Confidence Game: How A Hedge Fund Manager Called Wall Street's Bluff by Christine Richard (Book Review) ~ market folly

Sunday, May 9, 2010

Confidence Game: How A Hedge Fund Manager Called Wall Street's Bluff by Christine Richard (Book Review)

We've covered hedge fund manager Bill Ackman extensively here on Market Folly so it's always intriguing when a book is released on an investor we've seemingly tracked forever. As such, we were eager to dive into Bloomberg News reporter Christine Richard's new book, Confidence Game: How A Hedge Fund Manager Called Wall Street's Bluff. For those of you unfamiliar with the backstory, it centers on Ackman's short position in bond insurer MBIA and the ensuing battle he waged against the company, regulators, and seemingly anyone who thought he was wrong.

At the time, this was one of his most successful investments as it earned his firm $1.1 billion, a figure few can scoff at. Since then, Ackman has bested his performance with his investment in General Growth Properties which he has labeled the "best investment he's ever made." Still though, we'd argue that he deserves more praise for his work on MBIA because of the endless amount of obstacles he faced in proving his thesis ultimately correct. Not to mention, he dared to question the unquestionable triple A rating. Everyone knows that short selling is a whole different ballgame when it comes to investing. There are more risks involved and you have to cover every possible angle of your assessment. Being short a company is one thing. Publicly voicing your short position is quite another, as you immediately are labeled an enemy. This book details the multitude of trials and tribulations Ackman faced on his quest to prove his thesis and in the process silence his doubters.

Richard's Confidence Game chronicles a six year long epic battle between Ackman and MBIA, the regulators, the media and more. Think about that for a second. While he was ultimately proven correct, this took six years to play out. Buying and holding a stock long is one thing, but going against the crowd week in and week out for over half a decade to prove your point has to be draining. That's the crazy thing here, Ackman didn't get discouraged. He was not only making a contrarian wager, he was going up against the 'holy grail': a company wielding the coveted AAA rating. MBIA apparently thought they were untouchable. They were wrong.

Ackman faced an uphill battle from the start as he was labeled a fraud by the media and was even investigated by Eliot Spitzer and the SEC. This only added fuel to Ackman's fire and it's almost as if he started to take things personally as he worked even harder to prove that his thesis indeed was correct. As we all know, short sellers get a bad rap as they risk ridicule and harassment immediately upon going public with their crusade against a given company. Simply put, this book shows you what it's like to be a short seller. It takes you inside the research process, inside the trials and tribulations, and most importantly, inside the short seller's head. This book sets itself apart with a behind the scenes look at the process and all the baggage that comes with the territory of betting that something will fail.

Some of the more intriguing facets of Confidence Game are the exchanges between Ackman and MBIA's management team. In fact, the book starts immediately with a confrontation between the two where executives essentially try to bully Ackman. Even more impressive though is the book's ability to tell a story of perseverance and determination. This narrative covers all the proverbial bumps in the road as you watch Ackman transform from a perceived 'villain' into a hero. Before beginning the book, we knew he had conviction in his pick. (Let's face it, he stuck with it for so many years). What the book illustrates though is a detailed account of how Ackman first started buying credit default swaps on MBIA at a cost of $16,000 (per each $10 million of MBIA debt insured) and his hedge fund was still buying when the same protection cost upwards of $580,000. He hit many roadblocks along the way and had many opportunities to exit the position entirely. Instead, he upped his conviction and upped his wager.

Richard's book also brings to light a few pertinent issues that still seem to bluff Wall Street itself. Richard does an excellent job underlining just how over-reliant the markets are on financial models. Not to mention, she draws attention to the fact that many individuals on the Street place waaay too much blind faith and trust in credit ratings as if they are the end-all be-all of financial markets. Clearly, that's a recipe for disaster. And as we all know, it was.

One thing that struck us were the vast similarities between Confidence Game and David Einhorn's book, Fooling Some of the People All of the Time. Both detail arduous battles between companies and short sellers. In both cases, the hedge fund managers ultimately emerge victorious. Generally, we prefer to hear the tale direct from the horses mouth (ala how Einhorn wrote his own story). However, that's not to take anything away from Richard at all. There's no denying she did a masterful job chronicling the events and taking you inside Ackman's head and all his past encounters. The level of detail and research in Confidence Game is impeccable.

In the end, this book typifies what a grueling road short selling can be. Christine Richard's Confidence Game shines a light on issues that Wall Street still needs to address further. While the book won't all of a sudden teach you how to be a successful short seller (we'd recommend The Art of Short Selling for that), it does walk you through various steps in the process, all while telling a tale at the exact same time. A tale, we might add, that centers around one of the hedge fund managers we've tracked extensively on the site for some time. As such, it is the perfect combination of recent history, education, and entertainment. If you want to learn more about Bill Ackman as an investor, the strenuous short selling process, and the human trait of unbridled perseverance, then Confidence Game is obviously for you.


As mentioned above, we've covered hedge fund manager Bill Ackman extensively on the site so for those of you seeking even more information, be sure to check out our profile on his hedge fund Pershing Square Capital, Ackman's recent media appearance, as well as our coverage of Ackman's portfolio.

For more great books, be sure to head to our recommended reading lists.

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