Bloomberg News reporter Christine S. Richard’s new book tells the story of hedge fund manager Bill Ackman’s six-year short-selling crusade against municipal bond insurer MBIA. The tale is interesting on a purely personal level, as a study of Ackman’s remarkable character: his irrepressible outspokenness and obsessive tenacity in hounding his quarry. But Richard’s book is most valuable for the new light it sheds on the credit crisis of 2008, illuminating the extent to which MBIA and its fellow “monoline” insurers were dangerous weak links in the financial system. Having become dissatisfied with the profit margins from their traditional line of work, they ventured into the brave new world of “structured finance” and mortgage-backed collateralized debt obligations (CDOs), leading to a disaster that effectively killed off the bond insurance industry less than 40 years after its inception. Of course, like many others burned by the subprime meltdown, MBIA’s management to this day insists that it could never have expected such an apocalyptic turn of events, and has brought lawsuits blaming banks and subprime lenders for its losses. See “New York State Court Upholds 'Big Boy' Provisions and Dismisses Majority of MBIA’s Claims Against Merrill Lynch Relating to CDS Protection Sold by MBIA Referencing CDOs Issued by Merrill
,” Hedge Fund Law Report, Vol. 3, No. 17 (Apr. 30, 2010). Unfortunately for them, Bill Ackman gave ample forewarning of the dangers back in 2002, when his first hedge fund management firm, Gotham Partners, issued a research report entitled, “Is MBIA Triple-A? A Detailed Analysis of SPVs, CDOs, and Accounting and Reserving Policies at MBIA, Inc.” That title in itself indicates how Ackman’s pursuit of MBIA spanned the two major crises of capitalism of the last decade, from the earlier era of corporate fraud prosecutions epitomized by Enron and its off-balance-sheet special purpose vehicles (SPVs), to the late credit debacle stemming from the collapse of the CDO house of cards. In Ackman’s view, MBIA was both fraudulent and insolvent, and he spent years trying to persuade regulators and the credit rating agencies to see the truth as clearly as he did.