Posts filed under “Legal”

MBIA DESERVES to Go Belly Up

"DESERVES to go belly up" seems to be our latest new series, but its not. Instead, this is the 2nd — and hopefully last — example of a lousy company whose value has been greatly diminished by poor management threatening or actually suing an analyst/fund manger/critic. (Our 1st example being BankAtlantic).

The latest act of wanton idiocy from corporate assclowns: Suing critical analysts and fund managers who have brought to light the malfeasance of management in running the firm into the ground.

The beleaguered management of the moment is the team at MBIA (MBI); they are "considering" suing Bill Ackman of Pershing Square. The basis of the suit, as reported by Bloomberg, is a somewhat obscure
NYS law against spreading false rumors or making statements "untrue in
fact” about an insurance company’s insolvency (I do not know if this
law was constitutionally tested for passing 1st Amendment limitations, but that sure is an interesting question).

There are few absolutes in investing, but this may be one of them — I always run-not-walk-away from any firm that engages in this sort of corporate silliness. Rarely will you stumble across a less productive, more foolish
admission of unsuitability to be running a public firm
than suing your critics. All it does is draw more attention to your
past foibles, incompetencies, and random errors.

Since that seems to be what management wants, than we shall happily accommodate them with a brief history of their unconscionably gross mismanagement.

Like Ambak (ABK), MBIA ran what was an enviably low risk, high return business. They sold a product that was more or less unnecessary — Muni Bond insurance — to willing buyers that saw a decrease in borrowing costs once they bought into the game. I don’t buy into the notion that muni bond insurance is a scam, but it comes close: Fund buyers got insured paper, Muni borrowers got lower rates (therefore saving on borrowing costs), and ABK/MBIA got well paid for insuring bonds that went bust at one of the lowest rates of all classes of fixed income paper.

As we noted back in January, that high profit, low risk situation — despite its enormous profitability — was obviously intolerable. In came the
financial engineers, as the thought process seemed to be "Hey, we should be issuing insurance on riskier paper — think about how much much bigger the premiums are than boring
old munis!"

Was it Ackman, or management that brought down the stock? Let’s take a quick look at some charts to see where the market first started to recognize the fundamental problems at MBIA:

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Volume Begins to Pick Up Amongst Bad Earnings and News
Mbia_2007_churn

Chart via Bloomberg, FusionIQ

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Note the chart above; from May to July/August 2007, the average daily volume moved from 2 million shares a day, to nearly 5X that amount. Several days saw 10-12 million shares. That strongly suggests the marketplace was not liking what it was learning about MBIA, or their exposure to riskier segments of the credit markets.

The actual news that Summer was increasingly discouraging for the monoline insurers: Two of Bear Stearn’s hedge funds began blowing up due to sub-prime issues. In July, MBIA had a disappointing earnings report; Part of the reason were losses of 9.6 million from investments in these failed hedge funds run by Bear Stearns. I cannot imagine why an Insurer would be an investor in hedge funds, but to me that suggests very irresponsible decision making from the management of MBIA.

Previously, the CEO had been fired ("resigned" was the official explanation), and CNN reported "amid industry-wide crisis, former CEO
Joseph Brown assumes control." This is rarely a good sign.

There was even more evidence of trouble back in 2007: MBIA Credit Default Swaps were trading at Junk levels — despite being rated triple AAA.

"If you expect more headline risk, they’re a logical choice to short,” said Scott MacDonald, director of research at Aladdin Capital Management in Stamford, Connecticut, said of MBIA (Bloomberg). As credit quality weakened, those bets paid off handsomely. 

The next few major volume days were nearly 18 million shares and almost 30 million shares on several big downside moves. Then on December 20th, the stock gapped down from $27 dollars, and traded to $19 — on 52 million shares.

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Huge Down Volume on May Breakdowns
Mbia_big_down_vol

Chart via Bloomberg, FusionIQ

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Note that the news seemed to have been acted upon more urgently in November and December, as the mortgage crisis and subprime problems spread rapidly. The huge volume suggests that the news was widely acted upon by many market players.

