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Todd Sullivan
Todd Sullivan
Articles (5983) 

Book Review: “Confidence Game”

April 17, 2010 | About:

Could not put this book down. This a riveting account of a tenacious investor, incompetent/apathetic regulators & analysts and a company that hid information, deceived investors and used every connection it had in its attempts to silence him. At points this reads like a John Grisham novel…..except it actually happened.

For me, this is the best of the “melt down” books to date…hands down

The Warning and the Winnings

Confidence Game is a real-world “Emperor’s New Clothes,” a tale of widespread delusion and one dissenting voice in the era leading up to the worst financial disaster since the Great Depression. Wall Street appeared to have found the secret for turning everything from risky mortgages to credit card bills into super-safe, triple-A-rated securities. Behind the facade of safety, the financial system had become dangerously fragile. Few had anything to gain from pointing out the risk.

Bill Ackman did. In 2002, the hedge fund manager issued a critical research report on MBIA Inc., the owner of a triple-A-rated bond insurer that played a central role in the financial alchemy on Wall Street. “This company will spiral downward,” Ackman warned, and he placed a bet against MBIA that would earn his investors billions of dollars if it did.

The backlash was swift. Ackman was branded a fraud in the press and investigated by Eliot Spitzer and the SEC. Despite the scrutiny, he spent years telling anyone who would listen why MBIA was a catastrophe waiting to happen. With the onset of the credit crisis, the problems exposed turned out to be bigger than MBIA. An unquestioning acceptance of credit ratings, a blind eye to leverage, a dangerous reliance on financial models, and the abandonment of common sense had become part of a deeply flawed financial system. The collapse humbled nearly every large financial institution and plunged the country into recession.

Ackman’s story captures an era of delusional confidence, when debt exploded yet risk appeared to vanish. Told by award-winning bond market reporter Christine Richard, Confidence Game is a behind-the-scenes look at how warnings went unheeded as Wall Street careened toward disaster.
For me the story was more than that. This is about an investor knowing the company he had an investment in better than anyone. Ackman could recite chapter and verse the issues with MBIA and did so to everyone for years until he was finally proven correct. Like John Paulson and Micheal Burry, Ackman was subjected to boisterous doubters. Like the others, he knew they were wrong, held onto his investment (making it larger), and was proven spectacularly right. THAT, is a lesson for all investors. Do you homework and do not get shaken out because of the crowd…

But unlike Pauslon and Burry, Ackman also was forced to deal with forces lined up against him including the NY Insurance Commissioners Office and the SEC. His perseverance is even more impressive given the weight and influence of those attempting to stop him.

Richard’s also paints (not sure it was intended to be) a scathing indictment of the SEC, Insurance regulators, ratings agencies, and “analysts” up and down Wall St. Had any one of this group done their job’s and looked at the evidence without bias, the collapse of MBIA may have been avoided. Further, the eventual bursting of the bubble may not have been as catastrophic as some of the worst abuses at the company and in mortgage/bond insurance markets in general may not have developed to the extent they did. As we sit and hear calls for “increased regulation” one has to wonder, why? More or different regulation would not have prevented what happened to MBIA.

All the regulation in the world is impudent if regulators lack the ability or inertia to actually do something. Had any one of the group acted rather simply taking chapter and verse what they were being told by MBIA management as truth, the end of this story may have changed. Yes, more regulation to be ignored is precisely what we need.

The reasoning given by “analysts” and ratings agencies for not lowering their recommendations on either MBIA or Ambac will leave readers jaws agape. In most cases it boils down to the very same reason your parents gave you when you were a child…. “because I said so”. In virtually every instance Ackman’s questions, research, opinion and conclusions (which in the end were right) were summarily dismissed with a “we have received the information you sent and will review it”. I find it hard to believe they ever did or of they did, were so jaded that their response to it was predetermined. Call it what you want, incompetence or apathy……..

Only at the end, when both MBIA and Ambac were collapsing did ratings agencies and analysts begrudgingly lower ratings on both.

As for Ackman himself, it is clear the saga effected him on a level much deeper than the eventual outcome of a particular investment. One is struck by the fact that throughout the story, one that encompasses 6 years, that Ackman himself is perpetually optimistic. His view that ratings agencies, SEC official regulators, analysts etc would see MBIA for what it was never seemed to waiver. Despite disappointment after disappointment, Ackman is optimistic at the conclusion of every meeting that he was making headway. It wasn’t the case…..

“The whole thing became a corner stone in Bill’s life” said Shane Dineen, a Pershing analyst. In reading it though, one can’t escape feeling the whole thing became more about Ackman’s determination to right the injustice he felt throughout it than the eventual outcome. At various points it would have been easy to lick wounds or settle for a small gain on the trade and simply walk away. One would have to ask if the investigations and public scrutiny were worth it. In all reality, had people listened to Ackman 2002, while Pershing would have profited handsomely, those profits would have been dwarfed by what eventually was attained.

