Following Ackman: A Book Note

Bill Ackman is the protagonist of Christine Richard's new book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff. Ackman, the founder and managing partner of Pershing Square, even appears with her at at book signings.

I haven't read the book, but for the benefit of others such as myself who are curious about it, here is the link to what seems an informative review.

The book concerns the bond insurer MBIA, and portrays Ackman as the boy who saw and spoke to the nakedness of that particular emperor. Of course, he didn't do this because he was public spirited. He did it because a general public recognition of that nakedness would make him money. Still, he did it and was right.

This proves something of broad importance about speculation and its value in the broader economy. Speculation isn't the enemy. Speculators serve valuable functions, one of which is the ferreting out of information that managerial suits want to hide. When they're good at it, they deserve their monetary rewards. When they're bad at it, they quickly remove themselves from the marketplace.

Richard's book might be worth a read.

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.

Three brief items

1. More on Porsche, VW, etc.

A report in today's Wall Street Journal says that several hedge funds have taken a beating as a result of their speculation in VW shares, and the spike in VW's share price I discussed in yesterday's entry.

"Those affected by the moves include Greenlight Capital, SAC Capital, Glenview Capital, Marshall Wace, Tiger Asia, Perry Capital, and Highside Capital," the p. C1 story said.

There have been rumors of effects going beyond that list, and beyond the hedge fund world.

2. Ackman has a plan for Target

Pershing Square Capital Management, which owns nearly 10% of the giant retailer Target, said it has a plan for a transaction that will boost Target's value. It will present its plan today, Wednesday.

Bill Ackman is the principal of Pershing Square, a hedge fund that has been involved in some memorable corporate in-fighting over the years. To his credit, Ackman was arguing in a very public way, before it became a commonsensical observation, that credit ratings agencies and banks were co-operating to prop up bond insurers such as MBIA so that the banks wouldn't have to write down their exposure to such insurers.

Anyway, Pershing's latest statement on Target is as follows: "Pershing Square believes that the insights gained by sharing the potential transaction in a public forum will benefit Target and all of its stakeholders."

One clue to what he has in mind: Mr. Ackman recently expressed interest in a potential derivatives transaction that he said would let Target effectively retire more of its own shares. That provides a nice segway to my final item of the morning.

3. Canada wants to restrict bank share buybacks

The most important fnancial regulator in Canada at the federal level, the Superintendent of Financial Institutions, put out an advisory note Monday that banks shouldn't be buying back their own shares. That runs counter to the goal of strengthening their balance sheets.

Canada's banks are in general in better shape than those in the US or in Europe, where as one would expect the temptation to buyback/retire shares just isn't a big problem right now. Canada's financial institutions generally have a strong retailing base, and their mortgage-lending practices have remained conservative. So I'm a bit baffled by the SFI's concern.

Apparently, though, he thinks their practices may not be quite conservative enough. The SFI's note said: "The current environment calls for increased conservatism in capital management."