Ackman Proposes Breakup Plan

As reported by Bloomberg, Bill Ackman of Pershing Square weighted in with his own breakup proposal today. Details there were sketchy, but a reader sent me a pdf of Ackman’s PowerPoint presentation.

One slide points out something we have been saying: Berkshire Hathaway’s proposal would require a payment over and above the premiums paid by bondholders (normally, it’s the reverse; the reinsurer gets only a portion of premiums, to reflect the notion that there is a cost of underwriting the risk, and some of the premiums go to recoup the origination/screening/pricing costs, as well as to insure the risk).

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  1. Anonymous

    OT: As a result of FDA and USDA’s comprehensive investigation, on February 6, 2008, FDA announced that two Chinese nationals and the businesses they operate, along with a U.S. company and its president and chief executive officer, were indicted by a federal grand jury for their roles in a scheme to import products purported to be wheat gluten into the United States that were contaminated with melamine.

  2. Anonymous

    OT, Sorry:

    Also indicted were ChemNutra, Inc., a Las Vegas, Nevada corporation that buys food and food components from China to sell to U.S. companies in the food industry, along with ChemNutra owners Sally Qing Miller and her husband, Stephen S. Miller, who were charged in a separate, but related, 27-count indictment. Sally Qing Miller, a Chinese national, is the controlling owner and president of ChemNutra; Stephen Miller is an owner and CEO of ChemNutra. The indictments charge all seven defendants with delivering adulterated food that contained melamine, a substance which may render the food injurious to health, into interstate commerce; introduction of a misbranded food into interstate commerce; and other charges.

    The indictments allege that more than 800 tons of purported wheat gluten, totaling nearly $850,000, was imported into the United States between Nov. 6, 2006, and Feb. 21, 2007. According to the indictments, SSC falsely declared to the Chinese government that those shipments were not subject to mandatory inspection by the Chinese government prior to export.

    Melamine can be used to create products such as plastics, cleaning products, glues, inks, and fertilizers. Under certain conditions, melamine mixed with wheat gluten can make the product appear to have a higher protein level than is actually present. Melamine has no approved use as an ingredient in human or animal food in the United States. Wheat gluten is a natural protein derived from wheat or wheat flour, which is extracted to yield a powder with high protein content. Pet food manufacturers often use wheat gluten as a thickener or binding agent in the manufacture of certain types of pet food.

    ChemNutra contracted with SSC, a Chinese registered export broker, to purchase food grade wheat gluten, according to the indictment. SSC then entered into a separate contract with XAC to supply the wheat gluten it needed to fulfill its contract with ChemNutra.

    The indictments allege that the products purported to be wheat gluten were misbranded because the labels incorrectly represented that the purported wheat gluten had a minimum protein level of 75%.

    On March 15, 2007, a pet food manufacturer alerted FDA to the deaths of 14 cats and dogs, several reported by consumers and several that died during routine taste trials conducted by the company. The animals were reported to have developed kidney failure after eating pet food that had been manufactured with the purported wheat gluten.

  3. realty-based lawyer


    Do you know where I can get a copy of the presentation? Or, if permitted, could you send it to me at RBLawyer at

    From your excerpts, it seems that he’s proposing essentially to structurally subordinate SF claims to muni claims by setting up a subsidiary of the current insurer, capitalizing it somehow (new capital?) and transferring the muni policies to the new subsidiary (how, I don’t know). Not sure that works.

    The reserve issue you mention is also a problem.

    The proposal I sent you yesterday may be a simpler and more effective way to support the muni business without penalizing the SF business….

  4. Anonymous


    Ackman’s scheme is nothing but a cover for the municipal insurance premiums to underwrite the SF toxic crap risk.

    As Municipal Insurer writes safe business and generates excess profits, value can be upstreamedto the SF insurer to support SF claim obligations

    Has anyone anywhere come up with an explanation of why Municipalities(the public) should bear the risk of SF crap? As this gets more play, people are going to wake up and realize that muni insurance is a racket, and municipalities are simply paying too much for insurance. Remember Gross’s comment few weeks back?

    The municipalities would be better off with reclaiming the unearned premium, and purchasing new insurance.

  5. S

    Municipalities don;t underright anything? They gonly care about a lower cost of capital and this in theory achieves it. It is kindof ironic that he is essentially proposing a waterfall CDO/CMO structure to solve what is a waterfall problem. The most expediant and efficent solution is to get the Muni business earning ASAP and that is in the best interest of the SF counterparties unles they think they get a full scale govt bailout. That is probably what they want in the end and the question is will the feds cave. Although if the LBO losses come and CMBS falls down, any incremental reserve contribution will be difficult. I suppose if i were a bank why not stonewall and await what they know will be forthcoming. Problem here is nobody has an incentive to settle.