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My biggest issue with both of these suits is the chilling effect. Markets operate on the principle of freely exchanged information leading to the Truth. Nothing should prevent good faith analyses from being produced and disseminated.

Thomas Jefferson believed that truth would triumph in the free marketplace of ideas.  Anything that gets in the way of that process should be abhorent.  "I am for freedom of the press, and against all violations of the
Constitution to silence by force and not by reason the complaints or criticisms,
just or unjust, of our citizens against the conduct of their agents"
Thomas Jefferson 1799. ME 10:78 

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This was not supposed to be a continuing series — but unfortunately, seems to have become one. Last month, we noted that BankAtlantic DESERVED to Go Belly Up
for their suing Dick X. Bove. 

As noted, suing an analyst over a report is akin to blaming the shorts for
your stock price: It is a waste of time and corporate resources, a huge
distraction to management. As wee noted last time, investors can deduce a valuable piece of
information from the issue: They don’t want to own
BankAtlantic Bancorp (BBX), as it is apparent to this observer that management’s priorities are misplaced, and with
the stock at $2, they are spending precious capital and wasting time on nonsense.

Here we are again, only this stupidity is via the extremely dumb management team at MBIA.

I haven’t met either management team, but I can only assume that they are as dumb as the Alaskan night
is long in the dead of Winter. Even better, I assume their attorneys are bunch of asshats also.

The silver lining to litigation is that the defendant gets a tremendous amount of discovery. That includes access to corporate files, personnel reviews, internal memos, anything "reasonably relevant to the issue in controversy. Since MBIA will have made the gravaman of Ackman’s claims at issue by litigating, he gets access to ANYTHING that could help prove his claim.

Let me enter lawyer mode for a moment, with the caveat that I haven’t practiced in decades: Ackman
should immediately countersue
(Bove’s firm probably doesn’t want to, but
they should). 

Why? In the event that plaintiff eventually drops the litigation — which I bet they will do before it progresses too far — they no longer will have to respond to discovery requests. The countersuit prevents that escape, as Ackman now gets to defend his reputation, put into issue by MBIA.

Quite bluntly, I doubt either management team has the stones to pursue litigation to its logical conclusion. But a countersuit keeps the discovery process in the hands of the defendant — not the plaintiff. If that defendant is Ackman, I sincerely doubt that management wants him to see what they knew, and when they knew it.

Ackman should welcome the suit — and the opportunity to discover what management has not been forthcoming about.

Previously:
BankAtlantic DESERVES to Go Belly Up (July 2008)
http://bigpicture.typepad.com/comments/2008/07/bankatlantic-de.html

Counter-Party Risk  (January 18, 2008)
http://bigpicture.typepad.com/comments/2008/01/counter-party-r.html

Source:
MBIA May Sue Short-Seller Ackman’s Pershing Square
Christine Richard
Bloomberg, Aug. 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYYyVJGvOm98&

MBIA, Ambac Risk Trades at Junk Levels on Subprime Defaults
Christine Richard and Shannon D. Harrington
Bloomberg Data Service, July 18 2007
2007-07-18 16:37:42.810 (New York)

Category: Corporate Management, Credit, Derivatives, Legal, Valuation

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My Experience at Indy Mac: Fraud, Corruption, Criminality

Long time readers are familiar with my fascination with antique sports cars. One of my pals, Jan, is a well known Porsche collector who is also affiliated with the International Automotive Appraisers Association (IAAA). Its a hobby for him, and he specializes in the rehabilitation and appraisal of antique sports cars. He has rebuilt and appraised everything from celebrity Bugattis to classic Ferraris to modern supercars.

I call Jan "landed gentry" — he’s owned a major car rental firm (sold it), develops real estate, buys/sells land and houses. He is quasi-retired, leaving him plenty of time to play with his many fine automobiles — and for us to discuss the housing market collapse.

