David Einhorn has granted “Worth” an interview in which he talks about short selling, Allied Capital (ALD), and Lehman..
WORTH: Let me ask about some of the labels the press has given you: “Short-seller.”
David Einhorn: It’s not really the right description. We’re long and we’re short, and most days I’d much rather the market go up than down. But we do find some bad companies doing bad things and we sell them short, and I think that’s a good thing.
That label is often used as a pejorative.
Indeed.
What’s wrong with being a short-seller?
Well, first of all, a lot of people don’t understand it. They don’t understand whether short-seller means “short term”—they get confused with that. They don’t like the idea that you’re effectively betting that something bad happens. People want other people to succeed; they want the stock market to go up. I want other people to succeed; I want the stock market to go up.
But I do think that there is a social value in identifying companies that are doing bad things and betting against them. I’ve seen the demise of a fair number of these companies, and it’s not because we’ve bet against them, it’s because these were flawed companies. And our country, our markets, our economy are better when companies that are flawed or cheating are replaced by better ones.
Some people argue that this isn’t the right time to expose such companies, because they may fail and damage an already shaky economy.
How do you define when the right times are and when the not-right times are? The best way to handle this is to not put your business into a position where, if things don’t go exactly the way that you hoped, you’re forced to not tell the truth about your balance sheet.
Let me read you a sentence that appeared in the New York Times recently in a piece about you and Lehman Brothers: “For eight months now Mr. Einhorn, a rabble-rousing hedge fund manager, has pilloried the venerable Lehman Brothers in an effort to drive down the bank’s stock price, which he is betting against.”
How many things in that sentence would you take exception to?
Other than “David Einhorn,” I think everything.
“Rabble-rousing”?
A Washington Post journalist referred to me as a “cocky punk.” It’s interesting to see how folks are willing to engage in this.
The most loaded part of that sentence is probably the characterization, “in an effort to drive down the bank’s stock price.” That’s a common charge made against you in the context of Lehman and Allied—that you’re talking down these companies purely out of financial self-interest.
It’s self-evidently true that if the stock goes down we are positioned to make a profit. The question is, is that the whole story? And the answer is, it really isn’t.
If you talk about a stock, it’s not going to go down because you talked about it. It’s only going to change in price, up or down, based upon whether you add significant new information or analysis into the market. So the purpose of talking about the stock is to add information into the market, and if people find it old news or unpersuasive, more likely than not, they’re going to take the opposite side.
I’ve stood up and talked about lots of stocks where there’s been absolutely no reaction in the stock after I talked about it. And that’s fine too.
Why is it so hard for people to believe that a hedge fund manager could speak out on an issue for motives unrelated to profit?
DE: People believe what they want to believe, and the hedge fund industry’s press is miserable.
One of the things that must have been a real challenge for you, during the controversy over your short of Allied Capital, was this suspicion and distrust of hedge funds.
It’s the same thing as the, “Disregard what David has to say because he shorted the stock” argument, told by the management, who has all of their eggs in the stock. Who’s more biased in this equation? The short seller?
[Short-selling] is what it is and everybody can see it for what it is. Yet there’s this free pass given to management. They’re just supposed to promote and say whatever they want to say, and not tell the truth if that’s what it takes. And this is somehow acceptable.
I think the same [paradox] is true for the hedge fund industry. It’s boiled down nicely in the current credit crisis. The banks and the investment banks have had a very effective media campaign which basically says, ‘You have these lightly regulated, unregulated, whatever, hedge funds, that are the secret systemic risk—this is the monster. And what you really need to do is deregulate us and do something about those guys.’
We’ve seen that the hedge fund industry has acquitted itself pretty darn well as the credit crisis has unfolded. But the vast majority of banks and investment banks were taking on excessive risk with poor controls and pretty flawed thinking. And creating the exact same system risk many times over, many times bigger than anything that was imagined about the hedge funds.
And hedge funds don’t have government help to fall back on.
Hedge funds appreciate that if they do a bad job, if they blow themselves up, there’s nobody there who’s going to bail them out. They’re going to lose their business, they’re going to lose their reputation, their customers are going to lose their money, and it’s just going to be a sorry experience for everybody.
But if a big investment bank, like Lehman Brothers, makes a big mistake with their accounting because they didn’t have adequate systems, they believe that the Treasury or the Fed will bail them out.
The rest of this interview with David Einhorn will appear in the October issue of Worth magazine.
Disclosure (“none” means no position):
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