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The Persecution of Bill Ackman

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The New York Observer’s profile of Bill Ackman, the founder of Pershing Square Capital Management, provides a good opportunity to reflect on one of the most disgusting abuses of securities laws in recent memory.

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Ackman had begun to look at the bond insurance company MBIA after a friend suggested he invest in it. When he discovered that the company was engaged in financial engineering far removed from the traditional business of insuring municipal bonds, he decided that it would be a good short trade.

In 2002, Ackman met Joseph "Jay" Brown, then MBIA's Chairman and CEO, to discuss a report on the company that Ackman was planning to release. According to Ackman, what happened next is that Brown threatened him.

"You're a young guy, early in your career. You should think long and hard before issuing the report. We are the largest guarantor of New York state and New York City bonds. In fact, we're the largest guarantor of municipal debt in the country. Let's put it this way: We have friends in high places,” Brown allegedly told Ackman.

This wasn’t an idle threat. After Ackman shorted the stock and published “Is MBIA Triple A?” both the SEC and Eliot Spitzer began investigations.

From the Observer:

"Not to put it too impolitically, but we put him through the wringer,"

Mr. Spitzer told The Observer. For six months, Mr. Ackman was under investigation, and while no charges were ever brought, the news leaked out all over the press, nearly ruining him.

Of course, Ackman was right about MBIA. But that’s largely beside the point. Whether or not he was right, the “investigation” of Ackman was a costly and embarrassing error. Without a doubt, it discouraged others from addressing problems at other financial companies—which allowed those problems to grow unchecked.

The moral of the story: empowering regulators can result in a less transparent, more dangerous financial system.

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