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Digg
When David Einhorn speaks, people listen. At least they do now.
The co-founder and president of Greenlight Capital rose to prominence from his bearish bets against and public feuds with lender Allied Capital and Lehman Brothers.
His 2008 book, â??Fooling Some of the People All of the Time,â? details his analysis of accounting chicanery at Allied, and it runs through his years-long struggle to get other investors, Wall Street, regulators, reporters and the company to take him seriously.
Einhorn, 42 years old, has published a newly released edition of his book that wraps in the conclusion of the Allied saga -â?? Greenlight made millions of dollars as Allied shares fell â?? his short call on Lehman Brothers in the months before the company's collapse, and the near failure of the financial system.
â??[T]he failures of our system to deal properly with Allied are the same failings perpetrated throughout the financial sector, if not the entire economy, and the result has greatly contributed to the recent financial crisis,â? Einhorn writes in the updated edition, released Tuesday.
In October, Einhorn disclosed he is shorting shares of real-estate company St. Joe, based on his view that the company's land holdings in Florida aren't worth nearly as much as the company says. Underscoring his newfound reputation as a respected gadfly, St. Joe stock price dropped and hasn't recovered. St. Joe said it is comfortable with its accounting and believes the company is â??well positioned to succeed and to create long-term value for shareholders.â?
But Einhorn isn't just a negative Nellie. With about $7 billion in assets under management, Greenlight also has long investments in health care companies such as Pfizer, Cardinal Health and medical device company CareFusion, and in technology firms including Apple, NCR and Microsoft.
Einhorn talked to Deal Journal about his disappointment with financial regulation, his stock holdings and his favorite baseball teams. An edited transcript of the conversation is below.
***
Deal Journal: Why did you want to go back and update your book?
Einhorn: When the first edition was completed in May of 2008, the story was ongoing. Allied Capital stock still stood at around $20 per share. [Allied was sold to Ares Capital this year in a deal valued a roughly $5 a share.]? And now the story is complete.
Allied's stock went down a lot, and we were able to resolve the short position and give all away the money that we promised to give away. It was very exciting. The SEC basically concluded that we should not have been investigated, and that the SEC did a lousy job both investigating Allied and prosecuting them. We had an ongoing litigation to try to help the government recover its money from the fraudulent SBA lending, and it didn't get to a totally successful conclusion but it got to a conclusion. And then finally you had Lehman Brothers, which from a personal perspective was sort of the Allied story all over again but much larger and much faster.
Deal Journal: You write about what you see as failures of regulators, the companies themselves, Wall Street and the media to catch onto what you saw as improper financial conditions at Allied, and at Lehman. With whom are you most disappointed?
Einhorn: By far the biggest disappointment has been with the regulators. They're the ones who are charged with being unbiased and keeping the playing field level and protecting the common interest. The other failings are important â?? meaning whether it's rating agencies, sell-side analysts, media and so forth. The idea, though, that the SEC would go after the wrong team and then never really figure it out and deal with it, is terribly distressing.
DJ: You say the financial reforms made in the wake of the financial crisis won't help much, because the problems are with lax enforcement rather than weak laws. Why?
Einhorn: It's almost like they just sent the same people back to try to do a better job. They basically said, the SEC, do a better job; the Fed, do a better job; rating agencies, do a better job. They didn't really make any of the structural reforms that would seem obvious.
DJ: What are two or three structural reforms you would make?
Einhorn: You'd break up everything that's too big to fail. You'd eliminate the official status of the ratings agencies. You asked for two, I'll quit there. The people arguing to protect those positions held the day with enough Congress people, and the people who felt otherwise weren't as motivated. It's the classic problem of special interests within our government.
DJ: In the wake of the financial crisis, do you think people are more receptive to your views?
Einhorn: I thought that the media wasn't interested at all in the Allied story early on, whereas with St. Joe I think more people were paying attention so there was more coverage.
I think the media has learned from the crisis and is collectively doing a better job. People are more willing to give a hearing to a non-party-line opinion.
***
DJ: Greenlight has significant holdings in several healthcare companies including Pfizer and CareFusion. What's interesting to you about the healthcare sector?
Einhorn: There's been a lot of concern in health care reform, and I think it's had a depressing effect on the valuations. We've bought a bunch of ones that I think are less at risk. And then each of those has a company-specific reason for wanting to own it.
Pfizer is relatively straight forward. We understand why people don't like it: The stock has done badly, Lipitor is coming off patent, they cut the dividend, they bought Wyeth. We kind of look through it and say, alright, they're still earning $2 a share or more and that's not assuming anything particularly successful out of their [drug] pipeline. So we have a call option on the pipeline, and you have something earning a couple of dollars a share and the stock is at $16 and something. That seems reasonable.
DJ: Explain your investment in Apple, which is one of those companies people are endlessly fascinated about.
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