The added time in the trade allowed the position to build increasing larger over the years leading to staggering gains at the climax. In August 2007, when Pershing’s CDS contracts had risen from their initial $16,000 cost to protect $10M of MBIA debt has risen to $250,000 for the same $10M Ackman wrote to investors. “We believe we are still in the early innings”.

Here is yet another lesson for investors. Keep your eyes on the end, not the now. How many would have cashed out at this point, worried they would lose their gains? Had they done the work Ackman did, they would have been as sure as he was of the eventual outcome. Price does not equal value……

By November 2007, the same $10M insurance cost $345,000. The Pershing staff, at the time had the collective thought, “You’ve proved your point, get out while you can”.

Ackman’s retort? “I have never seen such a good risk reward opportunity in my entire lifetime”.

By mid December the same $10m of insurance cost $580,000 and Pershing was still buying..

In Mid January 2008 when MBIA sold $1B of notes at 14%, none other than Warren Buffett commented, “When a company issues a 14% bond when US Treasuries at under 4% and it is still rated AAA, we have now seen the cow jumping over the moon”.

On Jan. 17th 2008, the same $10M of insurance now cost $1.2 million a year, up from Ackmans original $16,000. This is the equivalent of a $16 stock rising to $1,200.00. By the end of the day on the 17th, the price had risen to $1.5 million.

On Feb. 25th, 2008, S&P reaffirmed AAA Ratings for both MBIA and Ambac

On April 4th, Fitch lowers both credit rating to AA

On June 4th, Moody’s lowers credit rating to A and S&P lowers to A on June 5th.

After Moody’s action Ackman begins selling CDS holdings in MBIA.

When 2008 had come to a close, six years after the original presentation on MBIA, Pershing had closed its position.

It netted them $1.1 billion dollars….

In 2008 markets got their answer…… No, in fact, MBIA was not AAA.

Follow this link to purchase the book

The website www.confidencegame.net has the NY AG and SEC interview transcripts with Ackman under the “source documents” tab

Here is the Original “Is MBIA Triple-A?” (click to open .pdf)


Who’s Holding the Bag?

'Who's Holding the Bag' - Presentation at the Ira Sohn May 2007 Conference by Bill Ackman, Founder, Pershin...

Todd Sullivan


About the author:

Todd Sullivan
Todd Sullivan's - ValuePlays: http://valueplays.blogspot.com

Rating: 3.6/5 (10 votes)


Superguru - 7 years ago    Report SPAM
even highly respected Martin Whitman lost big to Ackman on this one.

(btw, I hold whitman in high regard and invest with him)
Hpmst3 - 7 years ago    Report SPAM
"The website www.confidencegame.net has the NY AG and SEC interview transcripts with Ackman under the “source documents” tab"

Thanks for the post. These transcripts are good.

Buffetteer17 premium member - 7 years ago
Sowhat off topic, I am hoping my United Airlines short position turns out in the end to be a microcosm of Ackman's experience with MBIA. I'm way, way down, having started shorting at about $13/share and having increased the short position to around 10% of my portfolio as UAUA kept going higher. It is now close to $25/share, and may surpass that based on optimism due to the Continental/United merger talks. My fair value estimate is about $8/share. About once a week I consider cutting my losses. How did I commit so much money to a trade that is working so badly? It kind of crept up on me. I didn't intend to risk 10% of my total portfolio on this. But, I failed to realize that a short position grows as a fraction of one's portfolio when it goes sour, unlike a long position, which shrinks. Also, I did a synthetic short via long put/short call options. When the puts got cheap as a result of the stock price rise, I bought more without much thought. Then, to get the position into a put/call balance, I sold some more calls. I just didn't notice how fast the total money at risk was creeping up.

When I think about it, the case against UAUA remains intact. Qualitative factors: union shop, airlines have never made their cost of capital in in the long run, overreaction of the market, unclear that a United Airlines/US Airways deal has all that much synergy. Quantitative factors: UAUA has negative book value (-$16.9/share), negative earnings (-$4.3/share), and a terrible Altman Z'' score (-2.1). They have way too much debt (-$51/share). The possible United Airlines/US Airways merger is proposed to be financed with stock, not cash, resulting in further dilution of UAUA shares. The big risk is that Continental gets serious and buys out United, leaving me with a huge loss. I don't think that is very likely, but it is certainly possible, and it keeps me awake at night sometimes.

Today, given a redo, I wouldn't commit nearly so much capital to this idea. But I did and I intend to see it through. I think a certain stubbornness to see one's ideas to a conclusion is essential to value investors. At best, I will ultimately make a lot of money. At worst I will have learned a valuable lesson.

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