Excerpted with permission of the publisher John Wiley & Sons, Inc. ( www.wiley.com ) from Confidence Game by Christine S. Richard. Copyright (c) 2010 by Christine S. Richard.
By Christine S. Richard In the days after the congressional hearings, Eliot Spitzer's ultimatum hung over the credit markets. He'd given the bond insurers five days to come up with billions of dollars of capital. Many shared Spitzer's sense of urgency. Congress wanted the auction-rate crisis solved before half of all the hospitals, school districts, museums, and sewer authorities in the country were bankrupted by rising debt costs. Then, just five days after the hearings, MBIA ( MBI) announced it was making big changes. The company re-enlisted Jay Brown as its chief executive officer (CEO) and chairman of the board. Brown, who had taken the reins at MBIA after the bankruptcy of the Allegheny Health, Education, and Research Foundation (AHERF) and managed the company's strategy for exiting the tax-lien business, returned to address another crisis. Brown announced that MBIA might split itself into two insurance companies -- one that backed municipal bonds and one that backed structured finance securities. To preserve cash, it would cut its dividend; to build up capital, it would stop insuring any structured finance deals for six months. Brown assured shareholders that there was hope for the company's triple-A rating. Although other bond insurers had failed to raise capital, MBIA had obtained $2.6 billion. If the rating companies wanted more capital, then MBIA would raise it, Brown said. Brown's compensation was tied to the company share price, as it was during his previous tenure. He owned 618,456 shares when he rejoined the company. Under his new incentive plan Brown was eligible to receive an additional 1,634,000 shares. Brown sold part of his extensive car collection, which included Ferraris, Porsches, and BMWs, to buy 359,000 more shares with his own funds. If Brown could get the stock price back up to $70, his stake in the company would be worth more than $180 million. An executive-compensation expert put the value of Dunton's estimated severance package at $11 million, according to an article in the New York Times.Bill Ackman's Battle Brown also wasted no time before confronting Bill Ackman. "Many of you have asked me in the past few days whether there is something personal between us," Brown wrote in a public letter to shareholders. In fact, Brown wrote, he and Ackman were similar: Both were ''passionate in our beliefs" and "persistent in overcoming all obstacles." But, Brown told investors, he led a regulated financial institution that provided "security, jobs, and peace of mind to tens of thousands of institutions and millions of individual investors." Ackman, on the other hand, had a single-minded objective. "He will stop at nothing to increase his already enormous personal profits as he systematically tries to destroy our franchise and our industry." Be advised, Brown concluded: "His intent to force a collapse has no chance to succeed." Even as Brown described for investors his plan to save MBIA's triple-A rating, Ackman was shopping around another idea. The plan he had sketched out for Spitzer at the diner was now a 14-page PowerPoint presentation, which Ackman presented to Eric Dinallo, the New York state insurance superintendent, and Robert Steel, undersecretary for domestic finance at the Treasury department. He also discussed it with officials at the White House Council of Economic Advisors and the Federal Deposit Insurance Corp. The day after Brown returned to the helm at MBIA, Ackman made his plan public. He proposed that the insurance company be split in two, with the municipal insurance company becoming a direct subsidiary of the structured finance insurer, which in turn would be a direct subsidiary of the holding company. Dividends would pass up the chain, starting with the municipal insurer. Those dividends would be paid only if each company's board of directors was sure the company could maintain its triple-A rating. MBIA responded quickly, releasing a statement that called the plan "a continuation of Mr. Ackman's campaign to profit from his short positions and credit-default swaps in the bond-insurance industry." The structure was no more than "an attempt to find some way to make true his predictions that the holding companies are or will soon become insolvent," Brown said. "Mr. Ackman should let the officials charged with regulating the industry do their jobs, instead of continuing a relentless media-driven campaign fueled only by personal financial gain." Dinallo's office did not express enthusiasm. "Our concern with the Ackman plan is that it would split the company, and the structured side could be substantially downgraded, which would be bad for the banks," said David Neustadt, a spokesman for the New York State Insurance Department. "Our preference is a plan that keeps an AAA rating." For that the New York State Insurance Department was going to need some help from Wall Street.