For the third time in less than three weeks, the NY Times' business section has published a horrible hatchet job and smear, though this time it didn’t appear in the paper but rather was posted by guest blogger Prof. Steven Davidoff on the NYT Dealbook blog. He starts off sensibly enough, but then veers in an all-too-familiar hatchet job. Let’s go through it line by line:
A) Many short plays are enhanced through rumor and innuendo spread by those self-same shorts. Needless to say, these whispers are sometimes unfounded but can do real harm to a company’s share price and the company itself.
Hmmm... How many is “many”? More than one? A majority? 99% of the rumor and innuendo in the market I see is on the long side! The shorts I know, on the other hand, perhaps because they’re often falsely accused of spreading “rumor and innuendo”, bend over backwards to be open and factual. Think Bill Ackman on Farmer Mac and MBIA, Manuel Asensio (who has his own web site, www.asensio.com), Jim Chanos (for example, his presentation on Macquarie at the Ira Sohn conference last year, etc.
B) This fear is justified in part by a number of high-profile instances of short sellers committing fraud. These short sellers spread false, negative news to profit from the stock reaction.
Again, how many is “a number”? I’m trying to think of a single case of a short seller who’s been found guilty of committing fraud or spreading false, negative news, but there are countless cases of long investors committing all kinds of fraud.
C) It is illegal, in any circumstance, to manipulate the market. In order to show such a violation, what is key is showing that the person has driven a stock up (or down) through his or her actions in order to make a quick profit — that’s the proof of manipulative intent.
This is wrong. Let’s say I visit a lot of stores of a particular retailer, come to believe from talking to employees, counting customer traffic, etc. that the company is having a great (or lousy) month, buy (or short) the stock, talk about my findings/research publicly, the stock rises (or falls), say, 10%, and then I sell (cover) it shortly thereafter. According to Davidoff’s description, this would be illegal market manipulation.
D) That could explain Mr. Einhorn’s going public with his rant against Lehman (LEH): He wants to avoid the appearance of manipulating the stock price, or at least that he is the source of its downward spiral. (And he’s not, by the way, though he may or may not be feeding it.)
Now Davidoff is just smearing Einhorn. Why use the word “rant”? Has he read, seen or heard what Einhorn has said about Lehman? Rant is the last word I’d use. Jim Cramer rants (and sometimes my emails are rants), but Einhorn, in contrast, is unbelievably calm, cool and analytical – he’s even clear to say that he doesn’t think Lehman will implode like Bear did (watch the video of Einhorn on CNBC).
As for Davidoff’s speculation about Einhorn’s motivations for speaking publicly: I haven’t read anything so absurd in a long time. It’s precisely because he spoke out that Einhorn is being accused of manipulating the stock price and being the source of Lehman’s downward spiral.
Let’s be clear: there’s no doubt that Einhorn has affected Lehman’s stock price and is partly responsible for its decline, but that’s only because countless investors, hearing his analysis, have concluded that he’s right and that Lehman’s management is wrong (or else they know he’s right, but are doing everything they can to cover it up).
How is what Einhorn has done any different from what Meredith Whitney at Oppenheimer has done? On a regular basis in recent months, Whitney has issued reports slamming various financial companies, based on her (so far absolutely correct) analysis that the mortgage crisis and credit crunch are going to get a lot worse. When she does so, the stocks of the companies she writes about (and often downgrades) get hit, yet Whitney isn’t pilloried and accused of market manipulation and her reports aren’t dismissed as rants! Instead, she’s hailed (deservedly so) for her prescient analysis and courage.
The only difference between Whitney and Einhorn, as best I can tell, is that Einhorn has a position in Lehman and he and his investors stand to profit if he’s right. That’s a crime?!
E) And let’s face it: Even at the edges, this is a hard case to prove unless there is an actual untruth being spoken. The fact that someone simply stated, “I believe XYZ company is going to decline because they have failed to disclosure certain information, and I believe the undisclosed information is likely negative” is not going to get prosecutors very far in a manipulation case.
Davidoff seems almost disappointed that prosecutors don’t have a case against Einhorn. He’s also wrong that the standard for illegality is “an actual untruth being spoken.” I’m sure that I’ve expressed plenty of opinions in my writings and/or TV appearances that turned out to be wrong. My understanding is that there is a three-part test for illegal market manipulation: 1) The information must be false; 2) The person knew (or should have known) it was false at the time; and 3) The person traded around the release of this information.
F) In this light, the potential problems with Mr. Einhorn’s conduct are twofold. First, why is he going public with all this? What wider goal does he have here, other than to inject fear into Lehman’s stock price?
Well, as I said, Mr. Einhorn could be going public in order to make clear that he is on the up and up and not doing anything manipulative. But to the extent he sows doubt about Lehman, he benefits.
Davidoff is suffering from the assumption that if one has negative views about a company, then one should keep quiet about it, and that anyone who is short a stock who talks about it must be seeking to “inject fear into [the] stock price” for personal benefit.
There are, in fact, many reasons why people talk about stocks they have positions in, both long and short, other than trying to move the stock:
- I find that it helps my thinking to have to write down my argument for a stock and/or present it publicly.
- I find that if I’ve made a mistake in my analysis, I hear about it very quickly.
- When other people know I have a position in a particular stock, some of them contact me with valuable insights, analysis and information.
