You need to Re-Subscribe, or Why I'm an Idiot

Hi readers.

I totally messed up the feedburner switch on the new site, I merely went about it the wrong way, but, long story short, I believe the new feed didn't carry over my old readers to the new site.

If you visit this site, my old blog site, you need to go to the new site and re-subscribe to the new RSS feed. It's in the upper right corner of the site. If your feed, for some reason, did carry over, and you've received the posts on the new site, then you are all set.

Otherwise, please visit:

www.circleofcompetenceblog.com

and subscribe to the RSS feed in the upper right corner.

Thanks Readers. I'm an idiot.

-Jeff

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Circle of Competence Has a New Address!

I finally completing something I've been anticipating for weeks: The New Circle of Competence. Since I've decided that I rather enjoy writing the blog, and I've been gaining in readership, I felt a new home was better for the CoC. We now have our own domain:

http://www.circleofcompetenceblog.com

What does this mean for you readers? When you go over to the new site, the RSS feed will carry on over with you! Enoch Ko has kept me updated on feed technology, so thanks to him.

I'll keep the old blog up for a month or so in case anyone forgets or comments get posted over here, but eventually it'll be history.

Enjoy the new site!

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Lehman Drops Callan and 100 Readers for CoC!

I don't have anything substantive to say on the issue, but Einhorn's vindication continues as Erin Callan has now been ousted as CFO of Lehman Brothers, downgraded to a lower position in the company. There is going to be some wild media coming out surrounding this issue in the coming days, I suspect, but needless to say all is not well at Lehman.

For the record, I don't believe Lehman has Bear Stearns like prospects. They have some issues with disclosure and proper accounting, but they are raising capital at this point, and will probably avoid going kaputz. They needed to come clean long ago, but as they do it now the wounds will begin to heal. Whether or not their foray into this mess was of Callan's doing, she helped perpetuate the lie that Lehman was okey-dokey, this myth that Lehman had somehow risen about the mess and wouldn't be hit with billions of dollars in write-downs.

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On a more cheery note, yesterday we hit 100 Readers here at CoC, as measured by Feedburner. Adding another 3 today and we are at 103, after about 2 months of writing. I'm delighted that people have signed up for the feed, and I hope you're all enjoying the content. Since we've started, I've gotten e-mails or comments from bloggers, money managers, individual investors, and readers.

I strongly encourage all of my readers to comment or e-mail me whenever you have thoughts or criticism. I've tried to keep the content varied between Superinvestors, specific company analyses, and mental models. The focus on media chicanery wasn't my goal at the beginning, but the opportunities have arisen.

I've enjoyed the process immensely so far, and I hope I'll be reporting again soon when we get a couple hundred more readers. Thanks to everyone who has been supportive so far. I

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Unless another opportunity arises, which it may, my next article will be an initiation of my thoughts on a specific restaurant and holding company called Western Sizzlin' Corporation (WEST). Hopefully I'll get that up over the weekend.

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Carlos Slim: Value Investor and Worldly Thinker

Value investing gets a pretty narrow rap. While, in essence, value investing should be defined as merely buying any asset for less than its worth, thus defining all intelligent investing, it often is just spoken of as buying equities with low PE ratios, low price to book ratios, and the like.

In reality, value investors come in different flavors, invest in all asset classes, and are all looking for the same thing: assets on the cheap. That asset can be tangible (Ben Graham), intangible (Buffett), a stock, a bond, a commodity (remember when I highlighted Jim Rogers?), or anything else with an intrinsic worth.

In this vein, I recently came across another well known billionaire who, like Jim Rogers, isn't generally considered a "value investor," but when I read his words I see value investing principles. That man would be decabillionaire Carlos Slim, who controls most of Mexican telecommunications and a whole host of other assets around the world.

If you don't read Reflections on Value Investing, I reflected the other day on the Academy of Achievement, an organization that honors high achieving individuals from all walks of life. Their website has an absolutely fantastic gallery of interviews with its inductees, and the one I came across and enjoyed the most was that of Carlos Slim Helu.

Often, as Charlie Munger likes to point out, we can find very useful investing concepts outside of the traditional investing media and academia. I found some terrific nuggets of investing wisdom and history in the words of Carlos Slim, and today I'd like to highlight some of them so my readers can enjoy those words as well.

Mr. Slim has a keen understanding of business dynamics and intelligent investing, and that shines through when talks about his companies, his approach to investing, and some of his past ventures.


