Interview with Christine Richard, Author of "Confidence Game"
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In Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff, Christine Richard unravels the story of Bill Ackman's six-year battle in warning the public of a catastrophic $2.5 trillion bond insurance business waiting to happen. As the hedge fund manager of the MBIA (Municipal Bond Insurance Association), Ackman placed a bet against the MBIA and brought in more than $1 billion for his investors from the collapse of the credit markets. Despite his winnings, Ackman was called a fraud in the press and investigated by Eliot Spitzer and the Security and Equities Commission. A Bloomberg News reporter, Richard weaves a compelling narrative around Ackman, while revealing the financial fallacies on Wall Street. Bill Hayes, contributor to the Financial Professionals' Post, had the opportunity to speak with Richard about her book. (Richard will speak at NYSSA on Friday, September 24, 2010. Register now to reserve a spot.)
Why did you pick the title Confidence Game for your book? What is its meaning for the reader?
The title of the book—Confidence Game—comes from the idea that bond insurance was never really an insurance business. It was a confidence business. The companies were levered 140–to–1 and yet they were AAA rated. The market had to have confidence in those AAA ratings or the business would cease to exist. Bill Ackman's extraordinary confidence in his contrarian view on MBIA was also a big part of the story. He simply wouldn't accept the fact that MBIA deserved to be rated AAA, and he remained confident in that view even after his research on the company made him the target of an SEC investigation and the subject of ridicule on Wall Street. He was the perfect foil to a group of companies that believed they could underwrite credit risk to a “zero loss” standard. The tension between Bill Ackman and MBIA is what, I think, makes the story entertaining.
What role did the AAA debt rating play in the MBIA?
MBIA was a company that sold and marketed the AAA credit rating. All of the bond insurers did. They figured out, even before the credit rating companies themselves, that the AAA rating was one of the most profitable brands in the world.
What was the role of the AAA debt rating in the financial crisis?
Ultimately, the credit rating companies couldn't resist debasing the AAA rating. Wall Street was willing to hand Moody's and S&P half a million dollars for stamping a AAA rating on a CDO or a security backed by home equity loans. All these AAA ratings created huge, hidden risk in the financial system because they effectively sucked all of the capital out of the banking system. If you held AAA securities you didn't need to hold capital against that risk. The financial system nearly collapsed because AAA ratings on CDOs, and bond insurers and Fannie Mae and Freddie Mac and AIG were wrong.
How did the rating agencies miss the problems and vulnerabilities of the MBIA?
The credit rating agencies created companies that could never be downgraded. The bond insurers' ratings were extended to thousands of securities with a value of more than $2.5 trillion. By 2008 MBIA's CEO, Jay Brown, admitted that the bond insurers had somehow become the lynchpin supporting global financial market. There was no room for skepticism by credit rating analysts after a certain point. Besides, the analysts rating the bond insurers had to assume their colleagues were accurately rating the underlying risk of the insured bonds. It was very incestuous. There was no third party looking at the bond insurers and looking at the credit rating agencies and asking if either of them had it right.
Why were the equity analysts so wrong on MBIA?
I think equity analysts started from the assumption that the bond insurers would always be AAA rated. Otherwise, it was impossible to model earnings and to forecast a stock price. That view blinded them to the real risk of the companies.
Why did MBIA insure CDOs?
It's ironic but CDOs were presented by the bond insurers as perfect pools of diversified risk. Many of the CDO tranches that the bond insurers backed were deemed to be “super senior” securities or safer even than AAA-rated securities. Because the risk was “nonexistent,” the premiums to underwrite the risk were tiny, and the bond insurers compensated by taking on massive exposure. In the end, these securties weren't hugely diversified pools of debt; they were lethally concentrated bets on the housing market.
Did Ackman foresee what would happen when he issued a negative report on MBIA after shorting the company?
I don't think Ackman did forsee what would happen after he issued his report questioning MBIA's AAA rating. He seems to have believed that by making a strong case that the company was overrated, he would force investors and rating agencies to reevaluate the risk. Instead, he was investigated and labeled a fraud. Meanwhile, the bond insurance business boomed. The credit markets boomed. A lot of faulty assumptions went unchallenged across the financial system.
What is the message of your book for its readers and for the financial community?
First, Confidence Game is meant to be an engaging story that explains how our financial system went so far off the rails. It's a piece of Wall Street history. It's also certainly a tale about the power of research. To comply with a subpoena when he was investigated for shorting MBIA, Bill turned over 140,000 pages of documents he'd read and marked up in researching the company. That was early 2003. By the time I began to write the book in late 2009, Bill had an entire office filled with documents on bond insurance. Finally, I think Confidence Game is basically a story about the importance of free speech, persistence, and the power of staying positive.