“There are three universal lies: Margins are weak, but we’ll make it up in volume; the check’s in the mail; and I won’t come in your mouth” is really a thing that Partiarch Partners founder and CEO Lynn Tilton says, but “we’ll double down and make up all our losses” probably deserves a spot on the list too. That seems to have been MBIA’s plan when it entered into some cockamamie CDO transactions with Patriarch in 2003. These … did not work out for MBIA, and so in 2009 they sued, and today Tilton won the lawsuit, and also may have won some hearts in the courtroom:
Thirteen witnesses presented evidence to Judge Sweet in the lawsuit. He praised Ms. Tilton’s testimony in a section of the lawsuit on “witness credibility.”
Ms. Tilton is a well-known Wall Street personality, with a penchant for brazen remarks and an eye-catching style uncommon in the financial industry.
“She was vigorous, authoritative, informed and almost entirely supported by documentary evidence,” Judge Sweet wrote.
The case is a pretty nutty example of pre-crisis structured finance practices. The story begins with MBIA having written some insurance policies on some distressed-debt CDOs. Those policies were looking bad: Read more »
A judge’s answer to that question will go a long way towards determining if the more than $40 billion (and counting) that Brian Moynihan & Co. have already paid in penance (and write-downs and legal fees, etc.) for the albatross that was and is the “world-class” company known as Countrywide is enough, or if MBIA is entitled to some billions of its own. Read more »
There are some financial jobs that come with a perhaps undeserved swashbuckling cachet. “Oh, you know, I do hostile takeovers,” you say, and a certain crowd will treat you like you just got back from plundering a Spanish ship-of-the-line, even though you mostly sit in a cubicle updating spreadsheets and changing the wording in press releases. Then there are other jobs. When you say “I do liability management for insurance-company bonds,” everyone instantly thinks of spreadsheets.
Still, you swashbuckle on unrecognized, taking a quiet satisfaction in your piratical ways. Everyone in this story is a pirate, and this is a bond that somebody made or lost or made and lost a lot of loot on:
While we were out some people who keep to a less rigorous vacation schedule than we do wrote some stuff about complexity in finance. Lisa Pollack at FT Alphaville started the ball rolling by attributing increasing complexity in finance to increasing smartness in the financial industry. This is a delightful theory if you are or were in the financial industry, particularly if you were tasked with developing financial instruments, so we’ll go ahead and endorse it.
Like so many good con-men, bankers make themselves believed by persuading each and every investor individually that, although someone might lose if stuff happens, it will be someone else. You’re in on the con. If something goes wrong, each and every investor is assured, there will be a bagholder, but it won’t be you. …
If the trail of tears were truly clear, if it were as obvious as it is in textbooks who takes what losses, banking systems would simply fail in their core task of attracting risk-averse investment to deploy in risky projects. Almost everyone who invests in a major bank believes themselves to be investing in a safe enterprise. Even the shareholders who are formally first-in-line for a loss view themselves as considerably protected. The government would never let it happen, right? Banks innovate and interconnect, swap and reinsure, guarantee and hedge, precisely so that it is not clear where losses will fall, so that each and every stakeholder of each and every entity can hold an image in their minds of some guarantor or affiliate or patsy who will take a hit before they do….
This is the business of banking. Opacity is not something that can be reformed away, because it is essential to banks’ economic function of mobilizing the risk-bearing capacity of people who, if fully informed, wouldn’t bear the risk. Societies that lack opaque, faintly fraudulent, financial systems fail to develop and prosper. Insufficient economic risks are taken to sustain growth and development. You can have opacity and an industrial economy, or you can have transparency and herd goats.
This is delightful too, and features goats; my guess is that it’s mostly wrong but I don’t count that against it. One objection to it – though not a decisive one – is that it is wrong about the psychology of the people creating the financial complexity. People who design swaps and reinsurance and guarantees and capital structures actually want to know, really really clearly, what happens when things go bad. Part of the proliferation of complexity – not opacity, complexity – is the desire to have that definition. That’s what a CDO is. It’s slicing the world into possible future states and clearly defining who gets what payouts in those future states. Simple banking is “I will put equity into a bank, you will put a deposit in, I’ll loan out the money and whatever we get back goes first to you then to me.” Complicated banking is “that, but also if we don’t get the money back because of reason X, insurer A pays; and if we don’t get it back because of reason Y, noteholder B pays; etc.” Complexity is a move toward greater definition, greater clarity about where losses will fall, not less. Read more »
As you’re likely aware, one of the most important skills to master when you’re in this money making game is to be able to regulate your emotions. You can’t freak out every time you lose a little cash, and on the flip side, it’s probably a good idea to avoid doing an end-zone dance on the days you make it rain. Many of Wall Street’s most successful investors have perfected the art of staying cool and calm, with the best of the best being basically dead inside. Then you have Bill Ackman.
The Dead Inside model is not the one he’s chosen to follow over the course of his career. On the contrary, Bill is stuffed to the gills with emotion, and often feels compelled to let them out. No, scratch that. Letting his salty tears flow is not a choice, just like Ackman’s passion for standing up to institutions like MBIA and saying “J’accuse!” wasn’t a choice, it was his duty.
Obviously these raw and uncut displays of what Bill’s feeling haven’t prevented him from doing pretty well for himself. They have, however, caused a certain amount of agita for those around him. Bill’s visible tears at last year’s Target shareholder meeting were deeply distressing to Joe Nocera, who hasn’t yet evolved to the point where he’s comfortable seeing a grown man cry. And in Christine Richard’s Confidence Game: How A Hedge Fund Manager Called Wall Street Bluff, we learn of a couple other instances in which Bill’s inability to keep it locked up– one the adorable quirks we love most about him and probably the source of his success!– resulted in some minor and major fallout (making an employee uneasy and the enacting of the aforementioned Nut Kicking Rule, respectively). Richard writes: Read more »
MBIA, the mortgage insurer that decided to back all those subprime securities underwritten by Countrywide and others, will now have its day in court.
A judge ruled earlier this week that MBIA can proceed with its fraud claim against Countrywide (now Bank of America.) The insurer claims Countrywide lied when it told MBIA the mortgages being insured were “in in strict compliance with its underwriting standards and guidelines.” Read more »
That question came up in the hearing earlier this week in reference to an email sent by Josh Birnbaum, a former MD in Goldman’s structured products group.
The email, sent in July 2007, sought authorization form senior management for the structured products desk to buy put options on a slew of competitors including Merrill Lynch, Bear Stearns and Lehman Brothers. The email also revealed that Birnbaum had bought put options on MBIA, Ambac and Countrywide. Read more »