Portfolio profiles Bill Ackman

Soon after he graduated, he and a classmate, David Berkowitz, formed Gotham Partners, an investment firm. They shared an apartment to save money. One of the bedrooms was much larger than the other, and the two budding Masters of the Universe decided to have a closed-bid auction to figure out who would get the better room. Each wrote down the portion of the rent he was willing to shoulder to win the larger spot. Ackman remembers that he convinced Berkowitz that he badly wanted the big room when actually he was content with the smaller one. He contrived to drive up Berkowitz’s bid, making his part of the rent a fraction of his partner and roommate’s.

Ackman entertained the notion that he and Berkowitz might be able to raise tens of millions of dollars for Gotham’s launch-and he managed to talk his way into meeting with many of the wealthy and powerful moguls that he’d set his sights on. He pitched real estate scion Tom Durst and proposed three investment ideas to demonstrate Gotham’s research capacity. Durst declined to invest with the firm but then, according to Ackman, put his own money to work in the companies that Ackman and Berkowitz had recommended. After each had big gains in a matter of months, Durst came back to them and agreed to put money into their fund.


Gotham didn’t come up with anything close to Ackman’s hoped-for sum, mustering only $3.1 million. But in 1993, he and Berkowitz went ahead and launched the fund anyway. In time, Gotham gathered in millions. The Ziff family came in early; legendary investors such as Jack Nash, Leon Levy, Michael Steinhardt, and Seth Klarman also put money in.


In 1994, Gotham bought shares in a real estate investment trust poised to take control of Rockefeller Center, effectively becoming the largest holder of the real estate complex. At the time, the New York commercial real estate market was in a devastating slump. Thrusting himself into a highly publicized takeover battle, Ackman scored huge returns on his investment when the REIT was bought. He was on the map.

Over the next three years, his fund averaged returns of 40 percent annually after fees. Gotham hardly ever shorted or bet against companies. But one day in early 2002, Whitney Tilson, a friend of Ackman’s since their days at Harvard College, called him at home to recommend that he buy a stake in a company called Farmer Mac, the Fannie Mae of farm mortgages. Ackman printed the annual report and started reading it around 9 that night. Riveted, he continued past midnight. He called Tilson first thing the next morning, excited. Farmer Mac was indeed an opportunity, but Tilson had it wrong. Ackman didn’t want to buy the stock; he wanted to short it.


Gotham placed its bearish bets. Then Ackman confronted a problem-how to get his negative message out. He began by talking to a reporter at the New York Times but didn’t think the resulting story made the case strongly enough, so he set up a website for the express purpose of displaying a report he wrote, with disclosures that his fund was short Farmer Mac’s stock. Going public on a short is an invitation to be attacked by companies and investors.


Ackman relished the frenzy that ensued. He’s still proud of the report’s title, “Buying the Farm.” And he profited spectacularly from the results: By fall, Farmer Mac’s stock had collapsed.

Fresh from the Farmer Mac success, Ackman launched an audacious assault on MBIA, a company at the center of both Wall Street and state and local finance across the country. This move would prove remarkably insightful once the financial crisis hit, but vindication would be years in coming. First, Ackman was forced to undergo a remarkable battle with the company and its regulators.


MBIA dominated a sleepy, safe, and wonderful business: insuring municipal bonds from default. Since muni bonds almost never defaulted, MBIA almost never had to pay off the insurance. But when Ackman surveyed the company’s filings, he realized that MBIA had, to a degree utterly unrecognized by Wall Street, shifted into the business of insuring a vast array of much more dangerous paper: collateralized-debt obligations, or CDOs, which were constructed by the big banks to combine the bonds of multiple companies.


Expecting MBIA to default, Gotham began buying credit-default swaps, a form of short-selling in the unregulated derivatives market. If other investors became worried that MBIA would default, Ackman could sell the credit-default swaps for a gain; if MBIA actually did default, he would make a king’s ransom.


MBIA got wind of Ackman’s research and asked to meet with him. On November 21, 2002, Gotham representatives sat down with top MBIA executives. As people who were there recall the meeting, Jay Brown, the CEO of MBIA, began by saying how long he had been in the insurance business. “No one has ever questioned my reputation or my company’s,” he said. “You are using an unregulated market to manipulate a regulated market,” referring to MBIA’s insurance business. “You’re a young guy. It’s early in your career. You want to think very hard before you release that report,” Brown said, pointing out that MBIA was the largest guarantor of municipal bonds in New York State and the country.


“Is there anything you disagree with or that’s factually inaccurate?” Ackman asked.


“This is not about the facts,” Brown replied. “Let’s put it this way: We have friends in high places.” (An MBIA spokesperson says that the purpose of the meeting was to learn Ackman’s intentions and to request an early copy of his report to be able to point out any inaccuracies.)


The tense encounter lasted less than a half-hour. As they walked out, Ackman’s analyst shook Brown’s hand. Ackman then held his hand out to the CEO. Brown looked at it, lifted his arm up, and said, “I don’t think so.”