable for it.''
Its coming…..3 more months guys…..no excuse or delay this time, all the evidence we have is in writing, no verbal bs of “may vs shall” anymore
Thanks. Can’t wait for Lamberth & jury to review those that are still sealed & more damaging than these. We all know the reason behind keeping them sealed.
Not selling a share until $35
Pershing may have started buying more shares of FnF now that they will return $4B from SPAC investors who may instead wanna invest in something that has biggest potential in their portfolio.
https://www.sec.gov/Archives/edgar/data/310522/000119312513443212/d630953dex992.htm
Lamberth ruling on govt MSJ will set the stage for Jury trial, then we wont see FnF in pennies anymore imo
Awesome. Reward/retro relief/damages to shareholders will be the largest in financial history too imo.
Best three months ahead for us in last 10 yrs of legal fight.
Damages on common per my expectation should be at least $2 of lost dividend per year since 2012 NWS so total 10 yrs means $20 should be awarded by jury to common imo
A Federal judge said today that the White House and the Justice Department had participated in a ''reprehensible'' effort to cover up false statements by Ira C. Magaziner, the chief architect of President Clinton's ill-fated health plan, and the judge ordered the Government to pay a penalty of more than $285,000.
The judge said Mr. Magaziner and the Clinton Administration had been ''dishonest'' in describing the secret procedures used to develop the President's health care proposals in 1993. Mr. Magaziner said at the time that the proposals were devised entirely by a group of Federal employees, who were not subject to laws requiring open meetings or public disclosure of their working papers.
In the ruling today, the climax of five years of litigation between doctors and the Clinton Administration, Judge Royce C. Lamberth of Federal District Court said: ''It is clear that the decisions here were made at the highest levels of Government, and the Government itself is -- and should be -- accountable when its officials run amok. There were no rogue lawyers here misleading this court.''
Rather, Judge Lamberth said, ''the executive branch of the Government, working in tandem, was dishonest with this court, and the Government must now face the consequences of its misconduct.''
The Administration's efforts to correct the misstatements were feeble and belated, the judge said.
Joe Lockhart, a White House spokesman, said the Administration had no comment on the ruling. Hillary Rodham Clinton supervised work on the President's health plan, but Judge Lamberth did not say whether either of them was in any way responsible for the Government's misconduct.
Mr. Magaziner, who still works at the White House, also refused to comment on the ruling. But in an interview tonight, Mr. Magaziner said, ''My statements were honest, and I did not attempt to mislead anybody.''
https://www.nytimes.com/1997/12/19/us/judge-rules-government-covered-up-lies-on-panel.html
One day the news like this will be for us
Thanks for responding her via twitter
F&F should now have $92B capital, at 2.5% of their $7.5T portfolio they need another $95B raised via ipo (if it comes in July) to have $187B total capital to exit cship imo
ST firechat 3 months ago….
“We’re preparing the enterprises to adjust to supervision in a way they would be regulated outside of conservatorship,” said Thompson. “The safety and soundness of the enterprises, making sure their operations are really in tip-top condition, which they are, making sure their financial condition is as expected and that they never have to rely on the federal government again is really important.”
Thompson also iterated that the structure of the enterprises outside of conservatorship has to be determined before they can be released.
“The pricing is really important. If the enterprises ever get out of conservatorship, everybody knows it’s going to be the largest IPO ever. But they’re going to be questions investors will want to know. One, what is going to be the role of the government? Are they going to continue to have a PSPA (Preferred Stock Purchase Agreement)? Are they going to be working under some sort of consent order? Are they going to be a utility? Do you have rate setting authority. Some of those questions I cannot answer.”
In addition, Thompson continued, other details that will need be determined include: “Are they going to be subject to the single counterparty requirements of the (Federal Reserve), where some
of the largest SIFIs (Systemically Important Financial Institution) can only hold 15 to 25 percent. How much MBS securities do they hold and do we have to make changes for that? Anytime you involve two government agencies, having those conversations can be quite challenging.”
Other mutual or hedge funds may have to sell due to redemptions from their investors but Pershing has 85% as permanent capital so they are not forced to sell, big difference.
We just saw an email Bill wrote to Mnuchin, it shows he is working on this behind the scenes. Im sure he is in contact with Yellen & Powell about fnf exit from cship before its too late to raise outside capital & get govt off the hook from bailout of fnf once again when housing likely goes down another 25% in next 12 months.
Pershing square will never sell, they are in for the long term until govt finish recap & release, this is the most asymmetric risk reward opportunity in their portfolio.
Why would they give at the very end when all the ducks seemed lined up for them?
Nothing else in their portfolio offers many multiple of their money invested except their interest rate swaptions.
These both investments will become highlight of their 2022 annual report.
Ignore the noise & focus on the end goal.
I am waiting to see his presentation to Janet Yellen & ST some day
Few reacted docs here…from almost 21k sealed docs
http://www.delawarebayllc.com/images/Wash_Fed_excerpts_-_highlighted_and_redacted.pdf
The big question is who is gonna certify false affidavit of Mario Ugoletti in pre trial submissions from Govt side
And those who think Ackman is selling
His lawsuit is still consolidated with Fairholme, he hasn’t withdrawn yet
Here is the shareholders he is representing in court since Aug 2014
PARTIES
20.
Plaintiff Louise Rafter is a retired nurse who resides in California. She owns
36,000 shares of Fannie Mae common stock, some of which she and her late husband purchased
21.
Plaintiffs Josephine and Stephen Rattien are a married couple who reside in
Washington, D.C. Josephine Rattien is a retired psychiatric social worker and inner-city school
counselor. Stephen Rattien is a retired senior science and technology policy manager. They
jointly own 1,000 shares of Fannie Mae common stock, which they purchased approximately 15
years ago, and which they have held continuously since then. They bring claims as common
shareholders of Fannie Mae only; they do not bring claims with respect to Freddie Mac.