- I write and speak publicly about stocks I own because I like to teach and feel an obligation to give back. I’ve learned an enormous amount because great investors like Ben Graham, Warren Buffett, Seth Klarman, Joel Greenblatt and many others took the time to write and speak and share their wisdom with others. I certainly don’t claim that my wisdom is even a tiny percentage of theirs, but the obligation to try to give back is the same.
- Sometimes people talk about what stocks they own because they’re trying to make a name for themselves and build their business and there’s no better way to market yourself as an investor than by publicly saying or writing something that turns out to be profitable (this works in reverse as well, of course!).
- I hope you’re sitting down for this one: some fund managers have egos…
- Finally, some people speak out against companies they believe to be dishonest or fraudulent because it’s the right thing to do – and because far too often, the people who are supposed to do something about this (i.e., regulators, the press and Wall Street “analysts”) do nothing because they are too overworked, understaffed, unsophisticated, complacent, conflicted and/or corrupt. If you read Einhorn’s book, you’ll likely believe his decision to go public with his concerns about Lehman are rooted in this last reason.
G) And that leads to the second issue. Mr. Einhorn is not shorting a donut maker. He’s taking aim at Lehman on CNBC in front of God and David Faber during a time of lingering financial crisis. Should Lehman collapse, it could have much broader systemic ramifications — yes, everyone thinks the Fed would prevent a total collapse of Lehman, but just being in that situation is worrisome. And if Lehman goes down, Mr. Einhorn will profit.
This is a particularly dangerous game, since Bear’s failure was a classic run on the bank. If people lose confidence in Lehman, then its downfall becomes a self-fulfilling prophesy.
Davidoff is expanding the smear here, essentially accusing Einhorn of trying to make a quick buck by falsely shaking the market’s confidence in Lehman, knowing that as a highly levered financial institution it’s vulnerable to a run on the bank. What is Davidoff’s basis for insinuating something so scurrilous? Has he found even the tiniest error in Einhorn’s analysis? Or is Davidoff’s point that even if Einhorn is correct in his analysis and is raising legitimate questions, that he should just keep quiet about it because, unlike a “donut maker”, Lehman is: 1) an important company and 2) is highly leveraged (whose fault is that, by the way)?
H) When I watched Mr. Einhorn’s CNBC appearance, I was struck by his refusal to give a bottom price for Lehman — a price at which he thought it should trade now. In failing to do so, he was thereby implying that zero was possible (or at least that is what many viewers inferred).
By not announcing a floor for his short, he doesn’t lock himself in and can even feed the rumor mill so long as he holds onto his short position (which, as my wise colleague Professor Peter Henning notes, is ontologically impossible — you can’t hold something you don’t have, but that’s a different philosophical issue).
And I guess that is where my criticism lies.
I too watched Einhorn’s CNBC appearance and can’t figure out what Davidoff is talking about. Einhorn was asked whether he was covering his short and he said he hadn’t make a decision yet because he was waiting to listen to the conference call so he could gather more information. This is a crime?!
And by the way, given that what he says likely affects the market for LEH, why on earth would Einhorn disclose exactly what he’s doing so that others can front-run him?! As for “implying that zero was possible”, near the end of the interview Einhorn specifically said he thought this was very unlikely (though maybe Davidoff didn’t bother to listen until the end – he seems to have cut a lot of corners in this hatchet job).
I) These are extreme times and Lehman’s mess is of its own making. Mr. Einhorn is a stock picker, and he could be right or wrong. I give him credit for making the assertion publicly.
I wish Davidoff would make up his mind. He implies that Lehman’s mess is Einhorn fault and now says it’s the company’s own fault. He blasts Einhorn for going public and then credits him for doing so?!
J) He’s a smart guy and also a good poker player, which means he knows how to bluff also.
More smear, as Davidoff implies that Einhorn’s just playing a game and is bluffing.
K) With luck, the market, such as it is, will keep its cool and coldly evaluate Lehman’s earnings and Mr. Einhorn’s claims. I’m skeptical — but in the end, that is the market’s fault, not Mr. Einhorn’s. Message to the market: Don’t let the media hype get to you.
I think Davidoff is making two accusations here: 1) Einhorn is engaging in (or triggering) media hype (where’s the evidence for that?); and 2) Other investors are stupidly falling for this hype rather than calmly and carefully evaluating Lehman and Einhorn’s critiques. Again, where’s the evidence for that? So far, it appears that the only mistake investors have made is listening to and believing Lehman’s management rather than Einhorn for far too long!
L) All this is a bit unsatisfying for those who would want to regulate short sellers. But unfortunately, bad news is part of any financial system.
Davidoff is becoming more and more incoherent as he tries to wrap up this hatchet job of a post. He appears to be saying that because the market sometimes (he asserts) is a sucker for media hype (by, I assume, market manipulating short sellers?), there are people who want to regulate short sellers and prevent them from ever saying anything negative about any company. Other than Patrick Byrne, who are these people?
M) The trick is to build systemic risk “circuit breakers” that keep crises like these from coming to full fruition. I hate to blame the victim, but Lehman put itself in this place to begin with.
Far too little, far too late, Davidoff finally says something intelligent and coherent!
Disclosure: David Einhorn is a friend and funds I manage are short Lehman.