Table of Contents Praise Title Page Copyright Page Dedication Preface Acknowledgements Chapter One - The Meeting Chapter Two - The Short Seller Chapter Three - The Question Chapter Four - Backlash Chapter Five - The Worst That Could Happen Chapter Six - The Trouble with Triple-A Chapter Seven - Unanswered Questions Chapter Eight - Crimes and Cockroaches Chapter Nine - Turning the Tables Chapter Ten - Scrutiny Chapter Eleven - The Black Hole Chapter Twelve - The Court of Public Opinion Chapter Thirteen - The Insurance Charade Chapter Fourteen - When Crack Houses Become Collateral Chapter Fifteen - Storm Warnings Chapter Sixteen - An Uncertain Spring Chapter Seventeen - Apocalypse Now Chapter Eighteen - Parting the Curtain Chapter Nineteen - Ratings Revisited Chapter Twenty - The Panic Begins Chapter Twenty-One - Catastrophe and Revenge Chapter Twenty-Two - Time Runs Out Chapter Twenty-Three - Bailout Chapter Twenty-Four - Judgment Day Chapter Twenty-Five - The Nuclear Threat Epilogue Notes Index About the Author Praise for Confidence Game How a Hedge Fund Manager Called Wall Street’s Bluff by Christine S Richard Bloomberg News “Christine Richard’s Confidence Game is an insightful, timely, and fascinating high-speed drive into the often difficult-to-penetrate world of short sellers, with its particular focus on Bill Ackman and his campaign against monoline insurance giant MBIA.” SCOTT B MACDONALD SENIOR MANAGING DIRECTOR ALADDIN CAPITAL LLC AND COAUTHOR OF SEPARATING FOOLS FROM THEIR MONEY “How to head off the next crash? Listen to the dissidents now Christine Richard’s deeply researched and deftly written account of Bill Ackman’s high-stakes struggle with a leading pillar of a now-collapsed system is the right book at the right time, and a mesmerizing read.” DEAN STARKMAN EDITOR “THE AUDIT,” THE BUSINESS SECTION OF THE COLUMBIA JOURNALISM REVIEW “Bill Ackman’s battle with MBIA will be remembered as one of the great epics of Wall Street history, and no one followed the story more closely than Christine Richard.” BETHANY MCLEAN COAUTHOR OF THE SMARTEST GUYS IN THE ROOM “Finally, a financial crisis book with a hero It’s a compelling morality tale of how one man uncovered a massive fraud and then fought tenaciously to show the world he was right Richard had unparalleled access to the major players in this saga—from venal executives to incompetent regulators—and she weaves the threads of complex financial shenanigans into a page-turning narrative Ackman emerges as the Don Quixote of financial markets: you will root for him and a happy ending.” FRANK PARTNOY AUTHOR OF F.I.A.S.C.O., INFECTIOUS GREED, AND THE MATCH KING “Confidence Game is a lesson for all investors on the value of independent and exhaustive research It’s also a riveting story.” TODD SULLIVAN CREATOR OF VALUEPLAYS.NET AND A REGULAR CONTRIBUTOR TO THE STOCKTWITS BLOG NETWORK AND SEEKING ALPHA Copyright © 2010 by Christine S Richard All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com Library of Congress Cataloging-in-Publication Data: Richard, Christine S Confidence game : how a hedge fund manager called Wall Street’s bluff / Christine S Richard p cm Includes bibliographical references and index Summary: “Confidence Game tells the story how hedge fund manager Bill Ackman’s warnings regarding bond insurer MBIA’s credit rating went unheeded as Wall Street careened toward disaster”—Provided by publisher eISBN : 978-0-470-87330-4 Municipal bond insurance—History—21st century Securities industry—Credit ratings—21st century Wall Street (New York, N.Y.)