22.
Plaintiff Pershing Square is a limited partnership duly organized and existing
under the laws of Delaware, and its principal place of business is 888 7th Avenue, 42nd Floor,
New York, New York 10019. It is an investment advisor to private investment funds registered
with the Securities and Exchange Commission under the Investment Advisor Act of 1940.
Pershing Square primarily manages funds that are in the business of investing in securities.
Pershing Square is the Companies' largest common shareholder, with an approximate 10% stake
in the outstanding common stock of each Company. It brings claims with respect to both
Companies.
Settlement before Jury is allowed to see a single sealed doc. ST is sworn in, its about time we hear from Janet Yellen bcoz to raise outside capital they cant wait till next Fed’s mtg to hike rate by another 75bps, already housing is cooling off & affordable housing is one way to win middle class votes in Nov
Lamberth has narrowed down this case to single count, whether the govt acted in covenant of good faith & fair dealing or not. The few docs unsealed so far by Sweeney doesn’t seem to prove them innocent.
Discovery just finished this year in march in Lamberth court so I eagerly look forward to unsealed docs for Jury, 9800 docs/56k pages were given by govt in Dec 2020 after Lamberth compelled govt
Will know who else besides Ugoletti lied about cship & nws
Sweeney compelled govt to release 11k docs, Lamberth did 9800 docs, I dont think plaintiff lawyers wanted those for just just grammer & spell check or for summer beach reading :)
We dont even know the players in this dirty game who were brought back for depositions
Yes Kelly’s stay was lifted bcoz Wash Fed case is no longer appealable.
Judge here is Kathryn Davis
https://www.uscfc.uscourts.gov/kathryn-c-davis
Foreign Investment in the GSEs Pressured the Government to Impose Conservatorships Despite the Lack of Any Ground Under HERA
77. The ratings agencies and investors had high confidence in the security of GSE stock because of the Government’s open support for the GSEs. A number of foreign governments had significant holdings in GSE debt— Japan held $120 billion, Russia held $170 billion and China held $350 billion. These foreign governments had purchased GSE debt with the understanding that the GSE debt was guaranteed by the U.S. Government. The Government has since acknowledged the ambiguities leading investors to purchase what they believed to be low-risk, government guaranteed securities.
78. On September 7, 2008, the day after the Government imposed the conservatorships, Secretary Henry M. Paulson, Jr. made a public statement referring to “the ambiguities in the GSE Congressional charters, which have been perceived to indicate government support for agency debt and guaranteed mortgage-backed securities.” On September 24, 2008, in a speech to the nation, President Bush acknowledged that “ecause [... the GSEs] were chartered by Congress, many believed they were guaranteed by the federal government.” Following the failure of Bear Stearns in March 2008, representatives of the governments holding significant GSE debt asked Treasury officials to explicitly confirm this understanding. An explicit guarantee would have placed the GSEs on government books and doubled the U.S. deficit—a politically untenable solution.
- 26 -
Case 1:21-cv-01949-KCD Document 1 Filed 10/01/21 Page 30 of 45
79. China was the largest external investor in the GSEs. As reported by BBC News, Secretary Paulson was in close and regular contact with the Chinese Government as he “didn’t want them to dump the [GSE] securities on the market and precipitate a bigger crisis.” Secretary Paulson learned Russian officials had urged the Chinese Government to sell off GSE holdings to force the U.S. Government to guarantee GSE debt.
80. A sell-off would cause significant harm to the U.S. economy in the midst of the financial crisis. A sell-off by Russia began in January 2008, followed by a sell-off by China in July 2008. According to Benn Steil, an analyst with the Council on Foreign Relations, during this sell-off, “the yield spread between GSE debt and U.S. Treasury debt soared. From 2003 to 2007 it averaged 34 basis points. When Russia started selling GSE debt in January 2008, it stood at 57 basis points. When China started selling in July 2008, it hit 86 basis points. As GSE debt was widely used as collateral in the U.S. repo market, the rising spread forced U.S. financial institutions to pony up more and more securities to support their borrowing.” Steil added that this sell-off “exacerbated the growing credit crunch.”
71. The by-laws and offering documents for Fannie Mae’s and Freddie Mac’s common stock enumerated specific rights held by each GSE’s common shareholders, and these rights were typical of those rights usually associated with the private property interest represented by common stock in a shareholder-owned company. For example, these included the right of the GSEs’ common shareholders to transfer their shares of stock and to vote for candidates for boards of directors and shareholder proposals. The owners of Fannie Mae’s and Freddie Mac’s common stock also had the right to receive a portion of the GSEs’ assets in the event of dissolution or liquidation.
51. Despite the foregoing, on September 6, 2008, the Government moved to place both GSEs into conservatorship. The GSEs were blindsided. Although the FHFA claimed that it imposed the conservatorship only after receiving consent from the boards of both GSEs, as set forth below, that consent was based on misinformation, coercion, and threats of economic harm. It was therefore involuntary.
52. The final decision in regard to the GSE future came during a series of marathon meetings over Labor Day weekend at the Treasury. Attendees included Secretary Paulson; a dozen Treasury officials; Chairman Bernanke; Federal Reserve Governor Kevin Warsh; the Federal Reserve general counsel; Art Murton of the FDIC, a top banking official; Morgan Stanley; Director Lockhart and Mr. Lockhart’s team, which included FHFA outside legal counsel from Arnold & Porter and Wachtell, Lipton, Rosen & Katz phoning in from New York. According to Secretary Paulson’s memoir On the Brink, Inside the Race to Stop the Collapse of the Global Financial System, Sheila Bair, chairperson of the FDIC, sent her best examiner to “help write the case” and finally Director Lockhart “managed to get his examiners to sign off on what [... was] needed. Either [... Director Lockhart] had worn those examiners down or they had come to realize that immediate conservatorship was the best way for them to resolve this dangerous situation with their reputation intact (emphasis added).” Treasury Secretary Paulson stated in regard to the FHFA, “They needed to be led to the conclusion they know was right. Doing so would in effect overturn the work they’d done for years.” On September 4, 2008, the FHFA wrote to the boards of the GSEs and informed them that they were undercapitalized and required immediate recapitalization. The FHFA did not give the GSEs any time to address the concerns, however, raised in these letters.
