We’re Big . . . and We’re Connected

By James Kwak

MBIA, the big bond insurer, is actually headquartered in Armonk, New York, about forty miles from Wall Street, and it’s not quite one of the swaggering elite. But it plays its own crucial role in the financial system, insuring municipal bonds as part of a tight oligopoly. Then it recently expanded into writing credit default swaps on mortgage-backed securities and collateralized debt obligations, raking in profits during the boom while loading up on exposures that would almost kill it during the financial crisis.

But when it comes to attitude, MBIA wanted to be every bit the financial oligarch. Bloomberg has an excerpt from Christine Richard’s upcoming Confidence Game, which tells the story of hedge fund manager Bill Ackman’s short position on MBIA. (Here’s a previous Bloomberg story on the topic.) There isn’t much in the excerpt, but there is this choice quote from MBIA CEO Jay Brown, as recalled by Ackman:

“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.”

(The next year, New York attorney general Eliot Spitzer began investigating Ackman for market manipulation, but Ackman was never charged with anything.) It doesn’t get much more clear than that.

(Disclosure: I knew Bill Ackman a long, long time ago. We took calculus together in high school; I was a sophomore and he was a senior. And I vaguely recall helping him with it. Nice guy. Yes, he had gray hair in high school.)

13 responses to “We’re Big . . . and We’re Connected

  1. Too bad nobody will ever subpoena that list of “friends in high places”.

    I wonder if it includes clients number 1 through 8.

  2. It looks as though you have at least one high school friend in a high place. If Bill gives you any shorting tips I hope you will post them.

    When did you take geometry? Fifth grade?

  3. CEO Jay Brown would be a good place to start. Again our government is in the pockets of the corporations. Can’t live with them, can’t live without them getting all your money.

  4. Yes, but then look up Ackman and consider what he tried to do with Target. Spin off the land under their stores into a REIT (generating buckets of money for shareholders) and then have Target rent back what had been its own locations.

    Ackman may have successfully tilted at windmills when he was younger but his more recent history probably places him among the many other inglorious bastards.

  5. Got my book today. From the good old US of A Post Office. I thought surely I would get it from a brown natural gas guzzling USPC. So freaking cool. so freeeeeeeeeeeeeeeeeeeeeeeeeeeaking cool. I’ll be hugging the hardcover,indexed, edited beaUty while I watch TWO OF MY BIGGEST HEROES IN THE WORLD TONIGHT ON BILL MOYERS. TO LOVE JAMES KWAK AND SIMON JOHNSON ANY MORE THAN I CURRENTLY DO WOULD REQUIRE THAT I BE GAY. I’m not sighning up for that duty though. 15bucks and 3 quarters dollars got it delivered to the door. BEAUTIFUL

  6. By the way, I was drinking the last 2 days. If I said anything wrong or over the line I’m sincerely sorry. I guess I”ll be busy with my books the next few days.

    AMERICANS LOVE YOU JAMES AND SIMON!!!!!!!!!!!!!!!!!!!!

  7. Also I read President Obama won’t sign any bill (law) that doesn’t adresss the derivatives situation. This is a very very very good sign. The proof is in the pudding, but that is a very good sign for encouragement.

    Please President Obama, be sincere on this and make us trust your words forever more.

  8. Disclosure, oh brother. Way to toot your own horn.

  9. Come on, you have to see the humor in that comment (“disclosure”). That’s funny stuff in my book. If you had taken both men (Kwak and Ackman) at that time and told them where they would be now, my guess is they would have been more than mildly surprised.

  10. This story is, of course, not unique. Scratch the surface of Wall Street and smell the sewerage of human nature. Where there’s lots of money there are lots of “gamers” at work. That his been true since the time of the pyramids (Egyptian that is). But, we learned from the Great Depression that if we don’t take the necessary steps, these gamers will proliferate ad infinitum, amen. Such is the nature of the human animal. Capitalism is the best system, but requires constant pruning or the weeds outperform the productive flora. There is no reason to advocate socialism, but to advocate controlled capitalism is sane and sensible. I say, pay anyone who earns a great return for their company an amount comensurate with his skill and acumen, but don’t reward those who develop products (read CDO’s, etc.) that are devised solely to unjustly enrich those who understand their complications and penalize anyone willing to buy the other side of the scam.

  11. Ted, I love reading your additions to this blog. I have great respect for your sentiments and opinions. But the term (much abused these days) is: “the proof of the pudding is in the eating,” not “the proof is in the pudding.”

  12. If I had, say, tutored Bill Gates in computer programming in high school, I would feel kind of dumb letting that fact be known today, given that I still have to work for a living.

    So, I see your point. James’s disclosure truly does reveal information a less courageous writer would not want known.

  13. The stories of misbehavior at MBIA extend to most of the bond insurers, such as Ambac, FGIC, XL, etc. It keeps going AND NO ONE’S WRITING ABOUT IT (hint hint). I’m so surprised that with all the brou-ha-ha about bonuses and Wall Street that no one picked up what’s happening at places like Ambac, which have lost 99% of their value over the past 2 years. Here’s a taste: The Board approved enormous cash increases in senior management salaries and bonuses — take a quick glance at the 8K: David Wallis is now paid $1.8 million while the stock price is barely above $0.50! Callen got a nice salary increase too, all the while he continues to have his wine drinking fests in his office almost on a nightly basis (no kidding). AND, perhaps fearful of regulatory intervention, the Board approved a quarterly retention bonus!!! What? Because the financial guarantor sector is virtually dead, nobody is taking the time to cover the bonuses at some of these institutions — by comparison, in my opinion, this is far more egregious than the Goldman Sachs bonuses. And there’s fraud waiting to be uncovered, too. PLEASE COVER THIS.