Ackman Devoured 140,000 Pages to Prove `MBIA Was Never “AAA”

By Christine Richard and Katherine Burton
January 31, 2008

It was the $109,000 photocopying bill that hedge fund manager William Ackman says made him realize how much he'd read and underlined before betting against bond insurer MBIA Inc. in 2002.

His law firm charged him for copying 725,000 pages of financial statements and other documents, 140,000 of them about MBIA, to comply with a subpoena. Following New York and U.S. probes of his trading and reports, Ackman persisted in challenging MBIA's AAA credit rating for more than five years, based on his own research.

Ackman may soon be proved right. MBIA, the largest provider of insurance against defaults in the global credit market, today reported a fourth-quarter net loss of $2.3 billion because of a slump in the value of mortgage-related securities it guaranteed. The independent research firm CreditSights Inc. this week said MBIA's credit rating may be downgraded. Ackman had warned that MBIA was magnifying its risks by backing instruments such as those based on loans to the least creditworthy homebuyers.

``It's in the nature of a shareholder activist to be persistent,'' says Ackman, now 41. ``I've been persistent because it's an important issue. People are obsessive about stupid things. They are persistent about important things.''

In the MBIA documents, Ackman says he saw that the insurer was guaranteeing untested asset-backed securities. He also found a reinsurance transaction that allowed the company to downplay a loss. MBIA agreed in January 2007 to pay $75 million to settle U.S. regulators' inquiries into that deal.

$2,000 Bet on SAT

Ackman peppered rating companies and regulators with letters, e-mails and presentations criticizing MBIA's credit rating. He also got then-New York Attorney General Eliot Spitzer, who was investigating Ackman's activities, to probe MBIA.

Shares of MBIA, based in Armonk, New York, fell $2.02, or 13 percent, to $13.96 yesterday in New York Stock Exchange composite trading. The stock is down 81 percent from a 52-week high of $72.85 on Feb. 6, 2007.

In high school Ackman bet his father $2,000 that he would get a perfect score on the verbal portion of the SAT college- entrance exam. He says his dad called off the wager the morning of the test for fear he would lose the bet, though Ackman ended up scoring wrong on one answer.

Betting against MBIA and the No. 2 bond insurer, New York- based Ambac Financial Group Inc., helped Ackman's New York-based fund, Pershing Square Capital Management, to return 22 percent net to investors last year. He says he plans to give his personal gains on the bond insurers to Pershing Square's charitable foundation.

Speaking Publicly

``He has spoken out publicly about it, approached regulators, talked to the media,'' says David Einhorn, 39, head of New York-based Greenlight Capital LLC, who also has wagered against MBIA. ``He's not more right today than he was five years ago that MBIA was never AAA.''

Yesterday, in a letter to the Securities and Exchange Commission and to New York Insurance Superintendent Eric Dinallo, Ackman said MBIA and Ambac may each lose $11.6 billion on guarantees of mortgage-linked debt and other securities. He posted a list of the securities the two companies guaranteed on the Internet, along with a model supplied by an unnamed investment bank, so investors could do their own forecasts of what the insurers might lose.

In 2003, as the New York attorney general's probe was under way, Ackman fired off a memo to MBIA posing 146 questions he says the company never answered. The first was, ``Why did you have me investigated?''

`Emperor Has No Clothes'

``No one wanted to believe that a AAA-rated company was doing what it was doing,'' says Roger Siefert, a forensic accountant Ackman hired in 2003. ``We were treated like the little boy saying `the emperor has no clothes.'''

Chuck Chaplin, MBIA's chief financial officer, says in an interview that Ackman's criticism reflects misperceptions of the bond insurer's business. He disputes Ackman's estimates of MBIA's losses and says the trader is benefiting more from lucky timing than smart analysis.

``He was at the right place at the right time,'' Chaplin says. ``The past six months turned out to be a good time to be short business sectors with mortgage-market exposure, and as it turned out, the bond insurers ended up being one of them.''

Martin Whitman, the 83-year-old chairman of New York-based Third Avenue Management LLC, dismissed Ackman's criticism of MBIA in a December interview on CNBC.

``Mr. Ackman is a slick salesman who doesn't know much about insurance,'' Whitman said. Whitman's firm owned more than 10 percent of MBIA's stock, he said in the interview.

Advertising Commissions

Ackman earned undergraduate and business degrees from Harvard. His father, Lawrence Ackman, recalls that his son and another student worked one summer selling advertising for the ``Let's Go'' travel guides and earned unusually high commissions of $15,000 to $20,000.

``The next year they reduced the commission rates and ruined it for all future students,'' Lawrence Ackman says.

Straight out of business school, Ackman started his first hedge fund, Gotham Partners, with fellow student David Berkowitz. In the mid-1990s, Gotham tried to buy Rockefeller Center. During the talks, Ackman, then 28, says he got a call from Donald Trump.

Call From Trump

``He said to me, `Bill, Goldman Sachs is stealing Rockefeller Center and we've got to sit down and try to work something out,''' Ackman says. The two never agreed to work together.

In July 1996, a group led by Goldman Sachs and David Rockefeller, the philanthropist and former chief of Chase Manhattan Corp., took control of the center for $1.2 billion in cash and assumed debt. Gotham made a profit selling a stake in the property to Goldman, Ackman says. Trump didn't respond to a request for comment.

Ackman took an interest in MBIA after asking a credit market trader which companies didn't deserve AAA ratings, he says. In a report entitled, ``Is MBIA Triple-A?'' he argued that the company had insufficient reserves to cover potential losses and was guaranteeing increasingly risky debts.

He disclosed taking a short position in MBIA, in which an investor sells borrowed stock, expecting to repurchase it later at a lower price and return the shares to the owner. Ackman also bought credit-default swaps, financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. The swaps would rise in value if doubts about MBIA grew.

Spitzer Investigation

Late in 2002, Ackman published his MBIA findings on Gotham's Web site. Ron MacDonald, the head of reinsurance at MBIA until 1999, read the report early in 2003 and e-mailed Ackman praising it, MacDonald says.

Ackman learned in January 2003 from a Wall Street Journal reporter that Spitzer was investigating whether Gotham had engaged in manipulative trading on MBIA and other companies and that the newspaper would publish an article the next day. The SEC later started its own probe.

``This is going to be a good thing,'' Ackman says he told friends that evening. ``I'm going to meet Eliot Spitzer.'' He says he saw it as an opportunity to turn the tables and present his concerns about MBIA.

Spitzer was investigating not only Ackman's position in MBIA, but also his trading in two other companies, Pre-Paid Legal Services and Federal Agricultural Mortgage Corp., or Farmer Mac. Spitzer, now the New York governor, didn't respond to a request for comment.

Turning the Tables

Ackman and Siefert, the forensic accountant, drew investigators' attention to the reinsurance deal that led to the $75 million settlement a year ago. The transaction covered MBIA for losses related to the 1998 bankruptcy of a Pennsylvania hospital group.

Meanwhile, Ackman made a series of presentations to Moody's Investors Service Inc., the New York-based credit rating company, challenging the bond insurer's top credit grade. In 2005, he wrote to Moody's warning that it was risking its own credibility by keeping MBIA at AAA.

``I apologize for putting you and Moody's on the spot,'' Ackman wrote. ``I have simply lost patience, and it is 2 in the morning.'' A Moody's spokesman said no one was available to comment.

Ackman says he recently received notification that the SEC had ended its investigation of him without any finding of wrongdoing. The letter arrived only after he wrote to the SEC chairman and the agency's four commissioners demanding it.

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