53. In On the Brink, Secretary Paulson recalled that he met with President George W. Bush a mere three days before the conservatorships and informed him: “We’re going to move quickly and take them by surprise. The first sound they’ll hear is their heads hitting the floor.” He acknowledged that the plan was to “ambush Fannie and Freddie” “[f]or the good of the country.” Had they attempted to discuss the plan with the GSE boards, Secretary Paulson knew “they’d fight.” Lacking the necessary statutory basis to impose a conservatorship based on the GSEs’ financial condition, the Government had to rely on another statutory basis: consent of the GSE boards. The only way the Government could gain their consent was to take them by surprise and quickly coerce their agreement.
54. As also detailed in On the Brink, on September 5, 2008, Paulson, Bernanke, and Lockhart met with representatives of the GSEs and directed them to give their consent to conservatorship. If they did not agree, “we would seize them.” In that meeting, Paulson falsely informed the GSE executives that the Government “ha[d] the grounds to do this on an involuntary basis, and we will go that course if needed.” He made clear that “[a]ny Treasury investment would be conditioned on conservatorship.” The FCIC later concluded that “[e]ssentially the GSEs faced a Hobson’s choice: take the horse offered or none at all.”
55. As also detailed in On the Brink, Paulson indicated that he would go after the GSE leadership personally if they did not agree. He told the boards that if they consented to conservatorship, he would make clear that they were not to blame: “Obviously we preferred that they voluntarily acquiesce. But if they did not, we would seize them. . . . I left unspoken what I would say publicly if they didn’t acquiesce.” Those present at the meetings reported that the Government suggested that if they did not agree their reputations were at risk.
56. The Government was able to take advantage of the terms of HERA, which provided that the board “shall not be liable to the shareholders or creditors of the regulated entity for acquiescing in or consent” to conservatorship. 12 U.S.C. 1367(a)(6).
57. On September 6, 2008, the boards of the GSEs met and, as the Government gave no choice but to do, agreed to conservatorship. Daniel Mudd, the former CEO of Freddie Mac, later gave a speech in which he stated that “we were given 24 hours to accede to a government takeover—or else the government would effectively go to war against the company.” Mudd made clear that the Government’s approach was not regulatory practice, as he was not afforded any opportunity to address the Government’s concerns. Rather, as detailed by the FCIC, the Government’s plain goal “was really to force conservatorship.”
58. Although there are other statutory bases on which the FHFA can impose conservatorship, if the conditions are found to be met, the FHFA explicitly states on its public website that the GSEs “were placed into conservatorship upon the consent of each board of directors,” not on any other statutory basis.2
59. Consent based on coercion, false information, and improper threats, like those to which the GSE boards were subjected, is invalid.
Kelly case is now alive, only case that claims cship was illegal.
D. Financial Crisis and Imposition of the Conservatorships ......................................14
1. HERA Allowed the FHFA to Impose a Conservatorship Only if
Specific Statutory Requirements Were Satisfied.......................................14
2. The Conservatorships Were Imposed in Violation of HERA by
Coercing the Boards’ Consent ...................................................................18
3. The Conservatorships Eliminated Shareholder Rights and Destroyed Shareholder Value......................................................................................23
4. Foreign Investment in the GSEs Pressured the Government to Impose Conservatorships Despite the Lack of Any Ground Under HERA ...........26
5. The Government Bypassed Lawful Options to Impose the Conservatorships ........................................................................................27
E. FBOP Subsidiaries and FBOP Failed Due to the Conservatorships’
Destruction of Shareholder Value..........................................................................28
The world doesn’t end, there are 7 scenarios to make us whole, one of those will stick to the wall. As long as Bill is holding his shares I feel confident we will be rewarded for all these years we have been holding our shares. His investment team of 8 talented people are well paid to create value in his 9 Cos, and smart big investors out there pay him 20% of upside & 2% Mngt fees.
The day he sells I will give up too but not until that day. I see now what they see in FnF.
Its gonna be decided by Jury this time for a change & last time in 2014 Lamberth didn’t have discovery docs to disapprove Ugoletti’s death spiral story
Facts matter, evidence didn’t evaporate so until game is over I will always remain positive.
Rop & Bhatti judges can very well make our July/Aug quite exciting, then Sept 19th week is pretrial conference in Lamberth’s court room where he can tell govt you better settle before jury sees these docs
"Everybody knows it's going to be the largest IPO ever" - Sandra Thompson
As we have explained before, we do not need a favorable outcome in the courts for this to be a highly successful investment, as we believe the re-privatization of the two GSEs is their ultimate path, and existing shareholders will be beneficiaries of this outcome. That said, a win in the courts would greatly accelerate this outcome.
