全名是Municipal Bond Insurance Association，干的事情就是。。。厄，我们看到的一样。他们为市政债券提供担保，收取手续费。如果债券平安无事，那么这个公司就白拿了利润，如果债券违约，这个公司就要掏腰包理赔。一般来说市政债券的违约率很低，看起来这是个不错的生意。今天我们知道这显然是不对的，不怎么违约不代表不违约，只见过白天鹅不是说不存在黑天鹅。但是在当时所有人看到的都是市政债券基本不违约，甚至金融危机的时候也不怎么违约，这些市政机构总是能迅速找到一些钱。
What made him special? Guys recall the recent fight with Herbalife, conundrum in Valeant, but Ackman made his name with a company called $MBIA(MBI)$ . I believe most readers won't know it, and I didn‘t until I heard stories from our older guys. It was 2002, Ackman&# 39;s fund was in big big trouble with its golf course investments (private company), he got bigger as the investment turns sour. He was a brilliant guy, but experience had to come with time. Gotham structured a merger between the golf course company and a REIT they controlled. The REIT was making money and had tons of liquidity, but creditors were in the way.
A little crash course, most of the time a company does an acquisition, it is a negative for the credit / bondholders. You are using your cash flow to fund the purchase instead of leaving it on the balance sheet or pay down debt. So this time, judge granted wish of the creditor, and in this case, preferred holders because saving your dying Mom by getting heart transplant from Dad does not even make much sense to Dad&# 39;s distant cousin (preferred holders). In hindsight, it is a money losing cause even it goes through, just a matter of time.
Hedge fund is always talking their books, especially at that time. No regulation, guys build huge position knowing private information and the industry are perceived as secretive at best. After Ackman&# 39;s wish was denied, they knew their days were counted. So at this point, Ackman put out the piece that made him famous (in my view)
A great read it if you got time, and you will see how detailed Ackman is in his diligence process. The learnings could totally apply to the crisis that happened 6 years later. Fast forward 15 years, in 2016, MBIA is rated single B, so hell no, it wasn't AAA. The company got downgraded at the height of financial crisis and never recovered. A bit extra on MBIA. If you are interested, you can look up all the crap going on with $MBIA(MBI)$ and whole Puerto Rico saga. Nowadays, we often talk about this name as a stressed credit and the equity is irrelevant.
So what is MBIA?
To give a magnitude of how big MBIA was, it was a top 10 financial institution at the time, just behind the infamous Fannie and Freddie at the time. S&P 500 company of course and top 100 in terms of market cap.
Its full name is Municipal Bond Insurance Association, and it started out doing exactly what the names suggests. They provide insurance to municipal bonds issued by municipalities. At the old times, it was a business model that is set up to collect insurance premium by guaranteeing the bonds, and if those bonds default, MBIA puts up the loss (accrued interest + pincipal) with the assumption that those bonds barely default. And like any insurance company, they invest the proceeds for return.
They have one thing that gives them the license to virtually guarantee any fixed income instruments in the world: their AAA ratings from all three agencies. Given the flow of issuance, you know there is a conflict of interest here between the consitutencies. Rating agencies get paid by the issuer to give them ratings, so that goes the trick. It was a bit similar to Chinese corporate debt until recently, government figure out a way to keep it afloat and not get their face all torn in pieces.
Over the time, MBIA started to venture into new financial innovation from ABS of various kinds to eventually CDO. Ackman has previously shorted the company through CDS (also new instrument in early 2000s) and has publicly talked about the hidden mark to market losses and dangerous equity cushion MBIA had. He was unsuccessful however, because believe it or not, Ackman vs MBIA at the time was a complete mismatch. You would think Ackman in 2016 is the heavyweight, at the time, he was in the fairweather class at best as MBIA was considered a prestigious institution by Wall St and Main St (government). Plus, activists were viewed as gimmicks from hedgies to talk their books and were not respected at all. Things have certainly changed in 15 years.