On Making Mistakes

"How do you deal with disappointment in business? When things don't go well, how do you channel that disappointment?

Carlos Slim: I think in business, you need to have flexibility. If you're not doing well, correct it. Try to have small mistakes, not big mistakes. Sometimes you have big mistakes. Everyone has big mistakes, but try to make mostly small mistakes in life. I think, in business and in personal life, try not to make big mistakes."

On the Importance of Knowing History

"Is it important for someone in business to understand history?

Carlos Slim: Very important. I think so, in two ways. First, if you're in business you need to understand the environment. You need to have a vision of the future, and for that you need to know the past. That is very important. But also, on the personal side. A businessman cannot be only business. You need to have more interests. Life offers a lot of interests, many things to know, to learn, to feel, to live."

On Fundamental Investing Rules

"It's said that you have this unusual ability to look at a company or a business that is not doing well, to see that it is undervalued, to acquire that company and make it profitable. Is this something that is instinctive? Is it something that you learn from experience? Is it something that you learned as a student? How do you account for this ability?

Carlos Slim: We look at potential development of the company. To buy it at a low price and in bad condition, it makes it easier. But the good thing is the potential of the company. How far it can go. How far you can develop the company. I think more than the instinct, it's knowledge. Look at the numbers. Like I told you, numbers talk. You look at the numbers, you look at what they're doing. And we have a philosophy of working that makes these things not very difficult, because when you work with austerity, sobriety and you invest in equipment and you reinvest. There are, I think, some basic rules. Nothing magic.

Only basic rules to find out which are the conditions of the company and help to change them. But what is clear also for me is that you can do it very fast. You can do it very fast and the faster you do that, the best it is for the business, for the company, for the people involved, to make that. No? Well, you need to work in the whole area, not only finance, not to look only at one area. You need to look at labor, your treatment with people. You need to look that the people should be feeling good in the work they are doing, to be motivated to be there, to have the spirit to be in the company. And you look also at sales. You look at production. You look at finance. You need to look at the whole company and arrange the areas where things are doing bad.

Let's say one example. In some companies, you have a lot of levels of management. Many levels are not working for the operation. They have quarters far from the operation. Corporations, the corporation is outside the operation. We work without corporative people. We focus an operation. We take down as many levels as we can, to make the highest level be near the operation. With practice and experience we make a team that is very efficient, and we do that very fast.

I think it is not instinct. It's experience that you can learn, because it's not done only by me. It's all the team, and the organization is very big. We have nearly 200,000 people working in the group, and we have a lot of young men doing these kinds of jobs. That takes basic rules of management to do that, no? You read a lot of books -- how they do, what they do bad, what they do good, the conglomerates of the '60s, the way they managed. The biographies of some people and what they do, and you can take the good things from them. Not everything, no. And the experience -- you can, I think, have experience from the failures of others and your failures, no? And what we do when we are managing business is that we all need to take decisions, but we try to do small mistakes. We are very, very open to small mistakes. A big mistake is very dangerous. A very big mistake is bad, but small mistakes make the people trained, and they learn how to take decisions and move ahead."

On Value Investing

"When you read about what happened, in the U.S. in the '30s, it was clear that the country was not finished. We had a big problem (in the 1980s) because the fiscal deficit was very high, but also because the interest rates went above 20. It was 21 or 22 prime rate. The price of the companies was crazy. Not only the values were very low. That was really very, very low. Let's say three percent of the book value, or five percent of the book value. It was crazy. Very, very low.

There were available businesses (to buy). Because in our country, the companies have a "group of control" regularly, because they're not such big companies. Also, there is a group, a person or through the bank, that the controller of the companies is there. In these years, the U.S. companies -- the foreign companies -- want to sell, because to be investing in Mexico was not good, and they sold out these Mexican operations. The banks sold the assets, and many people wanted to sell everything, and we were the only buyers.

That is one of the reasons I got so complex a group with so many sectors, because these businesses were available, one day after the other. That's the only reason we were involved in so many things."

"I learned many things when I was very young, maybe 12 or 13 years old. Then I learned how to understand a balance sheet. I didn't learn that in school. When you look at a balance sheet, there is a lot of information. Not only a balance sheet, but also an estado de resultados. That is a report, financial statement in general. I think finances -- to invest, there are some principles that are very clear, but very easy. You invest with basic conditions. You invest when you have confidence in the management, in the sector -- you like the sector -- and the value of the prices are not high, or are low, low value. Buying intrinsic values in good companies, in good markets and in good sectors. No? I think these kind of things are basics and are not complicated.