We remain confident on long term value of F&F
We believe recap is eventuality regardless of courts outcome
-Ackman
Common or Pref we are all shareholders so lets not waste time on which one will do better than others
We all pursue a common goal
Imo
Despite these disappointing outcomes in the courts, we believe that the GSEs’ exit from conservatorship remains a question of when and not if, as their role as the irreplaceable core of the U.S. housing finance system is now broadly acknowledged across the political spectrum. Privatization of Fannie and Freddie will ensure that private capital bears the first loss in any future real estate dislocation, rather than having Treasury or U.S. taxpayers bear the risk. As common shareholders, we own valuable perpetual options on both entities that we believe will be worth many multiples of today’s prices once re-privatization occurs. The perpetual nature of these options protects our investment even if Fannie and Freddie do not exit conservatorship for years. In the meantime, both entities continue to build capital through retained earnings and now have combined capital of $75 billion.
https://assets.pershingsquareholdings.com/2022/03/29140526/Pershing-Square-Holdings-Ltd.-2021-Annual-Report.pdf
Losses in the main funds on retailers such as Target Corporation and Borders Group Incorporated were offset by gains on short positions in MBIA and FSA, Ackman explained. MBIA had been “the gift that keeps on giving,” but not any longer. Ackman told the group that he had closed out the MBIA position at the end of 2008 after nearly seven years. “It’s the end of an era,” Ackman said and moved on to the next slide.
Ackman’s short position on MBIA had been his highest-returning investment to date. Pershing Square investors made about $1.1 billion as faith in the bond insurer collapsed. As the managing partner with the largest stake in the fund, Ackman received the largest share of those gains, around $140 million. He didn’t actually pocket any of it, though. The gains offset losses elsewhere in the fund during 2008. Yet Ackman figures he owes the Pershing Square Foundation the full $140 million. He has given the foundation $50 million and expects over time to pay the $90 million balance as future profits cover 2008’s losses.
Those who continued to bet with Ackman and kept putting more money into the fund made multiples of their investment.
“Let’s take some exposure off the table,” Namvar said, confronting the issue with Ackman directly. “Look, it’s not about the thesis. It’s about the size of the exposure,” he reasoned.
MBIA and Ambac credit-default swaps were moving 50 to 100 basis points in a day. It was one thing when the position was a small fraction of the fund’s assets, but it had become a substantial part of the portfolio as the price of the contracts had surged. Too much hinged on it.
Ackman heard him out, and then he told Namvar simply, “Don’t be weak.” There was nothing more to say.
At 4:02 a.m. on January 30, 2008, Ackman e-mailed more questions to O’Driscoll and his team at Credit Suisse who had been working all night to make sure the data were complete. Before the market opened that day, Ackman gave the model’s predictions to Charlie Gasparino, a reporter at CNBC, who announced them on air. Shortly after, Ackman issued a press release describing the model. “Up until this point in time, the market and the regulators have had to rely on the bond insurers and the rating agencies to calculate their own losses in what we deem a self-graded exam,” Ackman said in a statement. “Now the market will have the opportunity to do its own analysis.”
There had always been that personal element in Ackman’s criticism of MBIA. Ackman had never doubted that MBIA executives wanted to put him in jail over his report questioning the company’s credit rating. In 2009, an individual involved in the 2003 investigation of Gotham agreed that MBIA’s response to Ackman had been unusually aggressive. “This was serious stuff,” the individual said. “They referred him to Spitzer who not only could have put him out of business but could have locked him up and taken him away from his kids.”
Loeb had talked to Ackman for several years about MBIA. He’d also held short positions on the bond insurers. Just now, with Ackman’s campaign against MBIA in overdrive, and confidence in the company crumbling by the day, Loeb couldn’t resist sending Ackman the Dumas novel. “He is not a vengeful person, but he has a keen sense of justice,” Loeb says of Ackman. “It’s an important nuance.” Loeb explains that the book is not just about revenge but also about perseverance. “It’s relevant to Bill because he was so dogged and persistent,” says Loeb. And in the spring of 2008, as in the final chapters of The Count of Monte Cristo, “everything seemed to be falling into place,” Loeb recalls.
As Ackman testified, Roy Katzovicz, Pershing Square’s chief legal officer, sat immediately behind him. Katzovicz had noticed this “adviser” position made for a prominent camera shot on C-SPAN. He was doing his best to present an appropriately calm and composed appearance as Ackman hit on all the points they had discussed in their preparation: the futility of a bank bailout of the bond insurers and the need to reform the municipal bond rating scale’s triple-A ratings.
Then Kanjorski posed what Katzovicz saw as clearly rhetorical questions: “How the hell did we get here? How did things get this screwed up?” Ackman’s hand went up. This is not school, Katzovicz thought. He reached over discreetly and tugged at the back of Ackman’s jacket, hoping to apply enough pressure to get him to lower his arm. Ackman resisted and Katzovicz tugged again, meeting with even more resistance. Worried he might detach Ackman’s sleeve live on cable television, he gave up.
“Investors clearly don’t trust the triple-A rating,” Ackman said. “What would create trust would be the transparency of the bond insurers coming clean.” The banks needed to be honest about their exposures, including how much they were relying on the bond insurers to shield them from losses. The bond insurers needed to disclose exactly what they had guaranteed.
The holding company, which owned the GIC business, could very well end up filing for bankruptcy. In which case, Ackman would make billions of dollars for his investors.
Ackman predicted at his “Saving the Bond Insurers” presentation in November 2007 that MBIA Inc. would be out of cash by the second half of 2008. His prediction was on the verge of playing out. He was also late for lunch.
Keep selling,” Ackman messaged Saad back. The transactions that day marked the first time Ackman had sold any significant amount of MBIA exposure since he began buying protection on MBIA in 2002
On June 18, Ackman made a presentation to a group of attorneys and hedge fund managers at the law firm Jones Day. That presentation, called “Saving the Policyholders,” was his last on the bond insurers.
He had a plan for recapitalizing Fannie Mae and Freddie Mac, the giant government-chartered mortgage companies, which many inves- tors feared were now insolvent. Ackman also had a short position in Fannie Mae’s stock and in both government-sponsored enterprises’ subordinated debt, which would rise in value if Ackman’s plan was implemented.
Ackman told the anchors on CNBC that it would be a mistake for the government to put equity into Fannie Mae and Freddie Mac. The companies needed to be recapitalized, and taxpayers shouldn’t be the ones to do it, he argued.
