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The Ackman-Barksdale Proposal


HBO's The Wire tells the bond insurer story.


Pershing Square Capital manager and longtime bond insurer critic William Ackman's proposal to restructure the bond insurers, MBIA (MBI) and Ambac (ABK), is out. See the presentation here.

What does this proposal entail? How is it really different from the Buffett proposal? What does this mean?

Well, this is pretty much what happened in seasons 2 and 3 of the HBO series The Wire. The main drug dealer organization, the Barksdale Organization, was pushed to the brink of failure by a combination of the incarceration of key individuals (this would be litigation impairment in the bond insurers' case) and a collapse of quality drug supplies (inability to continue to conduct their structured finance business).

A Barksdale rival, Proposition Joe (Warren Buffett), tried to make a deal with the Barksdale Organization to offer access to quality product in exchange for two key locations in the profitable Barksdale territory known as The Towers; take the good locations, let the Barksdale Organization bleed to death servicing the weaker locations, the Berkshire plan.

One alternative, call it the "Good Insurer/Bad Insurer" plan, would be for the Barksdale Organization to essentially follow the Proposition Joe plan internally; namely by diluting the product they do have access to in order to maintain all their key locations. Unfortunately, in doing so they would also eventually bleed to death.

In season 3 the prime Barksdale territory, The Towers, is destroyed, forcing the Barksdale Organization back to the streets to compete for business; essentially the equivalent of a catastrophic AAA rating downgrade. Meanwhile, a police Major (William Ackman) decides to set up an unauthorized legalized drug trading zone in an uninhabited section of the city; this would be where the AAA business can be conducted, benefiting the most people even if it means less profit for the existing organizations.

In The Wire series, crime was reduced in the surrounding neighborhoods and the market for drugs functioned as most unregulated markets do; the best product at the best price wins. The weaker businesses in the weaker territories (Structured Finance) eventually meet their demise, but the collapse is not as damaging as the bleed to death scenario under Proposition Joe (Buffett) or the Barksdale internal alternative (Good Insurer/Bad Insurer). That's basically the Ackman plan in a nutshell.

Unfortunately, here's why the Ackman plan won't work. In The Wire, although the plan involving the legalized drug trading zone was working, and working very well, the stage was set for grandstanding by opportunistic politicians intent on using the illegal drug trade and, by extension, the money involved in enforcement, to advance their careers and their political control.

So what was actually a good idea barely made it out of the starting gate and the end result was an all out bloody turf battle between the Barksdale Organization and a murderous rival named Marlo.

At this point I have no idea who the bond insurer equivalent of Marlo is, but I know, at least so far, he has managed to survive into season 5 in The Wire.

No positions in stocks mentioned.

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