.....

The problem is when you want to buy and sell and buy and sell, and that is when the investor gets into gambling, or speculation. That is not necessary, not something rational.

The training I have, for one thing, and the other -- to study financial statements during many years, maybe 10 years or 15 years -- and my experience in many areas, and the ability maybe to simplify the variables, take out parameters that are not necessary, or variables that are secondary, and look at the essential issues of the business. I really think that I make things that are not very rational, like I get involved with so many, too many areas, too many sectors, doing so many things, so different things."

On Being a Long Term Investor

It helps when you understand the numbers and read balance sheets well.

Carlos Slim: That's important to know the balance sheets, but also it's clear that some things will change. You know, a country that has a problem with prices -- after a devaluation, prices are very down, very low, they need to come back to have investments. There is an overshoot of the currency and some other conditions, and we have done when -- we are very clear that we are not speculators or investors in a short term. We are looking for a long-term plan. We don't worry about what is happening because there is a crisis today, like it was in '95 crisis. We invest more. It's a better moment to invest because you find many things, many opportunities of people that want to get out.

Some very good investors say, "I never buy anything that I wouldn't want to keep forever." Do you agree with that?

Carlos Slim: Forever is too long. When you make an investment, it is because you are not thinking in moves from one day to another, except if you're a gambler or you are playing. When you invest in something, it's because you can become big with this business, like if it were yours."

Read the Entire Transcript

These are the words of an Intelligent Value Investor, no?

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Todd Sullivan Interviews Liveris

I always like to point out good commentary by others, especially in the financial blogger arena. I've been a long time reader of financial blogs, many of which inspired me to write my own, notably NoiseFreeInvesting, Fat Pitch Financials, F Wall Street, Controlled Greed, Reflections on Value Investing (to which I now contribute), and one I'd like to mention today, Valueplays, a terrific and very active blog written by Todd Sullivan.

Todd writes about his portfolio in more detail than I can say of almost any other blogger out there. If there is any news out there regarding a company he owns, or might own some time, Todd will give his thoughts and a link. While that style is different than mine, a more opportunistic and sporadic structure, I love his blog and I generally agree with his thoughts.

I thought today I'd highlight a great series of posts he put up last week, namely the Interviews with Dow Chemical CEO Andrew Liveris. It's not often that one can have an in depth interview with the CEO of a major industrial corporation, but Todd pulled it off with style.

Todd has been a long time fan of the company and shareholder, so he knows Dow very well. His insightful questions prove that he knows his stuff. I hope you all read, and enjoy the interview, it is a rare occurence that a blogger gets to enjoy the privledge of interviewing the CEO of a company he or she owns. If I had the chance to interview Eddie Lampert (SHLD), Tom Jasper(PRS), Jack Kopinsky(FMD), or any of the other CEO's I am partnered with, I'd jump at the chance.

Congratulations to Todd for an excellent job:


Part 1

Part 2

Part 3

Part 4

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Lehman: A Reader Responds

My friend Sivaram Velauthapillai, who writes the terrific Can Turtles Fly? blog, responded to my article on Einhorn and Lehman yesterday with some of his thoughts. He brings up good points, though I disagree with many of them, and I'd like to try and give my perspective on his thoughts, and let my readers see a contrarian view on my own. Keep in mind that Sivaram and I have mutual respect for each other, and the comments are not personal in any way.

Here's what Sivaram said, in response to my post, "CoC Battles an Insurgent Columnist"

"I have to disagree with this (but admittedly I may be biased given that I'm long Ambac (poor bet no doubt) while Einhorn is short))... before I post, just know that I'm a fan of yours so this isn't anything personal :)


I don't know about the rabble rouser characterization but Einhorn has nothing concrete. He is cherry picking some stuff which may or may not have anything to do with the losses. Even Einhorn doesn't know how much the CDOs he is flagging should be marked down (if at all). Since he doesn't know what is in the CDOs, and since Lehman won't release what's in them, how does he know they are understating the losses or that there is soemthing illegal going on?

Furthermore, the CDO issue is so minor (only something like $6 billion total) but Einhorn is bringing it up because the market doesn't is scared of any type of CDOs. I'm not too sure about his other points (level 3 assets and such) since that's all vague stuff as well.