The two companies had all the capital they needed, Ackman said. It was just in the wrong form. They had too much debt and not enough equity. The company could be recapitalized by wiping out the equity holders, giving the junior debt holders warrants and giving the senior debt holders equity in the company.
Anchor Becky Quick asked Ackman when he had come up with this idea and when he had taken his short positions on the securities.
“I woke up on Thursday morning with an idea,” Ackman said. “The more I thought about it, the more logical I thought it was and that it would be implemented.”
Almost everyone was certain that bond insurers had found one of those safe places. As 2006 drew to a close, Ackman wrote to his investors: “MBIA is, by a large margin, our largest loser for the year.”
“Let’s hold off on more [credit-default swap] purchases,” Ackman wrote to Erika Kreyssig, the Pershing Square trader, in an e-mail in late 2006. “We are big enough in MBIA so that if it works, we will be happy.”
When Ackman wrote to investors in the early spring of 2007, he had never been more enthusiastic about the fund’s MBIA position. “For some time, I have believed that our investment in MBIA credit-default swaps offers the most attractive risk/reward ratio of any investment I have come across in my investment career,” Ackman wrote in a March 5, 2007, letter to investors. It cost the fund about $10 million a year to have a bet on MBIA in the credit-default-swap market. The potential payout in the event MBIA filed for bankruptcy was $2.5 billion.
“The price of CDS on MBIA today continues to imply that the market assesses the probability of the company defaulting to be nominal,’’ Ackman wrote. ‘‘We believe otherwise.”
On the same day, Ackman sent an e-mail to his investment team: “I think we should short some Ambac.” He had been reading Ambac Financial Group’s 10-K filing, and the second-largest bond insurer had “larger mortgage-backed securities and home-equity exposure than MBIA, at around $60-plus billion, or approximately 10 times share- holders’ equity.”
During the last week of July, Gerald Russello, the former lead investigator in the Securities and Exchange Commission (SEC) probe of MBIA, e-mailed Ackman a copy of an article headlined “MBIA Independent Review Finds No Wrongdoing.”
“I have lost confidence in the SEC,” Ackman replied.
When Ackman met again with the SEC later that summer, he lost his temper and told the government attorneys, “This company will implode, it will take the global capital markets with it, and you could have prevented it.”
The group took seats around a conference table and Ackman delivered the “Who’s Holding the Bag?” presentation he had given at the Ira Sohn Investment Conference in May. He described how the incentives to securitize and sell mortgages created enormous moral hazard in the mortgage market, how faulty structures allowed billions of dollars of doomed securities to be built out of the riskiest parts of bonds, and how small losses on $100 billion portfolios of collateralized-debt obligations (CDOs) could wipe out a bond insurer’s entire capital base.
Ackman argued. “There’s a huge crisis on the horizon, and it’s going to come sooner than you think,” he told the assembled group.
When the Pershing Square group got back to the office, others at the fund were eager to hear how things went. “Everybody would pile into Bill’s office for a recounting of events,” McGuire remembers. It was more than an investment-team event. Everyone was eager to hear about it: the investor-relations group, the traders, the tech guys, the assistants. “People appreciated the position, its significance to the firm and to Bill personally.”
“It was an incredible meeting,” Ackman told the group. Regulators were going to see that MBIA shouldn’t be taking any more money out of its insurance unit because policyholders are in jeopardy. “They’re toast,” Ackman concluded of MBIA.
Eventually, one of Ackman’s phrases for describing the success of his MBIA meetings was adopted around the office as shorthand for Ackman’s optimism. “Bill’s meeting? Ten out of ten?” “Yep. Ten out of ten.”
Ackman wrote to Pershing Square investors the same day: “In 2006, our short position in MBIA’s stock and our investment in credit-default swaps were a source of significant mark-to-market losses,” Ackman said. “We have more than recouped our previous mark-to-market losses on this investment.” Investors seeking to protect $10 million of MBIA debt against default for five years would have agreed to pay $16,000 a year in premiums on the day MBIA announced its settlement with regulators in January. That same insurance now cost $250,000 a year. “We believe that we are still in the early innings,” Ackman wrote.
As the summer drew to a close, Ackman attended the U.S. Open as a guest of JPMorgan. He made his way through the crowd at the Arthur Ashe Stadium in Flushing Meadows to the bank’s court-side suite. Inside, JPMorgan CEO Jamie Dimon and his wife chatted with guests. Dimon shook Ackman’s hand and mentioned that he’d seen the “Who’s Holding the Bag?” presentation. “Very interesting,” he told Ackman.
“Make sure you don’t have any bond-insurer exposure,” Ackman told Dimon as the matches played on.
By November 2, CDS rates jumped to $470,000; one day later, the cost stood at $510,000.
On November 28, 2007, Ackman took the stage at the Value Investors Conference in Manhattan.
For the first time, Ackman had hired security guards to accompany him to a presentation. Many people believed Ackman was fanning a dangerous fire with his criticism of the bond insurers. During a Barclay’s Capital conference call on the financial guarantors earlier in the month, one caller prefaced his question by stating that he believed those writing and speaking negatively about the bond insurers were “financial terrorists.”
For years Ackman had asked regulators, reporters, and just about everyone he spoke to about MBIA to see no contradiction in shorting a company and being a decent person. It is an idea that many people simply can’t accept.
When Ackman had testified at the Securities and Exchange Commission in 2003, this issue of doing good by short selling had come up. Ackman had said it was one reason he decided to short Farmer Mac. “I prefer investments where I’m not fighting against the country. You know, where there’s public policy on my side instead of against me,” Ackman had told the investigators.
But the SEC attorneys had been skeptical. Wasn’t he really interested in Farmer Mac because he was seeking to profit from the company’s collapse?
“I’m a bit idealistic so it isn’t only a profit motive, but there was a profit motive, absolutely,” Ackman had responded.
