83 of 85 people found the following review helpful
on May 5, 2010
In 2002, hedge fund manager Bill Ackman used credit derivatives to place a "short" bet against MBIA, the largest of municipal bond insurers. (Ackman later bet against other bond insurers.) Ackman raised serious accounting issues with MBIA executives, rating agencies, regulators, industry analysts. Among other things, Ackman questioned MBIA's foray into credit derivatives and synthetic CDOs.
Joseph "Jay" Brown, then MBIA's Chairman and CEO, met with Ackman in 2002 about a negative report Ackman was about to release. Ackman recalls this power-play (P. 6):
"You're a young guy, early in your career. You should think long and hard before issuing the report. We are the largest guarantor of New York state and New York City bonds. In fact, we're the largest guarantor of municipal debt in the country. Let's put it this way: We have friends in high places."
Ackman published the report on his fund's web site: "Is MBIA Triple-A?"
Here's some ironic background you won't find in Confidence Game. In 2003, Jack Caouette, then Vice Chairman of MBIA (he left in early 2005), wrote a blurb, still visible on Amazon, for my book on the dangers of credit derivatives and synthetic CDOs, Collateralized Debt Obligations and Structured Finance : New Developments in Cash and Synthetic Securitization. He began: "Caveat Emptor! Never in the history of finance has this warning been more appropriate."
Ackman's concerns were reasonable. Structured finance is easily gamed, and fraud was common. Moreover, Ackman was correct about several other accounting issues unrelated to synthetic CDOs. When his initial bet didn't pay off, the financial media strafed him.
Ackman persisted, MBIA protested, and in early 2003, the SEC and New York Attorney General's office investigated him. The NY AG's office, then headed by Eliot Spitzer, grilled Ackman for six days. Ackman's activism eventually led to a two-year investigation of MBIA resulting in its restating seven years of earnings and a $75 million fine.
Ackman didn't stop. He hired a top forensic accounting expert and several times brought evidence of fraudulent accounting to Moody's, the leading credit rating agency. Meanwhile, MBIA restated its numbers twice. At the end of 2005, Ackman wrote Moody's board of directors (P. 137):
"Moody's Aaa rating is so powerful and credible that investors don't do any due diligence on the underlying credit. Every day that Moody's incorrectly maintains an Aaa rating on MBIA, these extremely risk-averse investors unwittingly buy bonds that are not deserving of Moody's Aaa rating."
MBIA escalated its risk. MBIA wrote credit derivatives on new "Triple-A" risk backed by malignant mortgage loans, including built-to-fail mezzanine CDOs. It didn't matter how much "confidence" Wall Street, rating agencies, bond insurers, and regulators had in maintaining a collective financial lie, MBIA was unstable.
In February 2008, MBIA cut its dividend and suspended structured finance activities. Jay Brown wrote MBIA's investors that Ackman's "campaign" was an attempt to destroy his business. Ackman's shorts weren't the problem. MBIA could have used some shorts of its own, since it was long with too little coverage. MBIA had insured rotting mortgage risk with too little capital to maintain even an investment grade rating.
By June 2008, MBIA and Ambac, the largest municipal bond insurers lost their "AAA" ratings and slid fast from there. At the end of 2008, Ackman took $1.1 billion in gains for Pershing Square, enough to offset losses in other investments, some of which subsequently rebounded.
Wall Street banks with financial ties to mortgage lenders fueled bad--and often fraudulent--mortgage lending, created phony mislabeled securities, and off-loaded the temporarily disguised risk on bond insurers (MBIA, Ambac, AIG, FGIC, and more) and naïve investors to keep the Ponzi scheme going. A housing bubble fueled by corrupt finance damaged the U.S. economy, and taxpayers bailed out the chief culprits.
Those with "friends in high places" did the most damage to the nation's economy and personally profited the most. It's also noteworthy that Ackman's outrage was not directed at investment banks with whom he traded and that underwrote and created fraudulent value-destroying CDOs against which they bought bond insurance, fed him internal CDO data, internal CDO models, and information on MBIA's and Ambac's positions that Ackman made public, all of which bolstered his confidence to continue with his short positions. The high pay of Wall Street and its cronies doesn't reflect efficient markets or individual brilliance; it's a market failure.
