MBIA lawsuit

Early last month a state court judge in New York dismissed five of the six counts of a lawsuit MBIA filed against Merrill Lynch a year before.

MBIA was a bond insurer, and it lost big in the recent credit crisis as the insurer of CDOs issued by Merrill Lynch.

In the lawsuit, MBIA claimed that Merrill Lynch had fraudulently induced it to enter into these transactions as part of a scheme to “offload billions of dollars in deteriorating U.S. subprime mortgages and other collateral that [it] held on its books by packaging them ... or hedging their exposure through swaps with insurers.”

Merrill Lynch's reply, "So what? We're allowed to look for suckers, and you're allowed to be a sucker."

The court's response to MBIA, "You're a Big Boy." MBIA and its affiliate had contractually disclaimed reliance on any representations by Merrill Lynch as to the quality of those CDOs, so the court dismissed causes of action for fraud in the inducement, fraud by omission and negligent misrepresentation without regard to the truth of their accusations.

The contract claim that will go forward involves the theory that Merrill Lynch had promised to deliver securities of “AAA” credit rating quality, but had failed to do so when it delivered securities which had received but did not deserve such a rating.

Presidential Life

Presidential Life Corp., a life insurance company based in Nyack, New York, has reported a profitable first quarter, and the likelihood of a proxy contest.

This has attracted my special attention for a trivial personal reason: I was born in Nyack, spent a lot of time there during summer school vacations as a boy, and try to keep an eye on goings-on along the western bank of the Tappan Zee.

Anyway: year-to-year comparison. Presidential Life (Nasdaq: PLFE) lost $2.7 million in the fourth quarter of 2008. But they turned that around, and have reported a profit of $12.2 million for the last quarter of last year.

In between there, in the spring of 2009, Herbert Kurz, who founded the company back in 1965 and who had been CEO since, stepped down. He may be getting tired of playing golf, though, because he now says he plans to nominate his own share of directors in advance of the next shareholders' meeting.

What (other than that golf gets boring) is Kurz' beef? He contends that during his stewardship he instilled in the company a culture of frugality, which is why the company has lasted as long as it has, but that the new leadership consists of a bunch of spendthrifts.

There will be more on this going forward, I'm sure.

An Industry that Dodges Bullets

Entering the year of our Lord 2009, many participants in the hedge fund and alternative-investment industry in were of the opinion that the industry was on the eve of a radical transformation, at worst, effective elimination, due to government actions in a variety of jurisdictions that might result from the ongoing credit/financial crisis.

Yet it now appears that the industry may survive that impulse. I’m impressed by what hasn’t happened – by how any bullets it has dodged of late. Six come to mind at once.

1. The Insurance Department in New York appears to have lost interest in a plan, mooted last year, to regulate CDS’ as insurance.

2. The Governor of New York backed away early this year away from a plan to tax carried interest as ordinary income in that state's income tax

3.. The composition of the EU Parliament has changed in a way that will create difficulties for the implementation of new regulations of hedge fund managers there

4. Three efforts to regulate hedge funds failed in the General Assembly of Connecticut this year: although one of them had passed the state senate, they’ve all died with the end of session

5. In the US federal government, the new administration has dropped plans to radically rework the chart of its financial regulatory agencies

6. And the ban on short selling of a range of finance industry firms announce last fall was allowed to expire, and there seems no impetus to renew it.

Just a quick link

Schulte Roth & Zabel, a law firm with offices in New York, Washington, and London, recently posted on its firm website an intriguing report on current trends in activist investing.

You can read the report for yourself here.

I'll say something about why I find it intriguing tomorrow.

Insider Trading and mergers

About a year and a half ago, Gretchen Morgenson of the NY Times wrote a story with the lead, "The boom in U.S. corporate mergers is creating concern that illicit trading before deal announcements is becoming a systemic problem."

It wasn't merely US mergers she was concerned about, though, despite the wording of that lead. She cited a study by the UK's answer to the SEC, their Financial Services Authority: that showed that in 2004, 29% of companies involved in mergers experienced abnormal trading before public announcements. The FSA also said that in 2001, the comparable figure had been 21%.

What accounts for the increase? Perhaps it simply became more difficult to keep a secret between 2001 and 2004.