I think you are wrong when you say that short-sellers only make money if the fundamentals are right. I would argue that is not the case. Just like how longs can make money on hype, short-sellers can make money on bogus accusations as well. They don't have to do anything illegal or make up lies; all they have to do is introduce doubt.

In addition, short-sellers can make money by taking down firms that depend on the capital markets, or where customers are influenced by stock prices. That is definitely the case with investment banks. Bear Stears went down, not because it defaulted on any of its payments, but because everyone stopped doing business with it. Who knows if Bear Stearns would have ended up insolvent but it clearly was not when it collapsed.

Another good example of where short-sellers can make money even if they are wrong is with some aspects of the monolines. I will be the first one to say that some of what William Ackman was saying was correct (particularly the subprime mortgages). However, his original thesis was completely wrong. That's why he never made money on his original bet for more than 5 years. Ackman originally claimed that (i) muni bond insurance doesn't make any sense, and (ii) insurers can't price risk better than the market (i.e. impossible to charge lower spread than what the market was demanding). He was completely wrong on those points. Warren Buffett entered the market and he would be the last one to do so if he didn't believe the market made sense. If bond insurers can't price better than the market spread then how come Buffett is willing to write muni bond insurance? Ackman was completely wrong on the original point he was arguing.

He also said that the bond insuers were overleveraged (typically 100x), given the small spreads they charge, but he was wrong on that as well. Again, Berkshire Hathaway Assurance's leverage is something like 100x (we don't know for sure but that's what the intial capitalization was) and Buffett is fine with that. The fact of the matter is that you can charge low spreads on muni bonds (i.e. end up with super-high leverage) and insurers can price risk better than the market.

Einhorn, who was also short the monolines, argued that muni bond insurance is a scam and rip-off for the government. No doubt the government loves to hear that thought and some are now planning to go without insurance (I think California is even floating the idea of insuring its muni bonds (similar to how Florida insures against hurricanes)). Ambac et al may not exist in 5 years but I'll bet that the governments are going to a rude shock when they find out that they can't price risk better and that the market would be willing to pay a small fee for some insurance.

The reason William Ackman, David Einhorn, and Whitney Tilson, are right regarding the monolines has little to do with their original investment thesis. Almost all of their gains are due to a narrow portion of the structured product insurance (essentially subprime CDO-squareds, CDOs, direct RMBS, HELOCs, and CESs).

Anyway, getting back on topic, Einhorn is accusing Lehman Brothers of hiding a lot of stuff but he is just throwing out ideas out there. He can turn out to be right (although I don't think he will) but he will most likely be wrong on most of the things. Einhorn will make money, not necessarily based on fundamentals (although that can help), but because he causes a panic of some sort.


Finally, I think it is reasonable to lob some grenades at David Einhorn because is an ACTIVIST hedge fund manager. Some people don't like him because he is a short-seller but even if he were long-only, I think he should take some blame because he gets in people's faces. Very few like Carl Icahan because he is an agitator. I think David Einhorn usses similar tactics. There are many short-sellers but they don't get in the media or personally take on CEOs or CFOs. He is very articulate and if his ideas are right, he may end up being a great investor. But I don't think he will get much respect because is an activist investor."

Obviously, we disagree on these issues. However, we both have our opinions, and you should take what Sivaram said seriously. My follow up thoughts are thus:

Sivaram,

I appreciate the comment and I'm glad you enjoy my writing. I absolutely don't take the response personal.

I'll address your points as I see them. Keep in mind I have no position in any securites mentioned here, so I'm not in the market to profit from this right now. I'll be sure to let you all know if that changes.

"I don't know about the rabble rouser characterization but Einhorn has nothing concrete. He is cherry picking some stuff which may or may not have anything to do with the losses."

I think it's unfortunate that you believe Einhorn has nothing concrete. I believe he found some substantial discrepancies in their financial reports. I suppose that, yes, he doesn't know exactly what comprises the CDO's. Einhorn, in the speech, merely points out that they are fishy.

25% of their CDO exposure is sub investment grade, which were trading in Q1 no higher than .50 on the dollar. Knowing this, there's simply no way their 1Q mark was correct. It doesn't matter what is in them. They all fell much more than 3%, even the investment grade ones.

Callan even said, in a response to Einhorn:

"In a follow-up e-mail, Ms. Callan declined to provide an explanation for the modest write-down and instead stated that based on current price action, Lehman “would expect to recognize further losses” in the second quarter."