The Great Bailout protected debt holders and some shareholders in corrupt financial institutions. Culprits involved in phony securitizations that damaged the economy have windfall gains and are now heavily subsidized with taxpayer dollars.
Christine Richard's beautifully written account of Bill Ackman's ordeal shows us how much endurance will be required to reverse these mistakes.
In the interest of full disclosure, I attended Bill's book launch party and am quoted in the book.
40 of 44 people found the following review helpful
on April 20, 2010
this is a fascinating account of outlandish corporate greed and hubris and the author's and a fund manager's multi-year attempts to shed sunlight on the manifold fraudulent machinations one large company's management employed to keep its debt rating and "earnings" intact. it also contains insights into the then forthcoming credit crisis, the almost-fraudulent conflicts facing the sell side and bond rating agencies, and the ineptitude and politicization of the sec- sort of michael lewis meets harry markopolous. for me it's a five-star book; however, some of the more technical finance and accounting, while very clear, might make it a slightly less rich experience for those less interested in these details. i was surprised that this book hadn't been more broadly publicized or reviewed, then found out it's only on kindle; hard copy is released 4/26. really great read.
10 of 10 people found the following review helpful
on May 11, 2010
CONFIDENCE GAME is a thoughtful, sharply observed piece of reporting on an historic moment in U.S. history--both financial and sociological--that brought the intricacies of the financial world into sharp focus for me. With a brisk pace, telling details, and the ability to explain the financial industry and its people with wasting a word, Richards has crafted an extraordinary book.
7 of 7 people found the following review helpful
This book came out in late April, and the Wall Street Journal, the New York Times, and the Financial Times have all ignored it.
The lack of attention is a shame, because it's an amazing, amazing book.
Hedge fund manager William Ackman gave author Christine Richard impressive access. She writes, "Ackman gave me a CD-ROM containing every e-mail he had written or received that mentioned MBIA as well as years of appointment calendars and access to an office filled with more than 40 boxes of documents he'd collected in researching MBIA. He encouraged colleagues, advisers, and friends to talk with me and spent hours answering my questions."
The result is a fast-paced, behind-the-scenes look at how a "short" investor uses the press, stock analysts, and the government to beat down the price of a stock he has bet against.
Mr. Ackman's campaign that is at the heart of this book is his war against Municipal Bond Insurance Association, or MBIA.
Here the key journalist seems not to have been anyone at the New York Times, or even Ms. Richard, who worked for Dow Jones and Bloomberg. No, it was "Marty Peretz, the editor-in-chief of the New Republic magazine, who had been Ackman's thesis adviser when he was an undergraduate at Harvard."
Mr. Peretz, reports Ms. Richard became the first investor in Mr. Ackman's hedge fund after Mr. Ackman "drove from Boston to Peretz's summer house on Cape Cod to pitch him the idea." (Mr. Peretz tells me the investment was $500,000, made at the time and not subsequently increased.)
By Ms. Richard's account, Mr. Peretz wasn't exactly what you'd call a passive investor. After the SEC didn't really follow up on a meeting in which Mr. Ackman aired his allegations about MBIA to SEC staff, Mr. Peretz wrote in July 2004 to the chairman of the SEC, William Donaldson, "with whom he was friendly." Reports Ms. Richard, "Peretz's appeal stirred a response at the SEC, which asked Ackman to return to Washington."
If the SEC did not act against MBIA, Mr. Ackman would try another regulator, the attorney general of New York, Eliot Spitzer. Ms. Richard reports that in January or February 2005: "Ackman, along with Marty Peretz, and Eliot Spitzer were huddled around a small table in the attorney general's office, eating pressed turkey sandwiches. Peretz had arranged the lunch meeting. Ackman wanted to point Spitzer toward the important issues at MBIA."
