Tuesday, July 7, 2015

Confidence Game

Several years before the credit crisis, Bill Ackman warned investors that the large bond insurers, MBIA in particular, were taking on too much risk. He started shorting the stock and talking about the company's problems to anyone who would listen. He was attacked by many, including MBIA management, regulators who don't appreciate the role of short-sellers, and the media. He was eventually vindicated as his predictions turned out right and he generated an incredible profit as a result. In Confidence Game, Christine Richard tells this story.

The story is told mostly from Ackman's side (the sides that turned out to be wrong chose not to comment for some reason) and it is long, but if you can accept those two caveats it is a very good book. It reveals Ackman's mental strength as he perseveres in his short even as he is questioned by those in his own firm. For years he held on or shorted more as MBIA's stock rose, only to finally be rewarded.

Though I have now read a lot about corporate malfeasance, I am still always surprised at how some managements behave in order to sweep problems under the rug. MBIA managers were not candid with shareholders, created transactions that postponed losses that should have been recognized immediately, and attacked the character of those who shone light on MBIA's problems, rather than address the problems. The "greasy pole" school of management is one interesting filter.

The book also illustrates the power of incentives; MBIA's managers were paid for short-term stock increases, and so they managed the company with that in mind. Just awful.

I see a lot of parallels between this Ackman short and his current short of Herbalife. They are both long, drawn-out (in years!) campaigns, Ackman has been persistent in the face of naysayers and those who attack his character even as a rising stock price increases doubts, and he is keen to share the failings of Herbalife's model with anyone who will listen. But for all of Ackman's campaigns against MBIA, it was not a regulator that finally took the company down, but a credit crisis that he didn't cause. For all the effort he has put into shutting down Herbalife with the help of a regulator, he may not be able to do it without an industry or company crisis.


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