Excerpted with permission of the publisher John Wiley & Sons, Inc. (
As concern over the bond insurers and their triple-A ratings built to a frenzy, Ackman, for the first time in a long time, was not part of the show. He'd gone back to Tierra del Fuego for more fly fishing, accompanied by his father, Larry Ackman; Paul Hilal; and several others, including Oliver White, the former fly-fishing instructor who had become a member of Pershing Square's investment team. They were back at the Kau Tapen Lodge, along the Rio Grande, where giant sea trout were running from the frigid Atlantic upstream to the Andes Mountains. While New York shivered through the worst of the winter, it was summer at Kau Tapen. Ackman's only contact with the markets and his office was through a satellite phone, and it was not reliable."Many men fish all their lives without realizing it's not the fish they are after," Thoreau wrote. There was a connection with nature, a camaraderie, a spirit of competition. At Kau Tapen, the anglers included "an attorney, a structured-finance banker, and a hedge fund manager -- a type-A competitive group," Hilal says. The trout averaged around 12 pounds, but some were nearly 30. On the first day, Ackman caught the biggest fish and held the title for the next several days. Then Al Rankin, deputy chairman of the Federal Reserve Bank of Cleveland, caught "a monster," says Hilal. For a while Ackman's only concern was whether he could regain the title for catching the biggest fish. Back in New York, Jay Brown wrote to shareholders again. He had Ackman on his mind. "If someone had purchased protection, say, in January of last year, when spreads on our five-year CDS were relatively benign, they would have paid about 40 basis points per year," Brown explained. That meant someone could have bought protection on $7.5 billion of MBIA debt for about $30 million in annual fees. Huge swings in the price of that protection over the last year meant that this hypothetical person would have gained and lost massive fortunes. "On paper, the value of the trade peaked north of $2.6 billion" and had lost about half its value since, Brown wrote. "The reality is that for the guys who play in this $45-trillion zero-sum game, $30 million is chump change. It's also why, given the amount of money that can be made here, people will go to no ends insisting the company will be broke in mere weeks."
Later that day, Governor Spitzer appeared on CNBC to assure viewers that Ambac would be able to maintain its triple-A credit rating for the foreseeable future: "A lot of parties helped make this happen, and it was important for the capital markets."Although Moody's and S&P were willing to say -- at least for the time being -- that the two biggest bond insurers had triple-A ratings, not everyone was on board. Fitch Ratings, the smallest of the three rating companies, had downgraded Ambac several weeks earlier and was actively reviewing MBIA. On the afternoon of March 7, MBIA issued a press release saying it had asked Fitch to stop rating its insurance company. Brown said he disagreed with the company's methodology, which required more capital to be held against guarantees on structured finance versus municipal bonds. Fitch's model also had proven erratic, he said: "We have very little idea why Fitch's capital model produces the charges it does, and why it can change so rapidly at any point in time when there is no obvious change in our circumstances or in the credit market at large," Brown had written in a recent letter to shareholders. After affirming MBIA's top rating with a stable outlook in January, Fitch had put MBIA back under review for a possible downgrade, Brown noted. "Did the world really change that much in two weeks?" Brown asked. "The only event of note that I can think of is the fact that the other two agencies put us on review for possible downgrade in the intervening time period." Fitch's chief executive officer, Stephen Joynt, wasn't so certain about Brown's motivations. "Is it because you are aware we are continuing our analytical review and may conclude that MBIA's insurer financial strength is no longer AAA?" Joynt said in an angry letter that Fitch made public. "It would appear that rather than work with Fitch, your intention could be to emasculate our opinion by withholding information and subsequently discrediting our opinion as being uninformed," Joynt concluded. MBIA had become very aggressive about discrediting people who were skeptical about it. Shortly after Brown returned to MBIA, the company hired a public relations consultant named Jim McCarthy. After a few weeks on the job, McCarthy emailed my editor, telling her that he had compiled a list of people who felt I had harassed them in the course of my reporting or misrepresented their views in articles. I had never received any complaints. ''This is egregious conduct," McCarthy wrote, adding that he would reveal the names of those who had complained, but only if my editor agreed not to share the names with me. It seemed that the bond insurers tried to wring the skepticism out of the market in any way possible. Over at Ambac, all eyes had been on the share price following the equity sale. But the gains were meager, with the shares up just 4 cents from where the new issue was priced. Then the closing trades came scrolling across broker screens -- $7.38, $7.38, $7.39, $7.37 -- and then the price and the volume surged. At 4:05 p.m., several last-minute trades were reported at $9.50 on huge volume. These last-minute trades pushed the stock's gain for the day to $2.08, giving those who bought the newly issued Ambac shares a one-day return of 28%. "People think something's going on because the print went up so high," Joseph Saluzzi, co-head of equity trading at Themis Trading LLC in Chatham, New Jersey, told Bloomberg News. "It doesn't look like it's a keypunch error since it was such a large block." The stock was up. That's what mattered. On March 7, 2008, Ambac executives, insurance regulators, and investment bankers breathed a collective sigh of relief over the salvation of Ambac's triple-A rating. But events were already conspiring to unwind that bit of confidence. That afternoon, a New York Times reporter contacted Spitzer about an outfit called the Emperor's Club. That weekend, Spitzer huddled with aides and warned them about what to expect. The following Monday, at around 2 p.m., the story hit The New York Times's Web site: Spitzer had been linked to a New York-based prostitution ring. The story was picked up immediately by CNN and CNBC, which broadcast the sketchy details into trading rooms around the world. The man who had hectored and prosecuted Wall Street for its moral failings had been caught in the tawdriest of scandals. It was shocking, though not exactly market-moving, information. Then traders began to put the pieces together. The New York governor had played an unprecedented role in corralling the banks into backing an equity issue for Ambac. It seemed almost certain that without Spitzer's prompting, Ambac would have lost its triple-A rating. What if the bond insurers required more help in the future? There was at least one way to trade the news of Spitzer's downfall, and that was to sell the bond insurers. By the end of the day, Ambac shares erased all of Friday's late trading gains and ended the day down 23 percent. MBIA shares lost 10%. Relief had been short-lived.
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