“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.”
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