Now Ackman asked the packed auditorium of investors to believe that he had devised a plan that would both hasten the collapse of a company he was betting against and do some public good in the process. Not many people would try to pull that off, but Ackman had his unrepentant idealism.
Ackman’s 146-page presentation was titled ‘‘How to Save the Bond Insurers,” and it laid out his plan for conserving capital within the insurance subsidiaries of MBIA and Ambac.
Ackman also announced that—at least as far as his personal profits were concerned—he was now shorting the bond insurers for charity. “We are going to make hundreds of millions of dollars on the failure of the holding companies,” Ackman concluded. “So I’m pledging to give my share of the profits to the Pershing Square Foundation.” Ackman had set up the foundation to provide funding for education and other charitable causes.
“He may be aggressive, he may be over the top, he may not be able to speak in short sentences,” New York Times columnist Joe Nocera concluded following the presentation. “But he’s doing the hard work, and thinking the hard thoughts that they refused to do for so long.”
Ackman seized the moment to remind some people of that.
The letter was also addressed to the three New York SEC staff attorneys with whom Ackman had met over the years: Alan Kahn, Steve Rawlings, and Chris Mele. But the real barbs were directed to those higher up at the SEC. “My sense is that it’s more likely that the responsibility for the lack of pursuit of these issues lies at the highest levels of the SEC including Chairman Cox,” Ackman wrote.
“You cannot kick our chief regulator in the nuts without consulting with me first.” Ackman agreed, and Katzovicz stayed.
Einhorn wasn’t so sure. “I need to figure out how Bill does meetings,” Einhorn joked, adding, “I always feel like those kinds of meetings are a waste of time.”
Not Ackman. “Bill was optimistic every time,” McGuire remembers.
The MBIA position had taken Ackman years to build, buying $10 million blocks of protection day after day. The lowest price he agreed to pay in premiums was 13 basis points, or $13,000 a year, and the highest was 700 basis points, or $700,000 a year. Most of the position was bought for less than 60 basis points. With MBIA 5-year credit-default swaps trading at around 450 basis points, there was a strong argument for taking profits.
When Ackman met with the advisory board to give his views on the MBIA position, he repeated what he’d been telling investors for years. Despite the 30-fold rise in the value of MBIA CDS contracts, he remained convinced that Pershing Square should continue to hold its short position: “I have never seen such a good risk-reward opportunity in my entire career.”
In late January 2007, when MBIA announced that it was settling the regulatory probe the cost of protection was quoted as low as 13 basis points. Now it was approaching 1,300 basis points.
The magnitude of change in MBIA CDS prices between January 2007 and January 2008 was equivalent to a $13 stock rising to $1,300.
The more I looked, the more I found,” he told me, and he just kept finding more.
Ackman gave me a CD-ROM containing every e-mail he had written or received that mentioned MBIA as well as years of appointment calendars and access to an office filled with more than 40 boxes of documents he’d collected in researching MBIA.
Ackman took on this sacred institution knowing that he stood to make his investors billions of dollars if he was right.
Brash, blunt, almost neurotically persistent, Ackman was the perfect foil to the bond insurance business. Even among his friends and colleagues, Ackman is known for being a font of not-always-welcome forthrightness
Bill Ackman’s openness and optimism are key ingredients of this book, and I am grateful to him for sharing both with me over the last few years. He gave me a story to tell amidst all the financial gloom and doom that is in many ways about the importance of free speech, persistence, and staying positive.
Ackman explained that the position had the potential to generate a return of approximately five times the fund’s total assets if it was successful.
“Bill did what he always does on vacation,” Hilal says. He read financial statements. That week his reading consisted of years of MBIA quarterly filings. “Every once in a while, you’d hear Bill exclaim, ‘Oh, my God, this is such bullshit,’” Hilal recalls. “What he was reading about was another layer of hidden leverage or messed up accounting at MBIA. The tone was a combination of surprise but also glee: ‘I can’t believe it’s this good.’
Ackman churned out a series of reports on the company provocatively titled “Buying the Farm,” Parts I, II, and III. He didn’t mince words: “Gotham believes that the company is in precarious financial condition and could face severe financial stress.”
For months, Ackman was a thorn in Farmer Mac’s side.
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.
Bill came in bearing an armload of stuff, talking a hundred miles an hour,” Schroeder says. “There was the obvious part, that [MBIA was] overleveraged, and we agreed with that.” But there was a list of other issues, “a many-headed hydra” of other issues, not all of which Morgan Stanley analysts agreed were problems, Schroeder says.
Ackman’s unwillingness to mince words was evident long before he came to Wall Street. “He’s not a critical guy, but he has a point of view,” says Michael Grossman, a friend of Ackman’s from high school. The two grew up in the prosperous suburb of Chappaqua, New York, with the children of executives from IBM and Wall Street. “There was a lot of type A in the mix. It was an affluent, competitive place,” Grossman recalls.
Grossman describes Ackman as a “force of nature” at the Horace Greeley High School, where he graduated fourth in his class in 1984. Tall, with prematurely gray hair, Ackman stood out. “When Bill came into a room, you knew he was there.” That was even before one got wind of his personality. “Bold. Sharp. Brash. Blunt,” Grossman says. “Some people loved him, some found him abrasive.” Grossman gave Ackman the epithet that appeared in his high school yearbook: “A closed mouth gathers no foot.”
The sentiment sprung partly from Grossman’s frustration with Ackman as a partner on the tennis team. “If there were a film of us playing tennis, it would show him talking and me ignoring him,” says Grossman. “He’d say to me, ‘You just missed a forehand volley into the net.’ He’d reprimand himself, too, if he missed a shot. He would talk to me literally after every point. He paid compliments, too, even to himself.”