If Mr. Spitzer and the SEC both did not act, there was always the chairman of the House Financial Services Committee, Barney Frank. The book recounts Mr. Ackman and his lawyer flying to Boston on June 5, 2007 for a meeting with Congressman Frank, with whom they visited only after they "picked up Marty Peretz, who knew Frank from their student days at Harvard." Mr. Frank agreed to hold hearings on MBIA.
There's plenty of other rich detail here. The broker who gave Mr. Ackman the idea to short MBIA worked for, of all places, Lehman Brothers.
The dependent relationships among short-sellers, regulators, and the press are illuminated for all to see. At one point, Mr. Ackman asks an SEC official what it would take to get the agency to act. The SEC official's reply? "A story on the front page of the Wall Street Journal or the New York Times, especially the New York Times."
What to make of the whole episode? Well, it's certainly a newsworthy tale, and not only for those interested in hedge funds or short-selling. One MBIA vehicle named something like Latin for "black hole," Ms. Richard reports, "owned liens on 11,000 properties in Pittsburgh, nearly 10 percent of the entire city."
As an investment idea, shorting MBIA was a big success. The shares lost more than 80% of their value. "Pershing Square investors made about $1.1 billion," Ms. Richard reports. About $140 million of that was Mr. Ackman's personally, though, Ms. Richard reports, he has pledged the entire amount to charity.
Those troubled by Mr. Ackman's use of the regulators to press his position at least have to concede that MBIA and its allies also used the regulators to press their own case against Mr. Ackman, subjecting him to SEC and New York attorney general inquiries that were eventually dropped.
While Ms. Richard's book is finished, the story isn't over. Some value investors are now placing bets on an MBIA recovery. And short-sellers are circling the for-profit education industry using the same strategy of press and regulatory pressure that was deployed so successfully against both Farmer Mac and MBIA.
7 of 7 people found the following review helpful
on May 7, 2010
This book is an incredibly engaging story about a hedge fund's quest to expose an over-leveraged and unstable company - a company that would later play a major destabilizing role in our nation's financial crisis. Given the subject-matter, the book is surprisingly *fun* - it is a page-turner populated by entertaining personalities, and they really come to life. And the story is fantastic - the audacity of the companies involved will make you gasp out loud, if you are not too busy smacking your head. On a more serious note, I also believe this is an important story to tell. Our financial markets and regulators are very poor at highlighting bad and risky businesses - they need the help of the private sector to identify and expose these businesses. This book is about an incredibly courageous effort to bring market information to the light of day. This is one of my favorite books of the year.
6 of 6 people found the following review helpful
on June 9, 2010
One of the best books I have read so far and I have read a lot. It is an intriguing story about the bond-insurance business and the no-loss illusion of MBIA. The main character Bill Ackman, a hedge fund manager raised serious accounting issues with MBIA executives, rating agencies, regulators, analysts, etc. All is written in a natural way by Christine Richard's. It takes you step by step in the world of the subprime market.
Some beautiful quotes in the book that gives you an inside impression:
The no-loss illusion of MBIA was a farce. "Zero-loss"underwriting required such extraordinary machinations to stay on the right side of the law that it was hard to believe the concept was not fraud.
Securitization can create value from thin air and assumptions.
The subprime market contained the hallmark of every Ponzi scheme. It worked only as long as more money was put into the scheme.
A must read in my opinion, because one thing I learned is do your research and don't believe everything a company is telling you.
5 of 5 people found the following review helpful
This book really synthesizes much of what went wrong with the financial markets in the early 21st century. While it focuses on Bill Ackman, it stands as an indictment of virtually everyone involved in the real estate bubble, including regulators, banks, ratings agencies, and others. In 2007, I listened as bankers and financial advisors told our company to issue 7 day "auction rate" securities covered with bond insurance. Not one of the actors mentioned Ackman's criticisms of the bond insurers or the troubles with the CDO and other markets, and neither did the ratings agencies we met with. 6 months later, the market melted down and we ended up paying default interest rates of 20% - to the same bankers who told us to issue the bonds in the first place! This despite the fact that our company was and is AA rated on its own, without taking into account "bond insurance" that initially made our debt AAA. It was disgusting. Of course, the actors in our situation have done fine, and we were left dealing with the mess they helped us into.