  6. a

    “Municipal Insurer continues to be controlled by executives who caused problem in the first place.”

    Major point here, which needs to be screamed from the rooftops.

    Management of the monolines screwed up. A good bank/bad bank split up works only if management gets put into the bad bank part, and new management is brought in to manage the good bank.

  7. dwell

    People . . . People . . . why does anyone take anything Ackman says seriously? He is TALKING HIS OWN BOOK! In his most recent proposal, please note that the only really effective outcome he has ensured is the destruction of the holding company equity value. This has been, is, and will remain his primary directive. Nothing this jamoke proposes should be viewed through any prism other than that reflecting his portfolio.

    Another and very interesting point that has been ignored by seemingly everyone is that unless MBI/ABK/Etc. file for bankruptcy, Ackman’s firm probably is toast. Long a motley group that includes Borders (BGP, -52% in 2007), Barnes & Noble (BKS, -13%), Sears (SHLD, -39%) and Target (TGT, -12%), Ackman was up 22% in 2007 primarily because he was short stock, long puts and long CDS in the insurer space. In fact, from what can be gleaned from commentary, including his own, Ackman appears to represent a substantial amount of the CDS exposure in the insurer space. Therefore, if MBI and ABK don’t implode, those CDS and derivative positions will be donuts and Ackman will be out of business . . . again. He NEEDS MBI and ABK to disappear or he will find himself on the wrong side of The Street.

    Keep this in mind the next time you give any sort of academic credence to his commentary or proposals.

  8. Anonymous

    Sure Ackman is talking his own book.

    However nothing from his proposal strips value from the holding companies. With his proposal if by some chance the insurers continue producing profits then that income will eventually be downstreamed to the holding companies.

  9. S

    Ackman is simply the latest to offer a plan. He doesn’t need to talk his book, the thesis is pretty well intact considering the capital costs for these triple AAAs and the general regulatory consensus that somethng need to be done. Buffet aired the dirty little secret that the muni bond business is a scam – the magic of financial alchemy is well financial alchemy.

    Ackman is no fool; he has been right on about the exposures/potentialities

  10. Yves Smith

    Anon of 5:12 PM,

    There are two different issues here. One is that muni guarantees are fundamentally a ripoff, and I agree. But I don’t know how we get rid of them. Look at what happened in the auction rate securities market. Put the guarantee at risk and suddenly no one wants the paper.

    Most of this is irrational, but muni bonds are the ultimate retail product, and you have quite a few unsophisticated buyers.

    There is one segment of the market for which the insurance is a sensible product: entities that have sufficiently small fundraisings that buying a guarantee is cheaper than paying for a bond rating.

    The second issue is “why should the munis suffer because of the SF business?” Well, aside from the fact that the regulators were dumb enough to let the insurers write it, the SF policyholders may be every bit as entitled to the full value of the insurer reserves as the muni holders. Remember, we operate under a society of law, You can’t change contracts just because you don’t like the outcome.

    I haven’t gotten a clear reading on this issue. The prevailing opinion seems to be that the SF policyholders entered into their contracts assuming the monoline’s balance sheet was there for them. There appears to be no basis in the law for preferring one group of policyholders to another. The only way out may be that the SF product was written via a slightly different structure (the so-called transformers); the firms and regulators may be able to argue that that makes the SF policyholders subordinate to the ones who had their guarantees written directly. Again, not sure this argument holds water.

    Finally, if you tank the enough bank equity by being cavalier about the SF guarantees, you hurt the economy. There is not a high road through this mess.

  11. Anonymous

    Apparently not everyone agrees that muni bond insurance is superfluous.

    A recent (Feb 15) post by Nouriel Roubini at RGE Monitor indicates that he seems to be predicting a wave of muni bond defaults to come… and Warren Buffett demanding 150% to reinsure bond insurers’ muni portfolios seems to indicate he sees a risk as well as an opportunity.

  12. Yves Smith

    The argument isn’t that it’s worthless, it’s that it costs too much and the munis would do better economically not being insured (ie, it’s cheaper for them to pay the higher interest rate than the insurance premiums). Munis are rated much more harshly than corporate issuers. I don’t have the stats readily at hand, but the gap is pretty large, not a percentage or two. If munis were rated the same way corporations were, you’d see big increase in the number of AAA and AA credits.

    And given the worsening outlook for government finances, the cost of insurance is rising. per your Buffett comment.

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