Ms Morgenson also quoted a money manager named Herbert Denton: "Martha Stewart got hurt very badly for something that happens every single day on Wall Street. It's a falseness and a hollowness to the capitalist system when you are pretending that things are pristine and they are not. Either the SEC should get very, very serious and prosecute a lot of people or forget about it."

I'd raise my hand for the second option there. "Systemic problem" solved.

Happy New Year, everyone

In yesterday's entry, I wrote about a story in this month's issue of Vanity Fair, one that concerned Mayor Giuliani's campaign for president and, in consequence, the law firm in which he is a name partner, Bracewell & Giuliani.

Today I'd like to stay within the four corners of VF. For it has another story with at least a tangential relationship to the themes of this blog: David Margolick's article on Governor Elior Spitzer of New York, and the tough year he has had in Albany.

The reason that's of interest to Proxy Partisans, of course, is that in his last job, as state attorney general, Spitzer put himself front-and-center as the "sheriff of Wall Street." In his view, the SEC wasn't doing its job, so he would.

Margolick contends that Spitzer developed a model of "strategic craziness" -- planned tantrums, really -- for getting what he wanted in terms of changes in the way business is done on Wall Street, but that this model, become a habit, has backfired on him.

He quotes an unnamed source explaining the difference between being a prosecutor and being a governor -- a difference that (this is the gist of the piece) -- Spitzer has yet to grasp: "If you're a C.E.O. at a company and I call and I say, 'I'm going to fuck you, I'm going to destroy you, I'm going to indict your company,' and I sound totally crazy, you hang up on the phone, and you go see your chairman of the board, and you say, 'This guy is crazy, we need to settle,' because you're given no option. If you're a state legislator and you get the same thing, you hand up the phone, you call the Albany Times Union, and you say 'This guy is crazy,' because you don't give a shit."

Perhaps tomorrow I'll look back upon Spitzer's days as New York A-G, especially in connection with two high-profile scandals (a) "market timing" in regard to mutual fund shares, and (b) the relationship between research and underwriting.

Bracewell & Giuliani

The latest issue of Vanity Fair has a feature story about former New York mayor Rudy Giuliani. Some of the buzz about this issue has suggested that this story, written by Michael Shnayerson, would be a great take-down piece. A serious blow to Rudy's candidacy.

It isn't. Frankly, I got the sense reading it that Shnayerson was flailing about a bit, trying to score a solid punch and missing.

Example: In 2005 (as the story accurately reports), Giuliani became a partner at what had been the Texas law firm of Bracewell & Patterson. It's now, of course, the Texas & New York law firm of Bracewell & Giuliani.

By the time Giuliani put his name on the door, Bracewell had become, we're told, "the go-to law firm for major polluters in oil and gas as well as coal companies."

Shocking. Until you give it a second's thought. A prominent Texas law firm represents oil and gas companies? Such companies, when accused of environmental violations, hire lawyers to defend them? What's the shocker there again?

Then we get a long graf re-hashing the Citgo connection. No "mini-scoop" here. This stuff was all thoroughly vented months ago. Yes, Citgo is run by the Venezuelan state, which is currently run by Hugo Chavez, a nasty piece of work.

"Bracewell & Giuliani [has] been happy to take Chavez' money," our intrepid reporter breathlessly informs us.

Would he be happier -- would he want us to be happier -- if B&G hadn't taken Chavez' money? Suppose they had represented Citgo's interests in the US for free, and called it their pro bono work for the year. Feel better?

Either way: they're in the business of advocacy, aren't they? A law firm can, without any shadow to its reputation, defend a serial killer -- for money if he can pay it. Why is it hard to believe that a law firm can work for the interests of a company that does a lot of business in the US, that is run by the government of a foreign state.

The fact that I say "big whoop" to this doesn't make me partial to Giuliani. (Although, for the sake of full disclosure, I might as well admit that a couple of the lawyers who work in Bracewell & Giuliani -- NOT the candidate -- have been valuable sources to me in explaining some legal issues pertinent to stories I've been working on.) I'm not partial to Rudy as a candidate at all -- indeed (a) I don't believe in politics, (b) even if I did believe in politics, it would be a sort of politics that would involve the rejection of the two major parties, and (c) even thinking within the box of those two parties, the only candidate who makes even a smidgen of sense to me is Ron Paul. So there, for Rudy.