—21st century Global Financial Crisis, 2008-2009 I Title HG4538.52.R53 2010 368.8’7—dc 22 2010001831 For Dean McLean, Bethany McCulley, Paul McDaniel, Raymond McDonald’s McGuire, Mick advises Ackman on MBIA position McKee, Brittany McKiernan, Anthony McMullen, Keiran Media Bistro (mediabistro com) Mele, Chris Memorial Properties, LP Merkel, David Merkin, Ezra Merrill Lynch ARS and Bank of America purchase of CDOs and CDSs and largest loss in company history (2007) mortgage crisis and rescue proposals for bond insurers and Microsoft Minor, Marc Mischel, Howard MIT (Massachusetts Institute of Technology) Mitchell, John Mitsubishi Estate Moloff, Andrew Money Market One monolines, defined Monte Carlo simulations, defined Moody, John Moody’s Investors Service AHERF and Ambac and Assured Guaranty and bond-default studies business described Capital Asset Research Management and CDOs and CIFG and congressional hearings on bond ratings and “Credit: Man’s Confidence in Man” (giant bronze frieze) FGIC and FSA and GICs and Gotham Partners / Ackman and MBIA and mortgage crisis and municipal-bond ratings system Pershing Square / Ackman and rescue proposals for bond insurers and review of bond insurers announced (November 2007) XL Capital and Moradi, Mohamed al moral-obligation bonds, defined Moreland Act Commission Morgan Stanley CDOs and Financial Guarantors on the Knife’s Edge Gotham’s Concerns—Warranted or Not? mortgage crisis and rescue proposals for bond insurers and Morgenson, Gretchen Moriarty, Michael Morrison, Cohen & Singer mortgage crisis ABX Index ACA Capital and Ambac and American Securitization Forum Assured Guaranty and Bear Stearns and CDOs and CIFG and Citigroup and Congress and FGIC and FICO scores Fitch Ratings and FSA and housing market and Lehman Brothers and MBIA and Merrill Lynch and Moody’s and Morgan Stanley and Pershing Square / Ackman and size of subprime market Standard & Poor’s and UBS and vintage (time frame) of loans Wachovia and XL Capital and Munger, Charlie Munich Re (Muenchene Rueckversicherung-Gesellschaft) “Municipal Bond Insurance Riddle, The” (Angel) MuniServices Murphy, Kevin Namvar, Ali Nash, Jack National Association of Attorneys General National Association of Real Estate Editors National Association of Securities Dealers (NASD) National Indemnity National Public Finance Guarantee Corporation Natixis Nazareth, Annette negative basis trade, defined Nester, John Neuberger Berman Neumann, Michael Neustadt, David New Century Financial Corporation New Republic New York City, rated by Standard & Poor’s New York State Martin Act moral-obligation bonds and Supreme Court of New York State attorney general’s office See also Spitzer, Eliot AHERF andAIG and Capital Asset Research Management and Farmer Mac and Gotham Partners / Ackman and Investor Protection Bureau MBIA and Pershing Square / Ackman and New York State Insurance Department (NYSID) AHERF and Ambac and Capital Asset Research Management and congressional hearings on bond ratings and Gotham Partners / Ackman and insurance law “2604,” MBIA and Pershing Square / Ackman and rescue proposals for bond insurers and XL Capital and New York Times Farmer Mac and Gotham Partners / Ackman and MBIA and Pershing Square / Ackman and Spitzer scandal and New York University School of Law Nightingale Nixon, Richard Nocera, Joe Noland, Doug Nomura Securities Company Northcross, Mark Northern Illinois University NTL Octonion CDO Limited O’Driscoll, Fiachra Odyssey Partners O’glove, Thornton O’Neal, Stan O’Neill, Leo One Up on Wall Street (Lynch) Onyx Acceptance Corporation Open Source Model (Credit Suisse) orphaned transformers, defined Ortseifen, Stefan Oswald, Lee Harvey Ovitz, Michael Pandit, Vikram Paulson, Hank Paulson, John Paulson Credit Opportunities Fund Pelling, Kendall Peretz, Marty Pershing Square, Bill Ackman and AHERF and Ambac and annual dinner (2009) Assured Guaranty and Barron’s and “Bond Insurers: The Next S&L Crisis?” Capital Asset Research Management and “Caulis Negris” (“Black Hole”) deal and CDSs and Citigroup and Congress and Council of Economic Advisers and Fannie Mae and Farmer Mac and FDIC and Federal Reserve and financial success for Fitch Ratings and founding