Turning to the book, because it's written by a journalist, it's very easy to read and terminology is well-explained. This is important, because most readers will probably not be familiar with many of the securities involved in the market meltdown. I was fascinated to read about how Ackman initially concluded the bond insurers did not deserve AAA ratings, and then how MBIA did everything they could to silence him, even convincing the NY AG's office to investigate him for potential crimes. Talk about playing hardball. In addition, the ratings agencies refused to take Ackman seriously, and his attempts at meeting with various other Wall Street institutions came to naught. MBIA was apparently manipulating the price of its stock by buying its own shares whenever bad press was released, undercutting the impact of the bad news. Even the author, working in her capacity as a financial reporter, faced pressure from her employer and others not to criticize the financial markets. Everyone was happily making money.
In any event, as the book unfolds, it will not surprise most people that Ackman's predictions came true, and then we had to bail out the same Wall Street shops that got us into the mess. As stated in the book:
"This wasn't the bond insurance business anymore. MBIA was providing a service that allowed banks to make huge amounts of securities disappear from their balance sheets. . . It allowed financial institutions to book all their profits on vast CDO holdings up front while assuming away the risk of default. As the risk seemingly disappeared, so did the need to hold capital."
Ackman gave the author, Christine Richard, a CD Rom with every e-mail he wrote that mentioned MBIA, access to appointment calendars, and access to 40 boxes of documents. So the book is extremely well researched and detailed. While some readers might find it painful to relive the market meltdown, it is interesting that things unfolded largely as Ackman predicted.
One thing that shocked me about this book is that Ackman came to his conclusions using analysis similar to that applied by "value investors," and among the books he read include Graham and Dodd's "Security Analysis," Lynch's "One Up on Wall Street," Graham's "Intelligent Investor," Cunningham's "Essays of Warren Buffett" and O'glove's "Quality of Earnings."
An interesting side-light to this book is the disagreement between renowned value investor Marty Whitman and Ackman. Whitman, who took a 10% stake in MBIA, clearly lost, but the disagreement between the two of them demonstrates just how even the most savvy investors could be mislead by the bond insurers. Ironically, Whitman's own books state that he prefers companies that don' t need to access the financial markets to raise capital, which is one of the shortfalls that undercut the bond insurers in the end.
This book provides a fascinating study in how our financial markets worked, and their flaws. But by tracking how Ackman uncovered the weaknesses in MBIA, it also shows some factors an investor can consider in analyzing a company. It's not always a pleasant read, and I have no doubt that some would consider Ackman to be arrogant/outspoken, and a publicity hound, but the truth is, after reading this book, he's one person I'd love to talk to over dinner because of his prescience in uncovering the derivative house of cards that we are trying to work our way out of to this date.
For me, this book is a must-read.
5 of 5 people found the following review helpful
on August 29, 2012
This true story book details the years and years of Bill Ackman's work and effort to tell the regulators about the problems at MBIA and Ambac.
Like Markopolos (telling the SEC about Madoff) and Einhorn (telling the regulators about Allied Capital), the slowness, stupidity, and uselessness of the SEC and other regulators shines through. (But like Einhorn's book, this book is a really tedious read too, mostly filled with a chronological record of who said what, what letters said, what the responses were, what letters were sent, etc.)
The story is powerful, no doubt. Credit to Ackman for his deep tenacity and persistence in the trade, and to bring the message to the public.
I would not recommend this book to a layman friend because of the tedious and detailed pace. But for someone who likes the details of financial stories, and likes to read about the stupid regulators -- seemingly wilfully blind once again -- this book would interest you.
4 of 4 people found the following review helpful
on July 19, 2010
Bill Ackman is an amazing investor and a great critical thinker and the book alone is worthy just to understand how he thinks and applies himself in the financial markets. He also does an incredible job of explaining through example why short sellers are so incredibly important to our financial system and why the mass media and our financial regulators miss the mark in vilifying the short seller, which is more or less cheap pandering to the establishment. Terse criticism of public companies based on facts should not only be welcomed it should be encouraged.