Amongst our many discussions, we have gone over the issue of housing appraisal fraud. So when the IAAA newsletter sent out the tale (below) to its members as a warning against fraud, conflict of interest, and corruption, it got his attention — and he forwarded it to me. His comments were: "This is even worse than the nightmare of corruption you described."

Let me hasten to add that many appraisers were offended by the corruption of colleagues in their industry, especially those greased by the worst elements among mortgage brokers and real estate agents. In 2005, more than 8,000 appraisers — roughly 10 percent of the industry — signed a petition asking the federal government to take action; the White House and Federal agencies demurred, and appraisal fraud continued unabated. Eventually, Phony and Fraudy cut a deal with NYS AG Cuomo to stop enabling the appraisal fraud.

Which brings us to the now defunct Indy Mac, and the below diatribe about the criminality, corruption, and rampant appraisal fraud that was the CountryWide spinoff’s stock in trade.

The original piece was published by Vernon Martin at the Appraiser’s Forum (http://appraisersforum.com). His story is utterly fascinating, and it deserves wider distribution.

Martin was the chief commercial appraiser for Indy Mac from October 15, 2001, to when he was terminated six months later for failing to look the other way or actively engage in fraud. Most of the details below are culled from the public record of his wrongful termination litigation, which was eventually settled in Martin’s favor.

My quick overview of the conflicts, fraud, and criminality at Indy Mac —

Fraud:

• Underwriting loans based on appraised values well above purchase prices;

• Fabricating rent rolls for commercial properties to be appraised;

• Over-stating Construction work as 80% complete versus 15% in actuality;

• Attempting to change discounted cash flow models for subdivisions in order to increase appraised value;

Criminality:

• Attempted intimidation of Appraisers;

• Providing false information to appraisers;

Conflict of interests:

• Appraising a development where the land was being purchasing from David Loeb, IndyMac’s Chairman of the Board;

• On one transaction, the CEO’s father and father-in-law were
commercial construction inspectors for the firm; the loan officer was
the CEO’s brother (a former police officer with no loan experience);

That’s just the overview.

Amazingly, these events took place before the enormous Housing and Construction boom from 2003-06. One is left to imagine just how insane the place must have been during that period. I’d love to find the details, and given the enormous lending losses — $8B and counting — we can only begin to imagine what sort of rampant fraud took place. I hope the FDIC releases a full report of their investigation of the collapse of Indy Mac. (Gee, I wonder how Senator Schumer caused THOSE problems back in 2001? CNBC should know better than to publish trash such as this.)   

You really need to read the entire piece to get a feel as to just how much of a criminal enterprise Indy Mac was before it went under.Is it any surprise the entire firm, and not just any individuals, are under FBI investigation for Fraud?

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These things have a tendency to disappear, so I am capturing a PDF and the text (after the jump) in case it somehow vanishes.

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Previously:
Idiots Fiddle While Rome Burns (July 2008) 
http://bigpicture.typepad.com/comments/2008/07/idiots-fiddle-w.html

Source:
My experience at IndyMac
Vernon Martin, Certified General Appraiser
Appraiser’s Forum, 07-14-2008, 12:41 AM

http://appraisersforum.com/showthread.php?t=141764

Appraisal fraud: your home at risk
Appraisers say they’re being pressured by lenders to inflate their estimates of home values
Sarah Max
CNN/Money  June 2, 2005: 9:56 AM EDT
http://money.cnn.com/2005/05/23/real_estate/financing/appraisalfraud/index.htm

Fannie Mae, Freddie Mac agree to new appraisal standards
Walter Hamilton
L.A. Times, March 04, 2008   
http://articles.latimes.com/2008/mar/04/business/fi-appraise4

My experience at IndyMac- General Real Estate, Mortgage, and Economic Discussions – Appraisers Forum PDF  Download my_experience_at_indymac.pdf

IndyMac fraud probe launched; FBI looking into firm, not individuals
Lara Jakes Jordan, The Associated Press 07/16/2008 09:08:13 PM PDT 
http://www.dailynews.com/business/ci_9901941

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