Capital Markets

Hedge Fund Bully Plays Subprime Savior

Fearing systemic risk in the bond market, Pershing Square's activist hedge fund manager William Ackman demands detailed data about MBIA's financial...
Stephen TaubJanuary 31, 2008

William Ackman, the activist manager of hedge fund Pershing Square Capital Management, took on an unusual new role today, demanding that management of embattled bond insurer MBIA give him far more information than it would normally disclose or is required to provide by the Securities and Exchange Commission.

In advance of the 11 AM call, Ackman, who has correctly shorted the stock for several years, widely disseminated a press release full of detailed financial questions he had submitted to management.

Hedge funds are often thought of as activists if they lobby for changes in governance, special dividends, divestitures, and the like. But in this case, Ackman may be trying to save the market from economic crisis. MBIA and other bond insurers are a backstop of last resort in the rapidly unraveling subprime mortgage crisis, and Ackman’s questionnaire was aimed squarely at determining the company’s level of exposure and its liquidity.

That’s a new role for an activist hedge fund, which usually causes a stir on the board, rather than in the finance department. Much of the information Ackman demanded of MBIA is data that CFOs are not accustomed to providing investors and thanks to Regulation Fair Disclosure (FD), the demands were made in a very public fashion.

According to the release, Ackman requested specific, detailed information regarding MBIA’s cash position, investments, collateral posting policies and even how it plans to use $1 billion infusion it received from Warburg Pincus last December.

For example, Ackman wants to know of the $433 million of “cash and investments” at the holding company, how much is unrestricted cash which is available to pay debt service, operating expenses, and/or dividends?

Likewise, he asked for a breakdown of cash and investments as of today, January 31, reflecting funding obligations since year-end, including dividends, interest payments, and any other expenses (excluding any funds received from Warburg Pincus).

Ackman also asked the company to describe holding company investments in the $433 million figure in detail. He also wanted to know “whether the investments are in publicly traded securities or are they private investments in subsidiaries, affiliates, or otherwise?”

The hedge fund manager demanded to know what collateral posting obligations exist at the holding company, investment management, insurance subsidiary, and other subsidiaries. “Please schedule the amount of cash, Treasury, Agency collateral required to be posted for each entity at each letter downgrade beginning at AAA,” he demanded. “Please describe whether the rating triggers are based on holding company or insurance subsidiary downgrades.”

Ackman also asked for detail descriptions of MBIA’s below-investment-grade exposure by name of obligor, gross and net exposure outstanding, S&P, Moody’s, Fitch, and MBIA internal rating, and risk status — that is, in default, breach of covenant, etc..

When MBIA reported results on Thursday, it said it lost $2.3 billion in the fourth quarter, compared with earnings of $181 million during the same period the previous year. It also reduced the value of its credit portfolios by $3.5 billion. That apparently pleased investors, who may have been expecting worse. They bid up MBIA’s stock by more than 12 percent at midday — bad news for Ackman.