The book does a great job of uncovering the pivotal (albeit silent) role bond insurers played in expanding leverage into the system built on top of a house of cards, and how the concept of bond insurers and their business model is flawed beyond any measure of common sense, funded by the taxpayers of America. It also demonstrates how the Rating Agencies amazingly sat around sucking their thumbs despite the mounting evidence to the contrary. I also found it very interesting that had the regulators listened to Bill's critical analysis starting in 2002 a significant portion, perhaps as much as 80%, of the financial crises could have been avoided. The regulators failed miserably in performing their function which should serve as a strong warning for those seeking peace of mind in the mountains of new regulations flowing through Washington.
This is an excellent book, and very educational for people interested in investing and politics alike. Two thumbs up!
3 of 3 people found the following review helpful
on March 20, 2012
This book is about the late 2000s financial crisis, revolving around the battle between MBIA, the largest and highly leveraged BOND INSURER, and Bill Ackman, a hedge fund manager, who in the course of several years has accumulated a huge SHORT position on MBIA.
Other players involved include RATING AGENCIES (using different credit-rating scales for municipal and corporate bonds - not making any sense, and earning fees from those companies whose securities they rate - not seeming right), INVESTORS (blindly believing in AAA rating and not doing due diligence - of course, the question is whether due diligence on ever more complex financial instruments is at all technically possible), MUNICIPALITIES (purchasing insurance from AAA bond insurers to lower their financing costs, which should be at this (lower) level in the first place), SHADOW BANKS (financial institutions lending outside the banking system with its capital requirements and regulatory oversight and taking exsessive risks knowing they can transfer them through securitization to less-informed counterparties), REGULATORS (did they do too little or too much?), and PRESS (that's where the author comes from - she has been covering the bond market for almost a decade).
Two factors make me "feel close" to the story. FIRSTLY, I used to live in New York during the Bush administration, the period of "credit bonanza" in which the MBIA vs. Ackman battle took place. Moreover, I used to have a student in Armonk, NY, the MBIA's headquarters, in the 2006/2007 school year as a math tutor. Little did I know what was happening there at the time. SECONDLY, to me as an actuary, the one-word "big picture" answer to the "what was the cause of the financial crisis" question would be reserves. It's very simple, although the particulars are not. The companies set aside absolutely insufficient reserves (in an ACTUARIAL sense!). Instead, the resulting high earnings and profits were channeled into the pockets of the few privileged in the form of bonuses.
Who won (and who lost) the great game of risk transfer engineered on Wall Street should be clear to everyone. The question I find more interesting (and tricky) is who (exactly) is to blame.
Returning to the book itself, I found it an educational page-turner about the guy who had seen IT coming well ahead of time, the guy who for several years had in vain tried to alert all the involved parties of an enormous risk in the bond insurer's AAA rating (being not really AAA), their "no-loss" business model (which they only nourished via "masking" all their deals that went south, such as AHERF case - equivalent to buying insurance after your house burns down, or the Caulis Negris deal - MBIA unwiling to recognize loss on the tax liens, writing them down gradually instead), and other dubious accounting practices (indirect partcipation in CDS market via a shell company, selling protection against its own bankruptcy filing to drive down the price of its CDS contracts and create an impression of stability, etc.)
And what do I think of Bill Ackman himself?
First time when I felt he needn't have done anything - in fact, I even felt he shouldn't have done it, was when he wrote to the Citigroup claiming they may have been making a mistake by considering an ivestment in (bailout of) Ambac, the second-largest bond insurer (p.262) - it is definitely not my style. But other than that, I did not have a problem with the guy. On the contrary, I admired his critical thinking skill as well as passionate perseverance in proving his case. I don't see why someone might have a problem with him/this. What's wrong with one criticizing a company publicly as long as it is based on facts? After all, if it is not, not only the guy risks going in jail (which can be viewed as an "unimportant by-product"), but more importantly, the company can always disprove the person's claims (and make him look incredible, even stupid), can't they?
This is yet another book on investment and finance that I read twice: first as a "novel," then as a "textbook."