If you "expect" to show further losses, they needed to be shown in Q1. Plain and simple, they are either smoothing or manipulating if this is true.


What's certainly not debatable is the discrepancy between the level 3 assets from the earnings release to the 10Q. Einhorn points out that in the release, they showed a loss of $875mm or so. However, in the 10Q, there was a movement that created a $228mm gain on its Level 3 assets. What changed in the days in between? Einhorn asked and their answer was "the movement between the conference call and the 10-Q is “typical” and the change reflects “re-categorization of certain assets between Level 2 and Level 3.” This created a 1.1B swing from a loss to a gain. No 8-k filing? No announcement? Nothing? Just a $1.1B swing in the numbers. That's not immaterial.

Here's another point I didn't even mention, from the speech:

"Lehman had $39 billion of exposure to commercial mortgages at the end of the year. The index of AAA CMBS declined about 10% in the quarter. Lower rated bonds fell even 9 further. Since Lehman’s portfolio is less than AAA, it would seem its write-down probably should have been more than 10 points. Lehman wrote its exposure down less than 3 points gross."

How did Lehman, over and over, avoid all of these marks in Q1? Are they that good? All of this paints a very fishy scenario. Like I said, of course he was cherry picking. He picked the ones that looked like flat out lies. I don't see any good explanations coming from Lehman to refute Mr. Einhorn. There's no factual release out to show why these things occured. They stick to the "he's lying" or "he's cherry picking." Where are the facts?

The CDO issue is not a small one. Billions of dollars in lies is not small, regardless of the size of your portfolio. Lastly, their profit for the quarter was less than $600mm. A better mark on the CDO's would wipe that out and thensome. Add in the other potential problems, and Q1 would have been rather horrendous. They showed profit.

Regarding the short seller quote, sure you're right, the stock can go down based on rumors. However, Lehman is a large, liquid stock, and no single investor can drive it down materially, sustainably, with a speech or letter. How come Berkshire didn't stay down when Doug Kass said he'd shorted it in Barron's? It came down a bit then bounced back as investors looked more deeply at his analysis, and disagreed. If Einhorn was/is wrong, the stock will be fine. He's still holding his position, and I'm sure he will, too, until the company either hits major turbulence or clears the problems and turns out OK (I'm guessing the former).

If Einhorn came out with a bunch of lies no one believed, the stock would be just fine. But, so far, he has been correct, and people believe the analysis, thus the stock is down. (Thanks to Whitney Tilson for pointing this out to me).

Regarding Ackman, he has been sketchy on the bond insurers for a long time, as you mentioned. His theses were numerous, and in the end, he was correct. Even though his doubt of their business model was not proved correct, he eventually predicted that their structured finance insurance would come back to haunt them. Well, it did, and the stocks are down 90+%. I'd say that's pretty correct no matter how you look at it. By continuing to follow the situation and dig deeper, he found more reasons why the companies would break, and he publicized them well in advance of their actual demise. I don't see how it is a mark on him that his original thesis didn't prove to correct. Rather, it is to his credit that he continued to flesh out his analysis. By doing so, he was able to hold on and ended up with an extremely successful investment.

I'll give you an example here. I'm sure you've read the Dhando Investor by Mohnish Pabrai. Now, in the book he gives the example of his investment in Stewart Enterprises. He lays out the initial thesis, what he thought could happen in the proceeding months to ensure the equity value would be double or more his price. He came up with 3 or 4 possible scenarios.

Guess what? None of them occurred. However, he stuck with it and management was able to keep the company alive by structuring yet another solution that Mohnish hadn't originally considered. He doubled his money in short order. Now, is it a mark on him that his original analysis was not correct? I'd say no, because he simply knew the investment well enough that it'd work out, somehow, and it did in the end for a good reason, but one he hadn't originally thought up. The situation with Ackman and the bond insurers is similar to that in many ways. He had a good thesis to start, began publicizing it, but he continued to analyze the insurers as he held the investment. As he went along, he discovered more and more to like about the short, and held on while it stagnated. In 2007 he was vindicated.


Regarding activism, I agree that Einhorn can expect to receive some flak there. In fact, he knew he would get some flak for this speech, I'm sure of that much. However, that doesn't give the right for NYT journalists to smear him with incorrect articles. I say again, where is the analysis in her article of his points? Where does she bring up the thoughtful analysis that Greenlight did? Where does she highlight his points and ask the readers to consider them? It's simply not in there.

