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Patrick Goldin
Patrick Goldin

Confidence Game: Book Review

September 02, 2010 | About:

I recently finished reading Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff by Christine Richard. The topic of the book is Municipal Bond Insurance Assuance (MBIA). More specifically, the book discusses MBIA and the investor who predicted and made a killing as a result of its downfall, Bill Ackman.

The story begins in 2002, when Bill Ackman published a research report on MBIA, titled “Is MBIA Triple-A?” In the report, he detailed why his first hedge fund, Gotham Partners, had taken a short position in MBIA. From this, the reader can draw a comparison between this book and Fooling Some of the People All of the Time. The main difference between the two is the fact that Confidence Game was not written by Bill Ackman. This fact is negated by the fact that the author, Christine Richard, a very good writer for Bloomberg, was given a CD by Bill Ackman with everything that he ever written about the company. In addition, I found the amount of additional research she conducted for the book to be quite impressive, so much so that she probably wrote the book as well as Bill Ackman could have.

This book is in some ways very similar to Fooling Some of the People All of the Time, but there are a few key differences. First, Fooling Some of the People discusses David Einhorn’s firm, Greenlight Capital in great detail, while this book does not discuss either Gotham Partners, Bill Ackman's first hedge fund, or Pershing Square Capital Management, Bill Ackman's second hedge fund, in much depth. Secondly, David Einhorn feels that what has occurred at Allied Capital is fraudulent, while Bill Ackman never alleges that any of MBIA’s practices were fraudulent. Thirdly, Bill Ackman profited greatly from his views on MBIA, while David Einhorn did not.

Bill Ackman short position in MBIA’s common stock and CDS were profitable for primarily due to one factor. This factor was leverage. In fact, MBIA was so leveraged that the company held just $1 of capital for every $140 of debt it guaranteed. This leverage meant MBIA had virtually no margin of safety. Even a small misstep would cause MBIA to lose its triple-A credit rating, which was paramount for the company to operate effectively. MBIA’s misstep was their expansion into new lines of business. In 2008, as mortgage-backed securities began to default, MBIA began to experience losses. Due to the degree of leverage, MBIA quickly burned through its cushion against losses and was downgraded by the rating agencies.

While it is not one of the author’s central themes, I derived one main lesson from this book. As an investor, one should make sure to seek out information and research that opposes their thesis. Bill Ackman report raised serious questions about MBIA and its ability to withstand losses. If an investor had read this report or any of his subsequent reports and sold their shares, they could have avoided serious losses. In fact, one famous investor failed to listen to Bill Ackman. Marty Whitman, of Third Avenue Management, told Ackman that spending time with Ackman to discuss his negative view on MBIA would be a waste of his time. Third Avenue went on to lose quite a lot of money when the value of MBIA’s debt and equity fell significantly. If Marty Whitman had listened to Bill Ackman's bear case on MBIA, his firm may have avoided serious losses.

While this book is in many ways similar to Fooling Some of the People All of the Time, that did not prevent me from enjoying reading Confidence Game. The author does a great job describing how Bill Ackman developed his thesis and eventually profited from the downfall of MBIA. As a result, I would recommend this book to anyone who is looking to learn from the credit crisis in order to profit in the future.

About the author:

Patrick Goldin
Patrick Goldin is the General Partner of the Alain Value Fund LP, a limited partnership exercising a value-focused and bottom-up securities approach. In addition to his duties as general partner, he is a student in high school. He can be reached at [email protected]

Rating: 4.3/5 (6 votes)


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