Still, I recognize a flailing boxer in the ring when I see one. And that is the figure Mr. Shnayerson cuts.

AIG and New York

New York State's insurance department has taken a position that may frustrate Hank Greenberg's efforts to ... do whatever it is he's planning to do, in connection with AIG, the global insurance giant he headed for years.

Perhaps the reader will recall my discussions from Nov. 4 through Nov. 7. I didn't know then, and still don't know, whether Greenberg seeks outright control of AIG, or whether he'll be satisfied engineering some profitable change in its corporate structure and policy. But something is up.

The New York Insurance Dept. filed a letter December 7 stating its position, which is that too much is up.

New York law says that if individual stockholder or group acting together acquires more than 10% of the equity of a company selling insurance within that state, the acquirer becomes a "controlling entity" -- which requires permission.

New York now calculates that entities Greenberg is piloting control more than the threshold amount of AIG, and must either seek permission to be a controlling entity or "cease and desist immediately from engaging in any further activities aimed at exercising a controlling influence over AIG."

An attorney for Greenberg, Marcia Alazraki, has replied, saying that the various entities involved aren't a group in the relevant sense, and asking for a meeting with NY officials to discuss the issue.

Ms Alazraki knows the issue well. She was deputy superintendent at the NY Dept. of Insurance herself in the early 1980s, and assistant counsel to the Governor of the state, Hugh Carey, before that (1979-81).

She's also got a fine, somewhat intimidating, photograph on her webpage. One likes that in a lawyer.
http://www.manatt.com/Attorneys.aspx?id=1247&item=1245

Tomorrow, then, let's examine the issue of when does a group of shareholders act in concert for purposes of sucg regulatory concerns.

Microsoft annual meeting

Microsoft is holding its annual shareholders meeting in downtown Seattle, Washington, tomorrow.

There are two contested shareholder resolutions on the agenda. One proposal, from the New York City Pension Fund, requests that "management institute policies to help protect freedom of access to the Internet" including certain minimum standards. The NYC pension fund is managed by the office of the comptroller there, William C. Thompson.

Mr. Thompson notes, on behalf of his proposal: "that some authoritarian foreign governments such as the Governments of Belarus, Burma, China, Cuba, Egypt, Iran, North Korea, Saudi Arabia, Syria, Tunisia, Turkmenistan, Uzbekistan, and Vietnam block, restrict, and monitor the information their citizens attempt to obtain."

The company recommends through its proxy statement that shareholders vote "no" on this: "In our view the most effective approach toward this subject requires more flexibility than the proposed standards would allow. We believe that availability of our products and services has increased the ability of people worldwide to engage in free expression and has helped transform the economic, cultural, and political landscape of nations throughout the world."

The second proposal would establish a board committee on human rights. The company likewise recommends a No vote on this one.

The history of AIG

American Insurance Group is the sixth largest company in the world, according to Forbes.

It was founded by Cornelius Vander Starr, a native of California, of Dutch descent, 88 years ago, set up as a Shanghai-based operation selling insurance to the Chinese.
It was marvellously successful, and soon had operations around the world. Of course with the Communist takeover in the 1940s, the company moved its headquarters to New York.

Greenberg climbed up the corporate ladder as Vander Starr's protege, and became his successor when the company founder retired in the late 1960s. Soon thereafter, the company went public. Greenberg remained its chief for more than 35 years.

In October 2004 the New York Attorney General Eliot Spitzer, who has since become Governor, announced a lawsuit against Marsh & McLennan Companies -- a brokerage -- for steering clients to preferred insurers with whom the Company maintained lucrative payoff agreements, and for soliciting rigged bids for insurance contracts from the insurers.

Spitzer also announced in a release that two AIG executives had pleaded guilty to criminal charges in connection with all this steering and rigging.

The resultant brouhaha led to Greenberg's departure early the following year. In February 2006, the State of New York and the post-Greenberg management at AIG agreed to a settlement, including a fine of $1.6 billion.

Greenberg hasn't taken well to retirement. One doesn't get the impression that he's spent a lot of time at the Elba fishin' hole, kicking back with a brew. We'll get into what he HAS been up to, tomorrow.