@VIC: Greenlight Capital's David Einhorn - Lehman's a Short

Fund manager Amit Chokshki attended this week's 3rd Annual New York Value Investing Congress on behalf of Seeking Alpha. Here are Amit's notes from the presentation of David Einhorn, Greenlight Capital:

• Value at Risk (“VaR”) is not appropriate for measuring risk:
  • Einhorn compared investment bank VaRs to actual results for recent quarters, which showed that actual results were off by multiples of VaR estimates in some cases.
  • Risk managers should focus on the tails of bell curves and also be prepared for fat tail risk - 5-10 sigma events are not uncommon.
• FAS 159: Profit from One’s Demise
  • Fair value accounting standard that allows asset and liabilities to both be marked at fair value.
  • This accounting mechanism allows for income to be recognized as liabilities are marked down to fair value.
  • FAS 159 is acceptable for market risk but not for idiosyncratic risk.
  • The Street is comfortable with FAS 159 but does not seem to grasp all aspects of the ruling.
• Lehman Brothers (LEH) – short idea
  • Looks vulnerable due to lack of transparency regarding writedowns
  • Could be following its “playbook” from 1998 liquidity crisis
    • LEH had mortgage exposure but took no writedowns
    • The market recovered and LEH pulled through
    • Could that happen now?
  • LEH stock has held up because of “good” quarters
  • 2008 EPS estimates remain unchanged at $7.75 which would follow a record year in 2007
  • Sellside believes the chance of a writedown at LEH is minimal
  • LEH 10-Q reveals no significant loss on Level III investments which Einhorn is skeptical of
    • In 2006, fixed income accounted for 48% of LEH income while securitizations accounted for 15% of income.
    • LEH should be much more exposed to losses than what has currently been reported.
  • LEH either recognizes larger losses (which will be a negative surprise) or LEH will likely under-earn competitors that have taken larger losses and cleaned up their balance sheets relative to LEH.
• Criteria Caixa – long idea (Spanish exchange)
  • Criteria Caixa is a portfolio of blue chip publicly traded Spanish companies
  • Parent company is La Caixa which is the largest Spanish retail bank.
  • La Caixa is not public nor is it owned by the government, sole purpose is to serve citizens of Spain.
  • Criteria Caixa is attractive because it is trading at a discount to NAV and Einhorn believes that Criteria Caixa will eventually sell the public equities in its portfolio and use the proceeds to invest in retail banks around the world.
  • Criteria Caixa will also transform from an investment company to an operating company as a result of the pure retail bank focus which should result in the company being valued at a premium to NAV.

See more coverage of the 3rd Annual Value Investing Congress