I even left out some awful quotes from my article. Here's one:

“These recent criticisms also seem will-timed to take advantage of the market’s concern around weak second-quarter results that we expect for Lehman,” the Buckingham analysts wrote in a report."

How could Einhorn control the timing of the Ira Sohn Investment Conference? That quote insinuates that he timed his analysis with the problems that the public began to raise concern about.

Here's another:

"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."

How could you claim that he's spreading rumors when he is making public speeches disclosing his short positions and analyses? That's not rumor mongering. He's laid out analysis, with facts and numbers, in a highly public forum. He's given them every opportunity to respond, and they have not come back with facts to rebut him. This quote insinuates the Greenlight has been involved in market manipulation behind the scenes. Where is the basis for that?


I appreciate Sivaram's comments, but I tend to disagree here. The NYT article could have been written in numerous ways, but she chose language that smeared Einhorn by insinuating illegality and immorality without basis to do so. People have every right to question, even lob criticism, but it is supposed to be in a factual and balanced way in the general media. Ms. Story writes for the New York Times, not a internet blog.

Check out this article from Fortune for an example of what a more responsible and balanced article looks like about this situation.

Thanks again to Sivaram. I hope he responds again, because his points are good ones. I'm glad to get another view out there for you to read beside my own.

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CoC Battles an Insurgent Columnist

The media never ceases to amaze me. You’d think that, over time, one would get used to the generalization, exaggeration, and pandering, but after reading a certain article this morning, I find that thesis incorrect.

Introduction

The article in reference is Lehman Battles an Insurgent Investor, from today’s New York Times, written by a lady named Louise Story. Unlike the Asia Times, an internet news source that I chose to refute in its assertions about Eddie Lampert last week, the New York Times is a worldly, reputable newspaper with a responsibility to provide fair, unbiased reporting.
After reading today’s article, I’ve come to the conclusion that Ms. Story slept through that class in Journalism 101 during freshman year. If this article is fair and unbiased, Russian newspapers were as well, circa 1934.

If you haven’t yet guessed, the article refers to David Einhorn, someone I’ve written extensively about before. I hate to make this the Circle of Einhorn blog, but right now the stories coming out surrounding his investments and speeches are too good to pass up. Today’s NYT article was an absolute gem; filled with misinformation, quietly mistaken arguments, and an impressive lack of analysis.

If you’re not familiar with Einhorn’s thesis, it’s basically that Lehman Brothers has not been honest about its accounting and valuation of complex investments in this environment. CDO’s are regularly selling for less than .50 on the dollar, sometimes way less, yet Lehman posted a mere 3% markdown last quarter. Not only that, but Lehman was able to post a $695mm gain on its equity portfolio in a first quarter that gave us a nearly 10% loss in the S&P 500. Lastly, there was a major discrepancy between the numbers in the 1Q earnings release and the numbers in the subsequent 10-Q, to the tune of over a billion dollars, in the category of “Level 3 Assets.” Einhorn has repeatedly requested that Lehman and its CEO, Erin Callan, explain the discrepancies, and to this day they have not done so. They merely claim that Einhorn is “wrong” or “cherry picking,” in his analysis.

Actually, I’d agree with the latter accusation about cherry picking. He’s cherry picking the numbers that Lehman lied about.

The Article

Onward to the NYT article, my readers will recall my disdain for ad hominem attacks in reporting, particularly business reporting. Often times, commentators use ad hominem when they either A. haven’t done their homework (read: Ms. Story), or B. don’t have a good answer to the attacker’s questions (read: Lehman).

I’d like to grab a couple of quotes from the article, and see what Ms. Story says about Einhorn and Lehman. To start, here’s the second sentence of the article:

"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.”

No longer is Mr. Einhorn just a hedge fund manager. He is now officially a “rabble rouser.” Did anyone call the analysts who pumped Internet stocks up “rabble rousers” in their heyday? Has anyone called managements who time and time again try to inflate the price of their stock through public commentary “rabble rousers?” How about plain old long hedge fund managers who try to shed light on a misunderstood long investment? Nah, only those relentless short sellers who, gosh darnit all, can’t seem to get over those nasty facts. And not only is he rabble rousing, he’s doing it to drive the stock down.