He says what he thinks. He has always said what he thinks. There’s not a lot of nuance. Either it’s true or it’s not,”
Let’s face up to what Harvard Business School represents,” Ackman argued in a commentary in the Harbus News. ‘We spend 90 percent of our studies at HBS pursuing the maximization of the dollar.”
Being a value investor usually means standing apart from the crowd, challenging conventional wisdom, and opposing the prevailing investment winds,” Klarman wrote. “It can be a lonely undertaking.”
It was a heady time for Ackman, then just 28 years old. There was the morning Ackman and Jerry Speyer, a founding partner of real estate giant Tishman Speyer, emerged from an all-night strategy session in a diner to grab a predawn copy of the New York Times and read that their supposed partner in the deal, Mitsubishi Estate, had decided to default on the Rockefeller Center mortgage.
And there was the time Donald Trump called. “Goldman Sachs is trying to steal Rockefeller Center, Bill. We’ve got to do something about it,” announced Trump, who had never spoken with Ackman
Gotham didn’t walk away with Rockefeller Center nor did it team up with Trump, but the fund made a fortune for its investors, selling its stake to Goldman at a large profit. The fund was up 50 percent that year. Confirming that he had arrived at an early age, Crain’s New York Business included Ackman on its “Forty Under 40” list in 1999 for his work on Rockefeller Center.
Ackman also caught the attention of executives at Leucadia National. Leucadia would co-invest with Ackman in multiple deals over the years.
Ackman had a way of leaving an impression. He had a way of bludgeoning with his intelligence,” Touby remembers. During one Media Bistro board meeting, Ackman’s barrage of questions about Touby’s business plan left Touby in tears. “That many questions just makes you feel inadequate,” she says.
Ackman was undeterred. He turned his full attention to writing a detailed report on MBIA. During the first week of December 2002, the report was e-mailed back and forth numerous times among lawyers and various Gotham employees. “We want to stay far, far away from libel, slander, etc., and make clear what’s fact and what’s opinion,” Ackman wrote in an e-mail to Lyss and David Klafter.
“While you can consider your investment in Gotham Credit Partners to be a hedge against a bear market or other economic collapse, our goal here is to make you money no matter what the general state of the economy or market,”
“We are not dropping the ball on MBIA,” Ackman wrote back. “They have worked hard to do this to us, and they have succeeded. Some day the facts will make it our turn.”
Ackman refused to be discouraged.
“It’s no fun going around to nursery schools and having people think you’re the next Dennis Kozlowski,” Ackman says. The idea that Ackman and Berkowitz might go to jail was something Hilal thought about in darker moments.
Ackman appealed to Rutherfurd to reconsider. This is a “CEO-level issue for Moody’s,” he insisted.
It was a phrase he repeated when he wrote Stephen Joynt, the head of Fitch Ratings, a 15-page letter in March 2003. “MBIA is a CEO-level issue.”
“Clearly, I am not writing to you as simply an unbiased good citizen,” Ackman told Joynt. “Rather, I am writing after having done extensive research and having made investments on which we will profit if my analysis is correct.”
He wasn’t optimistic that Ackman would heed his advice. “Bill rejected my advice more times than all of my other clients combined over the course of my entire career,” Marcu remembers.
We live in America. Free speech is an important central tenet of living in America,” Ackman said. “Someone may say something they believe to be true, which later turns out to be false. If they were
held to a standard whereby they were subject to some violation of law as a result of that, I don’t think anyone would ever make a public statement again. Certainly not about something as complicated as a public company, particularly this one.’’
He continued. “The capital markets benefit when money managers, who do their homework, share ideas. I worked incredibly hard to make this report accurate. Is it possible that there’s a mistake in the report? Yes. Did I knowingly put something in the report that was false? No.”
Ackman’s follow-up e-mail to Budnick contained 146 questions, starting with: “Why did MBIA ask the regulators to investigate Gotham Partners? Why did the company hire a PR firm and work to discredit Gotham in the media if it is truly Jay Brown’s desire that shareholders seek out even critical points of view? Doesn’t Brown realize that few others will be prepared to criticize MBIA in light of how aggressively the company has attacked Gotham?”
“This is the most incredible opportunity I’ve ever seen,” Tilson remembers Ackman saying, when they spoke again about Farmer Mac. Oh, my God, this is the biggest fraud we have ever seen in our lives.’ Both of us had the identical reaction,” Tilson said.
Perhaps you have noticed that Mr. Ackman does not follow my instructions much of the time,” Marcu said. “It’s below 1 percent; it’s perhaps below zero percent.”
“If my lawyer would be quiet, I would give my answer,” Ackman said.
Although regulators didn’t appear to be finding the criminal acts they were looking for, it was a stressful time. Ackman’s wife, Karen, remembers the low point as the day Marcu passed along a message to Ackman from one of Spitzer’s attorneys: “Tell him to pack his toothbrush because we’re going to find something.”
Ackman’s plight drew sympathy. When a college friend, having read coverage of Gotham’s problems in the newspaper, wrote to offer support, Ackman responded: “While it is a time-consuming process and I am not used to being perceived by anyone as having done something wrong, I have a clean conscience and am not afraid of any of the facts. Believe it or not, I actually enjoy testifying.”
Ackman explained how he was drawn to look at other companies that were perceived to be low risk after his success with Farmer Mac. He got a trial subscription to Moody’s Investors Service and printed out about 15,000 pages on structured finance and the bond-insurance business. He searched for articles and everything he could find on LexisNexis that mentioned the company, and he looked at regulatory filings. “This was one of those cases where the more work I did, the more confident I got,” Ackman said. “The more people I spoke to, the more I learned, and the more conviction I had with respect to the investment.”
Ackman had even surprised himself with the extent of his MBIA research. It wasn’t until the law firm Covington & Burling sent him a photocopying bill to comply with the attorney general’s subpoena that Ackman realized he’d read and marked up 140,000 pages of documents on MBIA, including financial statements, notes, and securitization reports.
