Confidence Game

Richard, a Bloomberg reporter, follows Bill Ackman's six-year campaign against MBIA, the bond insurer, from his 2002 research report through the 2008 downgrade. Ackman's argument was that MBIA's triple-A rating was the entire basis of its business, that it had insured structured credit products whose risk it had not analysed, that its capital was inadequate for those exposures, and that the rating agencies would not downgrade it because a downgrade would invalidate the ratings on everything MBIA had wrapped.

The book is a case study in the mechanics of a short thesis against an institution with regulatory and rating agency protection. Ackman was investigated by the New York Attorney General and by the SEC at MBIA's instigation, was accused of market manipulation, was refused meetings, and faced a company whose disclosure made the exposures hard to quantify. Richard documents the research process in detail, including the reading of individual insurance contracts and CDO documents, and shows how Ackman built the argument from primary documents rather than from models.

For investors the value is procedural. It shows how a rating-dependent business model creates a discontinuity rather than a gradual deterioration, how conflicts at rating agencies operated in practice, and what a well-researched short position costs its holder in time, legal exposure and reputation before it resolves. Richard is sympathetic to Ackman and had his cooperation, so MBIA's side is presented mainly through its public statements. The book was published in 2010 and covers this single episode rather than Ackman's later record, which is considerably more mixed.