the firm (2003) Freddie Mac and FSA and House Financial Services Committee and “How to Save the Bond Insurers,” investment team, building the letters to his investors Leucadia National investment in mark-to-market and MBIA and Moody’s and mortgage crisis andNational Association of Attorneys General and New York Times and notice of discontinuance received from SEC NYS attorney general’s office and NYS Insurance Departmant and Open Source Model (Credit Suisse) used by rescue proposals for bond insurers and “Saving the Bond Insurers,” “Saving the Policyholders” (Pershing Square / Ackman) SEC and Security Capital Assurance and at Sohn (Ira) Investment Conference Spitzer and Squawk Box interview Standard & Poor’s and U.S Department of the Treasury and at Value Investors Conference Wall Street Journal and “Who’s Holding the Bag?” Pershing Square Foundation Peter, Greg Pierre-Louis, Lydie PIMCO (Pacific Investment Management Company) Pinnacle Peak CDO Limited Piper Jaffray Pitt, Harvey Pittsburgh Community Reinvestment Group Pittsburgh Gazette Pizza Hut Plaut, Peter PNC Bank PNC Financial Services Group Poiset, Matthew Pollice v Capital Asset Pork Magazine Port Authority of New York and New Jersey bonds Powell, Lynn Pre-Paid Legal Services Press, Joel Preston, Darrellrice WaterhouseCoopers Priore, Thomas Progressive Farmer Purtill, Sabra Putnam Investments Quality of Earnings (O’glove) Quick, Becky Raiter, Frank Ramos, Charles Ram Re Rankin, Al Rawlings, Steve Reinke, Winfried Renfield-Miller, Douglas Reuters Rhineland Funding Ricciardi, Christopher Ridgeway Court Funding II Ltd Rockefeller, David Rockefeller, Nelson Roseman, Alan Rosner, Joshua Ross, Wilbur Roth, Paul Rothschild, James de Rouyer, Stan Royal Indemnity Corporation Rubin, Robert Russello, Gerald Rutherfurd, John Ryan, Rob Saad, Ramy Sagittarius trustee report Sallie Mae Salomon Smith Barney Saluzzi, Joseph S&P See Standard & Poor’s San Joaquin Hills toll road (California) bonds, MBIA and Sanno Point Capital Management, Saqi, Vinay Sard Verbinnen “Saving the Bond Insurers” (Pershing Square / Ackman) “Saving the Policyholders” (Pershing Square / Ackman) Schonfeld, Mark Schroeder, Alice background of Scoby, Joseph Schultz, David Scion Capital LLC, Securities and Exchange Commission (SEC) AHERF and Ambac and Bear Stearns and Capital Asset Research Management and CDSs and Fannie Mae and Farmer Mac and Freddie Mac and Gotham Partners / Ackman and Madoff and MBIA and - notice of discontinuance sent to Ackman Pershing Square / Ackman and short sales banned by securitization, risks of See also collateralized-debt obligations; mortgage crisis asset-backed securities (ABS), defined Security Analysis (Graham and Dodd) Security Capital Assurance Limited Fitch Ratings and Pershing Square / Ackman and triple-A credit rating Selz, Bernard Semerci, Osman Sender, Henny shadow banking system, defined Shanker, Joshua Shanley, Kathy Sharma, Deven Sharma, Sanjay Shell Shulman, David Siefert, Roger Siffert, John Sierra Club Silverstein Properties SIVs See structured-investment vehicles Smith, Dick Snowball, The: Warren Buffett and the Business of Life (Schroeder) Ira Sohn Investment Conference Sonkin, Mitch Soros, George special-purpose vehicles (SPVs) “Caulis Negris” (“Black Hole”) deal defined “Havenrock II,” Loreley Purchasing Companies market collapse of (2007) MBIA and orphaned transformers Rhineland Funding Triple-A One Funding Speyer, Jerry Spiegel Spier, Guy Spitzer, Eliot See also New York State attorney general’s office AHERF and Ambac and Congress and Gotham Partners / Ackman and as governor MBIA and Pershing Square / Ackman and prostitution ring scandal rescue proposals for bond insurers and at Wall Street Hedge Fund Forum Wall Street research and SPVs See special-purpose vehicles Squawk Box, Ackman on Stacey, Eve Stafford, Erik Standard & Poor’s ACA Capital and Ambac and