Bill Ackman Talks His Own Book

I don’t really have a dog in the fight regarding the financial guarantors, but after reading Bill Ackman’s proposal for how to split them, I had two reactions:

  1. That’s a good idea, and
  2. You are talking your own book.

As I have said before, most companies in financial trouble would just love to split themselves in two.  Create company A with the good business, and company B with the bad business, and the holding company owns them both.  Send company B into insolvency, and the holding company hasn’t lost much… most of the value was in company A.  Who lost, though?  The creditors of the company before the split, who now rely on company B.  In the real world, it gets called fraudulent conveyance.

Ackman’s proposal avoids that.  It makes the CDO guarantor the owner of the municipal guarantor, and the holding company only directly owns the CDO guarantor.  From my example above, it would mean that the holding company would own company B, which in turn owns company A.  If B goes bust, creditors of B still have the advantage of being to draw on the value of company A in insolvency.  In this split-up, in the short run, no one’s rights are compromised.

But for Ackman, it is still talking his book, because he is trying to protect against a split-up where the holding company owns both A and B independently, because the holding company (which he is short) is worth more if the regulators allow such a split-up, and the court cases fail that challenge such a split-up.

This is one of those cases where the proposer of the idea gets ignored because of his self-interest.