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