You may be curious why I’m getting so bogged down in the language of this particular sentence. It’s because, in writing, the use of suggestive language sets the tone for the piece. Right from the outset, Einhorn, who has presented nothing but absolute facts, is portrayed as the greedy profiteer has Allied Capital has tried to portray him as in the past.

Here’s another quote from the article:

“Mr. Einhorn instigated the latest dive in Lehman’s stock price two weeks ago when he encouraged other investors to short the stock at a large conference in New York.”

Oh, tremendous stuff. Ms. Story starts the article by framing Einhorn as a rabble rouser, a misfit with a motive for money. Then, after giving some details and background on the story, she proceeds to make the above statement, which is flat out false. She’s referring to his speech at the Ira Sohn Conference in New York. Once you’ve read it, I challenge any of my readers to pick out a statement where Einhorn explicitly encourages anyone to short Lehman’s stock. He merely goes point by point through the discrepancies he found and Lehman’s half-hearted responses. He concludes by asking some rhetorical questions to the audience about why these things might be so. When Ms. Story states that he “encouraged” others to short the stock, and he “instigated” the latest fall in the stock, she insinuates some powerful notions that are simply not true. In reality, he gave the facts of the story, and left the audience to choose their own action.

Later, after letting readers know that Einhorn has worked with a PR firm to get the message out about Lehman’s potential fraud, Story releases a quote for the ages.

““His position on shorting Lehman is only going to get traction and be successful if he can succeed in convincing people to drive down the stock,” said Michael Claes, a managing director at the public relations firm Burson-Marsteller. “That’s best accomplished with media exposure.””

This one really got me. Mr. Claes, let me try explaining this. Mr. Einhorn is not ultimately going to be proved successful because he “convinces people to drive down the stock,” - something I’ve already pointed out that he’s not doing – David Einhorn will be successful if he is right. The short will work (even further) if/when Lehman finally fesses up and says: “Gee, these CDO’s actually should be marked down by another $2 billion. Oh, and those illiquid assets? We accidentally booked a $1B gain in a week, sorry about that.”

His position doesn’t need media “traction.” Once people realize that he’s correct, Lehman is full of baloney, and that they probably need billions of hard to raise capital as well, the stock will fall plenty. MBIA and Ambac are case(s) in point. Regardless, I don’t understand how all of this talk matters one bit. So far, and Ms. Story actually points this out in the article, Einhorn has been consistently RIGHT up to this point! Not one thing he’s said has been proven false.

The Clincher

Here’s the clincher. At no point in the NYT article does Ms. Story bring up or analyze Einhorn’s actual accusations, the specific items that he brought to the table. Not once does she mention the 3% markdowns on CDO’s and illiquid assets. Not one time does she mention that the company had a billion dollar discrepancy in their earnings release vs. their quarterly filing. While she was plenty specific on how Einhorn could profit from the situation, Ms. Story refuses to look at any of his points and say “Hey, you know what, this is true!” and force Lehman to explain why the numbers are off. Very shallow journalism.


While there are massively important facts to be considered, Ms. Story goes with the “Capitalist vs. Struggling Manager” angle; a “Hedge Fund Millionaire vs. Wall Street Top Dog ” story. There’s even a graphic in the fashion of a boxing match flier, portraying Einhorn and Callahan.
I get a regular e-mail from Whitney Tilson of T2 Partners, who is also short Lehman, and he had this to say about the article (in addition to other things):

“The story here is not David Einhorn vs. Erin Callan or Lehman. It's whether one of the largest financial institutions in the world (with $786 billion on both sides of its balance sheet as of the end of Q1) -- a firm that we now know is de facto backstopped by the U.S. government (and U.S. taxpayers) -- is dangerously overlevered and underreserved, with all sorts of toxic waste on its balance sheet, about which it's lying like crazy.”

Whitney is right on point here. Much like the situation that occurred with Allied Capital, the media continues to portray this story as a battle between rich people. It’s populist writing, pandering to readers with less knowledge of the situation. It doesn’t talk about the deep and thoughtful analysis his firm did to uncover a potentially fraudulent company, or point out any relevant facts that Einhorn has unearthed. In a time where hedge funds continue to be vilified by the general media and the government, omitting the facts should not be permissible.

I know full well that Lehman is not going to come out with a point by point refutation of Einhorn that is factually correct. There are some issues here, and Lehman will try mightily not to own up to them.

I’ll eat my foot if Lehman ends up refuting his claims correctly in the end, but until then I remain on the side of the evil hedge fund managers.


Disclosure: No position

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