Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street's Bluff (Bloomberg) [ハードカバー]

In 2002, hedge fund manager Bill Ackman used credit derivatives to place a "short" bet against MBIA, the largest of municipal bond insurers. (Ackman later bet against other bond insurers.) Ackman raised serious accounting issues with MBIA executives, rating agencies, regulators, industry analysts. Among other things, Ackman questioned MBIA's foray into credit derivatives and synthetic CDOs.

Joseph "Jay" Brown, then MBIA's Chairman and CEO, met with Ackman in 2002 about a negative report Ackman was about to release. Ackman recalls this power-play (P. 6):

"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."

Ackman published the report on his fund's web site: "Is MBIA Triple-A?"

Here's some ironic background you won't find in Confidence Game. In 2003, Jack Caouette, then Vice Chairman of MBIA (he left in early 2005), wrote a blurb, still visible on Amazon, for my book on the dangers of credit derivatives and synthetic CDOs, Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization. He began: "Caveat Emptor! Never in the history of finance has this warning been more appropriate."

Ackman's concerns were reasonable. Structured finance is easily gamed, and fraud was common. Moreover, Ackman was correct about several other accounting issues unrelated to synthetic CDOs. When his initial bet didn't pay off, the financial media strafed him.

Ackman persisted, MBIA protested, and in early 2003, the SEC and New York Attorney General's office investigated him. The NY AG's office, then headed by Eliot Spitzer, grilled Ackman for six days. Ackman's activism eventually led to a two-year investigation of MBIA resulting in its restating seven years of earnings and a $75 million fine.

Ackman didn't stop. He hired a top forensic accounting expert and several times brought evidence of fraudulent accounting to Moody's, the leading credit rating agency. Meanwhile, MBIA restated its numbers twice. At the end of 2005, Ackman wrote Moody's board of directors (P. 137):

"Moody's Aaa rating is so powerful and credible that investors don't do any due diligence on the underlying credit. Every day that Moody's incorrectly maintains an Aaa rating on MBIA, these extremely risk-averse investors unwittingly buy bonds that are not deserving of Moody's Aaa rating."

MBIA escalated its risk. MBIA wrote credit derivatives on new "Triple-A" risk backed by malignant mortgage loans, including built-to-fail mezzanine CDOs. It didn't matter how much "confidence" Wall Street, rating agencies, bond insurers, and regulators had in maintaining a collective financial lie, MBIA was unstable.

In February 2008, MBIA cut its dividend and suspended structured finance activities. Jay Brown wrote MBIA's investors that Ackman's "campaign" was an attempt to destroy his business. Ackman's shorts weren't the problem. MBIA could have used some shorts of its own, since it was long with too little coverage. MBIA had insured rotting mortgage risk with too little capital to maintain even an investment grade rating.

By June 2008, MBIA and Ambac, the largest municipal bond insurers lost their "AAA" ratings and slid fast from there. At the end of 2008, Ackman took $1.1 billion in gains for Pershing Square, enough to offset losses in other investments, some of which subsequently rebounded.

Wall Street banks with financial ties to mortgage lenders fueled bad--and often fraudulent--mortgage lending, created phony mislabeled securities, and off-loaded the temporarily disguised risk on bond insurers (MBIA, Ambac, AIG, FGIC, and more) and nave investors to keep the Ponzi scheme going. A housing bubble fueled by corrupt finance damaged the U.S. economy, and taxpayers bailed out the chief culprits.

Those with "friends in high places" did the most damage to the nation's economy and personally profited the most. It's also noteworthy that Ackman's outrage was not directed at investment banks with whom he traded and that underwrote and created fraudulent value-destroying CDOs against which they bought bond insurance, fed him internal CDO data, internal CDO models, and information on MBIA's and Ambac's positions that Ackman made public, all of which bolstered his confidence to continue with his short positions. The high pay of Wall Street and its cronies doesn't reflect efficient markets or individual brilliance; it's a market failure.

The Great Bailout protected debt holders and some shareholders in corrupt financial institutions. Culprits involved in phony securitizations that damaged the economy have windfall gains and are now heavily subsidized with taxpayer dollars.

Christine Richard's beautifully written account of Bill Ackman's ordeal shows us how much endurance will be required to reverse these mistakes.

In the interest of full disclosure, I attended Bill's book launch party and am quoted in the book.

this is a fascinating account of outlandish corporate greed and hubris and the author's and a fund manager's multi-year attempts to shed sunlight on the manifold fraudulent machinations one large company's management employed to keep its debt rating and "earnings" intact. it also contains insights into the then forthcoming credit crisis, the almost-fraudulent conflicts facing the sell side and bond rating agencies, and the ineptitude and politicization of the sec- sort of michael lewis meets harry markopolous. for me it's a five-star book; however, some of the more technical finance and accounting, while very clear, might make it a slightly less rich experience for those less interested in these details. i was surprised that this book hadn't been more broadly publicized or reviewed, then found out it's only on kindle; hard copy is released 4/26. really great read.

CONFIDENCE GAME is a thoughtful, sharply observed piece of reporting on an historic moment in U.S. history--both financial and sociological--that brought the intricacies of the financial world into sharp focus for me. With a brisk pace, telling details, and the ability to explain the financial industry and its people with wasting a word, Richards has crafted an extraordinary book.