bond-default study business described CDOs and congressional hearings on bond ratings and FGIC and Gotham Partners / Ackman and MBIA and mortgage crisis and NYC rating from Pershing Square / Ackman and rescue proposals for bond insurers and review of bond insurers announced (November 2007) S&P 500 Index Triple-A One Funding research report Standard Oil St Denis, Joseph Steel, Robert Stein, Mark Steinberg, Joseph Steingart, Bonnie Structured Finance and Collateralized Debt Obligations (Tavakoli) structured-investment vehicles (SIVs) defined Nightingale Student Finance Corporation bonds Target Corporation Tarnoff, Jerome Tavakoli, Janet Teach for America Tehrani, Juliette Thain, John Themis Trading LLC, TheStreet.com Third Avenue Management Third Point LLC, Thomson Financial Thompson, Anthony Thomsen, Linda Thoreau, Henry David David W Tice & Associates Tilley, Christopher Tilson, Whitney background of NYS attorney general’s office and Tim Hortons Tishman Speyer Touby, Laurel Trinity College Triple-A One Funding Trump, Donald Turner, Lynn T2 Partners Tyco UBS Investment Bank / UBS Securities ARS and CDOs and mortgage crisis and rescue proposals for bond insurers and Unger, Laura United Airlines University of Michigan University of North Carolina University of Pittsburgh Medical Center (UPMC) University Center for Social and Urban Research U.S Congress AIG and Ambac and bond-ratings hearings CDOs and CDSs and FGIC and Fitch Ratings and House Capital Markets Subcommittee House Financial Services Committee MBIA and Moody’s and mortgage crisis and Pershing Square / Ackman and rescue proposals for bond insurers and Senate Agricultural Committee Spitzer and Standard & Poor’s and U.S Department of Agriculture U.S Department of Justice U.S Department of the Treasury Pershing Square / Ackman and rescue proposals for bond insurers and USF&G Value Investors Conference Veno, David Wachovia Wachtell, Lipton, Rosen & Katz Wako, Juichi Waldman, Roger Waldorf Demolition Wallis, David Wall Street Hedge Fund Forum Wall Street Journal AHERF and Capital Asset Research Management and Farmer Mac and Gotham Partners / Ackman and MBIA and Pershing Square / Ackman and Warburg Pincus MBIA, investment in Wasden, Lawrence Washington, Wilbert Washington Mutual Watergate scandal Weaver, Karen Webster, Charles Webster, Daniel Weill, Richard Weinstein, Boaz Wendy’s International Wertheim, Ram Wessel, Andrew White, Oliver Whitehouse, Mark Whitman, Marty “Who’s Holding the Bag?” (Pershing Square / Ackman) Wien, Byron Williams, James WMC Mortgage WorldCom Xerox Corporation XL Capital Assurance CDSs and Moody’s and mortgage crisis and NYS Insurance Department and rescue proposals for bond insurers and XL Capital Ltd Yahoo Finance Zerbe, Ken Ziff family About the Author Christine S Richard is a reporter with Bloomberg News She has covered financial markets in Washington, Hong Kong, Singapore, and New York Her reporting on the bond insurers received awards from the Society of American Business Editors and Writers, the New York Society of Certified Public Accountants, the National Association of Real Estate Editors, the New York Press Club, the Newswomen’s Club of New York, and the Deadline Club She lives in Frenchtown, New Jersey, with her husband, Dean, and their daughter, Sophie ... Library of Congress Cataloging-in-Publication Data: Richard, Christine S Confidence game : how a hedge fund manager called Wall Street’s bluff / Christine S Richard p cm Includes bibliographical... perceptions about MBIA’s triple -A rating remained unchanged and unchallenged Ackman’s bet was spectacularly contrarian He was wagering on the collapse of a company that the rating companies had awarded... MBIA and a hedge fund manager named Bill Ackman, who was obsessed with that company’s practices What is MBIA? It stands for Municipal Bond Insurance Association For years it was the largest of a