He was determined not to let all that research to go waste. At any opening, Ackman tried to hammer at the importance of the issues he’d raised in the MBIA report.
In fact, Marcu did advise Bill Ackman to let it be. “Twenty-five, maybe thirty times,” Marcu remembers. But Ackman was determined to get back in front of both the Securities and Exchange Commission (SEC) and the attorneys in Spitzer’s office.
“Bill, it’s 9 p.m. here,” Marcu told him. “It must be 3 o’clock in the morning where you are.”
“This is incredible stuff,” Ackman said. “I can’t put it down.”
Here’s a person, Marcu says, who seems to have gotten quite a few things in life right. “He’s tall, good looking, rich. He has a great family, lives in an incredible apartment,” Marcu says. “So what is he doing reading a bankruptcy treatise at 3 a.m. in the morning when he’s on vacation in Tuscany?”
If MBIA executives had hoped that the investigation would cause Ackman to focus less on their company, they were wrong. With Gotham’s main funds being wound down, Ackman was left with one active investment on which to concentrate his full attention—the short position in MBIA.
Marty Peretz, the New Republic editor-in-chief and Ackman’s longtime friend and investor, offered to write to SEC Chairman William Donaldson, with whom he was friendly.
“Dear Bill, I am writing to bring to your attention a company that is deserving of substantial SEC scrutiny that to date has appeared to escape the SEC’s normally careful review process,” Peretz wrote in a July 2004 letter to Donaldson. Peretz described Ackman’s two-year effort to publicize problems at MBIA, including the initial report, the hiring of forensic accounting experts, Ackman and Siefert’s 33-page letter to the SEC, and the five-hour presentation to a group of SEC officials in February 2004.
“It is Mr. Ackman’s counsel’s view that the SEC has not pursued Mr. Ackman’s and [accounting firm] Kroll’s allegations seriously, and may have dropped the matter entirely,” Peretz wrote.
The trip was a chance to celebrate the successful launch of his fund and to kick back—except that Ackman isn’t very good at kicking back.
“He’s so technical and inquisitive that he drove everyone crazy,” remembers Oliver White, the fishing guide assigned to work with Ackman. “It wasn’t enough to know how something was done. He always wanted to know why—why is it done that way,” White says.
“He is the smartest analyst I’ve ever met,” says Rafael Mayer, managing director of Khronos LLC, a family office and fund of funds investor, and a friend of Ackman’s. “He looks at something and he just decomposes it.”
“Ackman,” he says, “had been marinating in it.”
“He comes across as very smart, with an unusually intense affect,” explains the person who attended a number of Ackman’s presentations. “He’s leaning in, staring fixedly, talking for long periods of time. He’s bright. And he knows he’s bright.”
At his best, Ackman had a way of making others in the room feel like they were as smart as he was. At his worst, he came across as the only one smart enough to get it. Then there was the sheer volume of information he presented. “He had a tendency to throw in everything including the kitchen sink,” the person says.
Ackman delivered what was becoming a well-practiced monologue.
Ackman did manage to get another meeting at Moody’s Investors Service, and he ran through a lengthy presentation on MBIA and Capital Asset. But the rating company remained silent about the issue.
Ackman grew increasingly frustrated. He sent a steady stream of e-mails to Chris Mahoney at Moody’s.
“In the rating agency congressional hearings that took place after Enron, a number of your colleagues testified to Congress about why Moody’s missed downgrading Enron,” Ackman began one late-night e-mail. “If and when MBIA blows up, and it will—it is simply a matter of time in my opinion—Moody’s representatives will again be dragged into a congressional hearing. Moody’s will not be able to say that it was unaware of what was going on at MBIA. That it was misled. It is no longer true that you don’t have the facts. You have the facts you need and you have the ability to get more than we have been able to dig up.”
“I apologize for putting you and Moody’s on the spot,” Ackman concluded. “I have simply lost patience, and it is 2 in the morning.”
“I chose to go anyway. He was different from the person I was reading about.”
The first thing Ackman did after White arrived was drop the report Is MBIA Triple-A? on White’s desk. “Bill never doubted that he could possibly be wrong,” White recalls. “It was never that [MBIA’s] stock was going to go down and we were going to make money that way. It was that the whole business model was going to come apart.”
These are people who challenged my reputation,” Ackman said. ‘‘Do you understand what it’s like to have a company try to destroy you? To see your children’s friends shy away from them because their parents read lies about you in the Wall Street Journal?” Ackman was visibly angry.
Ackman still cared. Pershing Square continued buying.
Katzovicz noticed that Ackman was getting agitated. “I’ve shown you this fraud. I’ve shown you that fraud,” Ackman said. “What do I have to do? What do I have to prove to you before you take some action?” His face was flushed, his eyes misty.
Katzovicz was dumbfounded. Ackman was giving the SEC attorneys what could only be described as a tongue-lashing. In all his experience as an attorney, he had never seen an SEC lawyer treated with anything but deference. Katzovicz broke out in a cold sweat. He reached out and put his hand on Ackman’s shoulder, hoping to send a message that things might be getting a bit too intense.
Ackman regained his composure. “Okay. I have something else for you,” he said and pulled out a trustee report for a collateralized-debt obligation (CDO) called Sagittarius. A trustee report is a kind of report card that shows how a CDO’s assets are performing and how the various layers of protection for each class of CDO investor are holding up. This CDO was running into trouble, and yet MBIA had not taken any reserves against it, Ackman explained. “It’s yet another fraud.”
He passed around copies of the trustee report and then launched into an explanation that Katzovicz describes as “a blizzard of information.” The SEC attorneys flipped back and forth through the pages of the report as they tried to keep up with explanations about defaults, subordination, and super-senior tranches. Soon people all over Wall Street and even in remote corners of the financial world would be doing the same thing.