Here goes a game that is played by both sides, besides Ackman doesn&# 39;t really have that much game at that time. He had gone around the Wall Street to tell his story and wasn't successful. Rating agencies openly bashed him. His investors, at this troublesome time, also feared Ackman&# 39;s bold actions would hurt their investments even more, thus wanting out.
Ackman knows he is by himself, throwing up the heroics and put out the 66 pager. To sum up, he points to 1) Huge mark to market losses in CDOs, which company has been covering given its poor transparency 2) High leverage and dangerous equity cushion with its numerous SPV 3) Uneven underwriting standard 4) And lastly diversification of risk was excerggerated, and correlation was higher than it seems
This is in 2002. Nobody beleived it, and 10 years, those conclusion are in the textbooks. Interesting fact, MBIA went down just 4% that day after Ackman put out his report. How much was Valeant down after Andrew Left's half-ass report?
Wall Street defended that piece, even guys who sold Ackman CDS. (Some trivia here: the guy who sold CDS to Ackman was a salesperson at Lehman and someone now I work with day to day and always look up to. ) Why? They make so much money making ABS and CDOs. Ratings agency reiterated AAA ratings in the same day just because MBIA pays their bill.
MBIA then did their part, a bit conspriracy theory, but they just destroyed Ackman and took down Gotham with it.
Days before that heoric piece, Ackman was in the court trying to put through the merger that would be key to Gotham&# 39;s survival. Things were going well until a prestigious New York lawyer showed up in the court. Rumor has it that MBIA was behind it as the guy had represented the company in many occasions. The judge somehow delayed the hearing, which ultimately turned against Gotham.
MBIA, through its subsidiary, sold CDS on the open market. Hard to imagine some company does this, but there was no regulation. Ackman's trade got crushed.
Talked to a former Lehman sales person, MBIA did a conference and asked the question, should hedge fund be able to take a position and then bash the firm to profit? I will leave it to you people of 2016, but it was a new norm or a no no then.
And at the end, Ackman ran out of time. He and his partner wind down the funds, and what was left was those empty golf courses.
Why Ackman&# 39;s trade was not successful?
Several issues. One being the CDS, at early 2000s, was just invented and very new, and the liquidity at the time just started to pick up, so wasn't great. It was still very much a OTC product, but at least street are now actively making markets. In early 2000s, if there is little flow in the single name, it would be virtually impossible to find two-sided markets for this type of name. Lehman was the main one because of its dominance in fixed income early on.
Second, at the time, he put out this piece and dropped the bomb. It is a long shot to see company actually default, but did shake a lot of people in the weeks after. You see that dip in the price, but not as big as Ackman had hoped. There was no catalyst in the near term to expose the problem, and economic cycle was at mid stage of the boom. Inflation started to pick up and new president (GW Bush) had put in his tax cuts. Everybody starts to issue more and more and MBIA is key part of the chain.
Three, much like he liquidated Mondelez stake now to raise for Valeant, he had to liquidate and raise money at the time, not to make up the other investment, but for redemptions. He simply didn&# 39;t hold those favorable clauses at that time, and when he founded Pershing, that's one of things he has asked from investors - the ability to lock in enough funds to keep it afloat.
His heorics didn&# 39;t end up being successful. It might be the right trade, but it was some 6 years too early, and the integrity of the trade was tarnished by his fund’s situation.
He was ultimately proven right, and I believe it was one of best trades for Pershing Square. But really an exceptional piece, and shows his brilliance. That piece, in my view, may have made him come to conclusion of his true color, an activist who does whatever it takes to push for changes. He just needs to get bigger, stronger and faster. Also, he needed a breakthrough and a major project.
Preview: Chapter 3 The transformation of activism
A little TMZ talk at this chapter end, everytime I saw him in the picture, he does the same pose with same smile. Never changed, it is like those Chinese web girl sensation, they really look the same, THE SAME!! Enough for the rage. Wait, one more, BLUE STEEL! MAGNUM! It's so hard to be so ridiculously good looking. Well, he looks good, that probably worth that 1 mill for that gal.