“We have friends in high places” Jay brown MBIA’s chairman and CEO
“Markets are efficient. That’s the very basic assumption underlying everything we do here. And you attempt to challenge that? “
“You are less experienced, less knowledgeable and don’t understand what you are doing”
From: Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff (Bloomberg) by Christine S. Richard
In short what if the whole world is against you but you want to prove your position?
What if you are running against your society and become an outlaw?
Would you still hold firm your position?
But that is what Bill Ackman did for six years.
And as Christine Richard explains vividly, Ackman did this by reading between the fine lines of MBIA’s financials, which blinded most investors. The result was a war between Ackman and MBIA and its many supporters
Risk is a word every CEO likes to avoid and ignore, but the truth is that it was lack of accounting for risk which caused the financial crisis of 2008. Financial theorists making theories so that Wall Street can run the way it does assuming that investors behave rationally. Ackman wrote to Moody’s Rating Agency “investors don’t do any due diligence on the underlying credit”, which was soon to be proven. His efforts were then comprehensive enough to hire a top forensic accounting expert to disclose MBIA’s rating and expose further flaws, but they all fell to deaf ears.
At that time when 2008 crisis was still an unknown future, this resulted in backlashes and many claimed that Ackman was a fraud. How do you trust yourself when the whole world surrounding you doesn’t?
Ackman like David Einhorn with battle against Allied Capital; was convinced he was right. Ackman didn’t stop his activities then even though he was being probed by agencies for being a fraud himself. He was investigated by Eliot Spitzer and the SEC. Despite such an adverse response to his report, Ackman was adamant about his cause. He still went on for years, telling anyone who would lend him an ear that MBIA was a bubble waiting to bust. Note that this belief was not for days or months but for years. To go against the time is something few of us are willing to do; and that too for such a long time.
The story actually begins with the Wall Street being able to find a super formula or a meta-narrative. This meta-narrative was able to convert toxic products like mortgages or credit card bills into absolutely safe and highly rated and stable securities. However, in reality it was a mere front of the propaganda. This wall hid the intricacies of the markets and the level of risks and volatility they had attained; and Ackman exposed all of this.
The credit crisis was larger than any attempts to control it. Ackman’s predictions came true not only for MBIA but the entire house of cards. The credit crisis was the catalyst, which brought about the collapse of MBIA. A blind eye to risk and gearing, the failure to challenge the assumptions of the credit ratings and an unusual dependence on financial models led the analysts to conclude, that rationality had departed long from the market and that it was never present in the first place.
Note the name Christian Richard picked for the book “Confidence Game: ”; the whole game is about playing on human’s psychology and making him/ her a fool in the process. Ackman’s story sums up the shady confidence that is rested upon risk management, which actually was never present in the first place. This is how disasters are conjured up. Risk is completely cloaked within heaps of credit ratings that claim investments to be safe. It describes an era of delusional confidence but delusional confidence from which side, the market or the radical Ackman?
Christine Richard being well versed with the mechanism of the Wall Street has made her story as pragmatic as possible. There is a deep lesson for us to learn from this battle and convert it into a war. But a war has first to first be considered a battle and hence all of her efforts to portray actually focused on what happened between the time and the man who stood against it. This book exposed to us how the “friends in high places” sometimes manipulate the system for their own gains. They attempt to crush those who defy and willingly lead the blind towards financial death. Ackman is a public steward in this regard.
I am going to write more about Ackman’s short of MBIA in a future article/s.
To purchase the book on Amazon.com click on the following link-Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff (Bloomberg)