Fooling Some of the People All of the Time, a Long Short (And Now Complete) Story, Updated With New by David Einhorn (tohfa e dulha read online TXT) 📕

The next morning Lehman’s stock began to fall, and for the next six months, a familiar sequence played out. First came the personal attacks, when Lehman released the following statement to The Wall Street Journal:

We will not continue to refute Mr. Einhorn’s allegations and accusations. Mr. Einhorn cherry-picks certain specific items from our quarterly filing and takes them out of context and distorts them to relay a false impression of the firm’s financial condition which suits him because of his short position in our stock. He also makes allegations that have no basis in fact with the same hope of achieving personal gain.

Likewise, the sell-side analysts reacted just as they had with Allied. David Trone from Fox-Pitt, Kelton appeared on CNBC and said I was “looking at data from an inexperienced standpoint . . . the investment banks are very complicated. . . . I don’t think that the ratios he is looking at and the statistics that he is looking at are particularly relevant. I think it is a little flimsy case.” When I confronted him later, he said that someone at his firm had printed out my speech and left it on his chair, but he hadn’t found time to read it before calling it “flimsy” on national television.

The pundits weighed in with their own personal attacks. Outdoing Holman Jenkins, who had called the Allied speech “a mugging” in The Wall Street Journal, and Steven Pearlstein, who had labeled me “a punk” in The Washington Post, Louise Story wrote on June 4, 2008, in The New York Times,

David Einhorn thinks another big Wall Street bank is headed for trouble—and he is not being quiet about it. 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. Lehman Brothers is not amused.

Some paragraphs later, Story continued:

Mr. Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, has been profiting from Lehman’s growing pain. Critics say he is needlessly fanning fears about the precarious health of the financial industry at the very moment executives are struggling to stabilize their ailing companies. Many on Wall Street still wonder if hedge funds like Greenlight helped bring down Bear Stearns and spread false rumors about the bank, a possibility the Securities and Exchange Commission is investigating.

I knew neither which “critics” nor which “many” she was referring to, but I was familiar with the last group. And indeed, just six weeks later, the SEC sent us another subpoena. This time, however, they were satisfied with the information we provided and I was not asked to testify.

A number of people pointed out the problems with Louise Story’s lousy story. Yvette Kantrow in The Deal magazine criticized the Times for promoting the fight as a battle of the sexes. “Seizing on that, the Times ran a particularly ridiculous piece of art with its story, depicting Einhorn and Callan as contenders for the heavyweight title or some similarly ridiculous prize.”

Whitney Tilson commented in a June 13, 2008, piece titled “David Einhorn/Lehman Brothers: Another NYT Hatchet Job” in Seeking Alpha:

The story here is not David Einhorn vs. Erin Callan or Lehman. It’s whether one of the largest financial institutions in the world—a firm that we now know is de facto backstopped by the U.S. government (and U.S. taxpayers)—is dangerously over-levered and under-reserved, with a great deal of toxic waste on its balance sheet, about which it’s deceiving investors and regulators. Einhorn, a highly respected and successful investor, publicly shared his detailed analysis of Lehman at the Ira Sohn conference last month and then made a transcript of his speech widely available. Many investors obviously think his analysis is correct, so why didn’t Ms. Story’s article explore his arguments, present contrary opinions from the company or elsewhere and really educate its readers on the substantive issues here?

Tilson was pitch-perfect when he wrote, “Einhorn must be feeling a great deal of déjà vu right now.”

The rest of the Lehman Brothers story is history. On June 9, 2008, Lehman Brothers announced a $6 billion capital raise and a $2.8 billion loss. When asked about this by Reuters, I couldn’t help but note, “They’ve raised billions of dollars they said they didn’t need to replace losses they said they didn’t have.”

Three months later, in September, Lehman Brothers filed for bankruptcy, the largest in history, which brought the world financial system to its knees and required trillions of dollars in bailouts for other financial institutions. Although the bankruptcy proved my analysis correct, it was not an inevitable outcome at the time of my speech.

There is an old story about a man caught in a flood. He climbs to his roof as the rain continues. A neighbor comes by in a rowboat and says, “Get in.”

The man replies, “No, the Lord will save me.”

An hour later with the water higher, a rescue helicopter spots the man and offers a ladder. He turns down the help, repeating that the Lord will save him. Eventually, he drowns and goes to heaven.

When God sees the man, he says, “I’m surprised to see you here.”

The man replies, “I thought you would save me.”

God asks, “What did you want me to do? I sent a boat and a helicopter.”

So too with Lehman. It appears that Lehman management observed the Bear Stearns bailout and incorrectly assumed that, if needed, it would be bailed out as well. Accordingly, when presented with several opportunities to save the company, management instead chose to overplay its hand.

In many respects, Lehman’s behavior echoed Allied’s, but on a much larger scale. Both Lehman and Allied responded to financial turmoil by trying to avoid even temporary shareholder pain. They increased dividends, refused to acknowledge impaired investments, and doubled down on risk.

Though Lehman Brothers failed within a year, whereas Allied persisted for most of a decade, that is more a reflection of the economy than anything else. After that fateful Lehman