11 June 2010

Christine Richard's book

I've recently read CONFIDENCE GAME, the Richard book on Bill Ackman's daring, risky, but ultimately successful bet against the bond insurers' business model. One of the neat revelations in this book is telegraphed in the title of chapter 14, "When Crack Houses Become Collateral."

In 1998, it seems, MBIA, the bond insurance company at the center of Richard's story, bought out Capital Asset Research Management, a company that was in the business of buying "past-due tax bills from cities and counties at a discount and then [trying] to collect on the debts. These tax certificates also gave holders the right to collect interest and penalties and, if the debt went unpaid, to foreclose on the property."

Unfortunately, it soon became clear that Capital Asset had overpaid for the tax certificates. To pretty up the books, rather than writing these assets down and taking a loss, MBIA sold the tax liens to a special purpose vehicle (SPV)'s. The SPV paid MBIA an inflated price for them, having raised that money through the sale of bonds. What was the name of this vehicle? Caulis Negris: somebody's inaccurate and jokey attempt to render the phrase "black hole" into Latin.

Caulis Negris was a shell, it was still MBIA that was on the hook for payments to the bondholders. It turned out that most of the properties on which MBIA, through Black Hole, held tax liens were in the City of Pittsburgh. Richard got a list of all the properties in that city with Caulis Negris liens and looked them over, with the aid of a cabbie. "Almost invariably," she says, "we stopped at the worst property on the block, though sometimes that was a hard call." Some of them had clearly become magnets for drug abusers -- hence the title.

MBIA wanted to write down the value of its Black Hole slowly, so as to avoid any investor apprehension such as might have been instigated by a big single-shot write down. But that was no mere book-keeper's quirk. Its unwillingness to recognize losses "could hold up the redevelopment of entire neighborhoods." Not just one or two isolated blocks either -- Black Hole owned liens on 11,000 Pittsburgh properties.

Her story on this subject ran through Bloomberg News in November 2006. I'll give you a link to it.

1 comment:

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