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Book Review: Confidence Game

This book review is special to me.  I don’t often get quoted in books, but in this book I get quoted on page 98.  Here is the quotation:

When I asked an insurance analyst whether he thought the credit rating companies would ever rethink MBIA’s top rating, he was skeptical.  “For Moody’s [or Standard and Poor's] to put a bond insurer on negative watch (indicating a rating cut was being considered) could have extremely negative ramifications” for the entire bond insurance business, said David Merkel with Hovde Capital Advisors in Washington, DC.  “It’s a bit of a confidence game.”

Confidence Game indeed.  I did not see the phrase elsewhere in the book, but I may have missed it. If I inadvertently titled the book, I am honored.

I do not remember talking to the author, Christine Richard, but what she quoted was broadly representative of half of my view on the financial guarantee insurers.  I believed that it would be very difficult for the rating agencies to downgrade the financial guarantors, because they were such a large part of their AAA ratings, and because they would lose money in the short run from doing so.  Though it was written a year later, this article at RealMoney reflected my views.

In the short run, I viewed the rating agencies and financial guarantors as co-dependent.  The rating agencies  would protect the guarantors for as long as they could, and after that, the bottom would fall out, and it would become a “free fire” zone.

All in all, over the next five years I wrote over 30 times about the financial guarantors.  Here is a sample of that (in rough chronological order):

Again, my view was that the financial guarantors would eventually be downgraded, but that the rating agencies would delay it for as long as they possibly could.  That is what happened.

Now, as for Bill Ackman, he was prescient; he saw the problems early — way too early.  As I said about Markopolous and Madoff, it is usually a mistake to obsess over something that is manifestly wrong, but that you can’t affect.  Ackman spun his wheels for years over MBIA, and he was right eventually.  Many other men would have given up, but not Ackman.  And part of that is the nature of shorting; it is normally supposed to be a tactical discipline rather than a strategic one.  There are few companies that one can short into the ground, and Ackman almost went that way with MBIA.

But when you are right, you are right, so long as your funding base sticks with you.  Ackman had loyal investors, because the gains took years to manifest.

As for the author, she has carefully balanced the words of Ackman versus the words of others in the situation.  She has done an admirable job of being neutral while still portraying the victor fairly; would that the heads of MBIA talked to her more.  Sadly, they come off as a bunch of hacks who don’t understand that their models relied on a highly liquid economy, with rising housing prices.

I recommend this book highly.  If you want to buy the book, you can buy it here:  Confidence Game: How a Hedge Fund Manager Called Wall Street’s Bluff.

Who would benefit from this book

Most average investors could benefit from the book.  It would tell them that economic systems that rely on third-party appraisals are inherently fragile.  They can be gamed by those with a concentrated interest for a time, until reality catches up with them.

Full disclosure: Janet Tavakoli told me I was quoted in the book, so I asked the publisher for a copy to review.

If you enter Amazon through my site, and you buy anything, I get a small commission.  This is my main source of blog revenue.  I prefer this to a “tip jar” because I want you to get something you want, rather than merely giving me a tip.  Book reviews take time, particularly with the reading, which most book reviewers don’t do in full, and I typically do. (When I don’t, I mention that I scanned the book.  Also, I never use the data that the PR flacks send out.)

Most people buying at Amazon do not enter via a referring website.  Thus Amazon builds an extra 1-3% into the prices to all buyers to compensate for the commissions given to the minority that come through referring sites.  Whether you buy at Amazon directly or enter via my site, your prices don’t change.

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One Response to Book Review: Confidence Game

  1. Great review.

    I followed and actively shorted MBIA after reviewing Ackman’s excellent research. Ackman, did great work as you indicated and had perseverance in his capital base. I went to see the Senate testimony with Brown, Ackman and others including Dinallo and Spitzer. The cluelessness of the legislative committee was embarrassing. The New York insurance racket that lets this go on is unbelievable and my guess is the liability eventually gets passed to the feds.

    The other shoe has yet to drop and the whole racket is stil on a knife edge in my perspective.


David Merkel is an investment professional, and like every investment professional, he makes mistakes. David encourages you to do your own independent "due diligence" on any idea that he talks about, because he could be wrong. Nothing written here, at RealMoney, Wall Street All-Stars, or anywhere else David may write is an invitation to buy or sell any particular security; at most, David is handing out educated guesses as to what the markets may do. David is fond of saying, "The markets always find a new way to make a fool out of you," and so he encourages caution in investing. Risk control wins the game in the long run, not bold moves. Even the best strategies of the past fail, sometimes spectacularly, when you least expect it. David is not immune to that, so please understand that any past success of his will be probably be followed by failures.

Also, though David runs Aleph Investments, LLC, this blog is not a part of that business. This blog exists to educate investors, and give something back. It is not intended as advertisement for Aleph Investments; David is not soliciting business through it. When David, or a client of David's has an interest in a security mentioned, full disclosure will be given, as has been past practice for all that David does on the web. Disclosure is the breakfast of champions.

Additionally, David may occasionally write about accounting, actuarial, insurance, and tax topics, but nothing written here, at RealMoney, or anywhere else is meant to be formal "advice" in those areas. Consult a reputable professional in those areas to get personal, tailored advice that meets the specialized needs that David can have no knowledge of.

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