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.
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